Trading at 1.5x Sep-27E P/ABV (RoA/RoE of 1.7%/15%), valuations are undemanding for a large bank like Axis. Dolat Capital believes consistency on core metrics would be key to narrowing the valuation gap vs peers. Credit costs are nonetheless settling at relatively higher levels vs peers. With contingent provision buffers at ~40 bps, impact on net-worth from the recent ECL circular is expected to be negligible.
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Dolat Capital Report
Axis Bank Ltd. reported a good quarter with strong loan growth at 5% QoQ, limited net interest margin contraction at 7 bps QoQ (to 3.73%), and contained NPA related credit costs at 75 bps. Overall provisions at 130 bps were, however, impacted by priority sector lending declassification of ~Rs 240 bsillion of loans, resulting Rs 12 billion or 5% additional one-time standard provisions.
This, along with the PSLC purchase to compensate for the above declassification resulted in a sharp PAT miss with RoA of 1.24%.
Advances growth at 5% QoQ was led by sharp sequential growth in corporate (+11%), and SME (+9%) portfolios. NIM is guided to bottom in Q3, assuming no further rate cuts.
Opex optimization to continue despite additional PSLC costs coming in (Rs 4.8 billion in Q2 and 2.4 billion over the next two quarters). Asset quality trends are improving in the cards book and stabilizing for the PL and MFI portfolio.
We tweak our estimates, after factoring one-time provision impact. Maintain ‘Accumulate’ rating with revised target price of Rs 1330, valuing the bank at 1.7x Sep-27E P/ABV against RoA/RoE of 1.7%/15%.
We look for consistency in growth and asset quality trends for a stronger stance.
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Also Read: Axis Bank Q2 Review: Motilal Oswal Maintains 'Neutral' Rating On The Stock — Check Target Price
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