Emkay Global Financial's report on Axis Bank
Despite retail-driven healthy credit growth at 15% yoy, Axis Bank continued to report subdued core earnings growth at 9% yoy, mainly led by subdued margins and higher opex, including a one-time expense related to the Citi portfolio acquisition and business/collection-related spends. However, lower LLP led to a slight beat on PAT at Rs41bn (est: Rs40bn). Axis has taken back earlier exit cost/asset guidance of 2% in Q4FY23 (~2% in FY22), as it may look at accelerated investments in the near-to-medium term, and thus may hurt core earnings. However, Axis retains medium-term RoE guidance of 16-16.5% and long-term RoE aspiration of 18%. We have slightly trimmed our earnings estimates, factoring in higher costs but expect RoE to gradually improve to ~14-16% over FY23-25E from ~7%/12% in FY21/22E. Axis has signed a definitive agreement to acquire Citi Bank’s retail portfolio, including cards, CASA rich deposit pool and nearly 3,600 employees, at a higher price of USD1.6bn/Rs123bn (ex-integration cost of Rs15bn). We believe the acquisition will boost the bank’s retail/card portfolios, but the payback period could be longer and would also dilute the CET 1 ratio by 230bps to ~13%, calling for equity/RoE dilution post the acquisition (Q4FY23).
We retain our long-term Buy rating on the stock with a TP of Rs1,020 (value standalone bank at 1.9x FY24E ABV vs. 2x Dec’23 ABV due to higher CoE and subs valuation at Rs73) given steady improvement in RoEs and reasonable valuations. However, the bank’s recent opex conundrum (risk of upward revision in cost/asset guidance for FY23) and the potential impact on core profitability in the near term will impact the stock’s performance.