Buy Axis Bank; target of Rs 600: ICICI Direct

ICICI Direct's research report on Axis Bank

In Q2FY21, Axis Bank reported net interest income (NII) growth of 20% YoY to Rs 7326 crore. Strong NII growth was driven by expansion in net interest margin (NIM), which jumped 7 bps YoY, 18 bps QoQ to 3.58%. Sequential 18 bps expansion in NIM was due to 3 bps from capital raise, 5 bps from lower interest reversals and 10 bps from better liquidity management. From Q1FY21, the bank is adding some amount in NII reserve. As a result, NIM was negatively impacted by 5 bps. Other income for the quarter increased 47% sequentially to Rs 3807 crore, which was on account of 67% QoQ rise in the fee income (insurance distribution surged). Cost to income ratio declined 90 bps QoQ to 38.0%. Part of this can be attributed to relatively lower business volumes as a result of less cost. PAT for the quarter increased 51.3% QoQ to Rs 1683 crore compared to a loss of Rs 112 crore.

Outlook

The management held its guidance to remain well above industry credit growth, though it is currently cautious on certain segments. It can see minimal loans going for restructuring (estimated 1.6% of loans). Strong capital position, healthy operating metrics and reasonable prudence in provisioning provides comfort for steady earnings visibility and return ratios reaching 0.9% RoA and ~9% RoE by FY22. We value the bank at 1.6x FY22E ABV to arrive at a revised TP of Rs 600 (from Rs 530). We maintain BUY.