"We expect normalisation of asset quality to lift return on equity to mid-teens over FY19-20 from 7 percent in FY17," CLSA said.
Global brokerage house CLSA has upgraded Axis Bank to buy from outperform and also hiked price target to Rs 620 from Rs 600 per share, citing attractive valuations.
"Valuations are attractive and the stock can be rerated as asset quality normalises," the research house said.
CLSA expects normalisation of stress & retail scale-up to lift earnings. Normalisation of credit costs and bottoming of margins may also aid earnings from second half of FY18.
According to the research house, stabilisation and easing out of new stress loan formation is likely to be from FY19 onwards.
"We see scope for operating efficiencies that will aid earnings, and expect normalisation of asset quality to lift return on equity to mid-teens over FY19-20 from 7 percent in FY17," CLSA said.
Its cost growth and cost/income ratio are higher than large private banks but retail business continued to grow well.
Axis Bank's balance sheet grew 11 percent year-on-year to Rs 6,06,718 crore in the quarter ended June 2017. Its total loan book increased by 12 percent YoY to Rs 3,85,481 crore, with retail loan growth of 22 percent at Rs 1,75,278 crore that accounted for 46 percent of the net advances of the bank. Corporate credit growth was only 3 percent during the quarter YoY at Rs 1,62,284 crore which accounted for 42 percent of net advances.
Its asset quality was stable as gross non-performing assets as a percentage of gross advances stood at 5.03 percent in June quarter (against 5.04 percent QoQ) and net NPA increased to 2.3 percent from 2.11 percent on sequential basis.
Meanwhile, the bank will announce its July-September quarter earnings on October 17.At 11:35 hours IST, the stock price was quoting at Rs 520.65, up Rs 6.70, or 1.30 percent on the BSE.