Axis Bank: What Ails India's Third-Largest Private Lender, And Is There A Silver Lining?

Axis Bank Ltd. stock has been a notable underperformer in the sector on both a 12-month and year-to-date basis. Once viewed as a clear turnaround story closing the gap with larger peers, the bank has experienced stagnation over the past 1-2 years in its stock price and across key operating metrics.

Last week, multinational investment firm Goldman Sachs removed Axis Bank from the APAC Conviction List — a pack of Asian stocks on which the brokerage holds 'buy' recommendations and expects outperformance. The stock was in the group for 112 days and gave a negative return of 8.3% and a relative return of -24% to the MSCI Asia Pacific Equal Weighted Index.

Analysts at Bernstein said in a recent note that Axis Bank saw a marked improvement in its liability franchise during the FY20 to FY23 period. However, performance weakened after the acquisition of Citibank's India consumer business.

"Deposit growth, cost, and quality have stagnated, bringing the earlier catch-up phase to a halt. More concerning has been asset quality - with credit cost outcomes markedly worse than ICICI Bank (despite similar growth in unsecured lending), with consistently higher provisioning and a recent spike in retail NPAs," they said.

Volatility in earnings and frequent senior management churn continue to weigh on the bank, they said.

Axis Bank Stock Performance

Axis Bank stock has lost 11% in value over the last 12 months, faring poorly against the main Nifty Bank index that has risen 6.2%. The stock has also weighed on the Nifty Private Bank index.

Moreover, the share price is down 18% from its 52-week high in late September 2024.

Q1 Disappointment

The June quarter raised several red flags, particularly in provisioning. Axis Bank reported a shocking Rs 3,948 crore in provisions, up 191% sequentially. Even after adjusting for technical write-offs, provisions were way above estimates at Rs 3,127 crore.

The technical write-offs, taken out of “prudence,” failed to mask the elevated provisioning levels. Margins missed expectations and are projected to trend lower. However, operating profit was a bright spot, beating estimates thanks to strong other income and lower operating expenses.

The management said cash credit, overdraft and one-time settlement accounts impacted these technical write-offs. Moreover, 80% of the book technically written off has 100% security cover.

Besides, net profit fell 4% year-on-year and 18% sequentially to Rs 5,806 crore.

The markets did not take the financial results well as the stock tanked over 5% a day after the announcement.

Axis Bank Target Price

• Buy: 42

• Hold: 10

• Sell: 0

• Average target price: Rs 1,343

• Upside: 28% (over Aug. 26 closing)

Source: Bloomberg

Still A Bull Case?

Being India's third-largest private sector lender, Axis Bank benefits from its size and scale. It has 5.8 crore customers and 5,879 branches across India. The bank aims to build a strong liability franchise with lower variance on the cost of funds.

The management has guided a return on assets (ROA) of 1.5-1.7% and return on equity of 15% in the current financial year, the lowest among the top four private banks.

The stock trades at an 18% lower price-to-earnings multiple than its five-year average.

Despite disappointing trends over the past 12 months, current valuations remain attractive, supporting a value-buy case, Bernstein analysts said.

"Stabilisation of credit costs and stable deposit market share should support a near-term re-rating. For a sustained re-rating, however, Axis still faces significant gaps versus peers across multiple fronts," the note said.

Besides, optimal capital levels have enabled Axis Bank to sustain a healthy ROE despite its lower ROA.

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