Axis Bank has been moving up this year and on March 20 it hit a record high of Rs 767. The stock has rallied over 23 percent so far in the year, and the trend is likely to continue, suggest experts.
HDFC Securities maintained a buy rating on the stock with a 12-month target price of Rs 894 which translates into an upside of 18 percent from current levels.
The recent interaction with the top management of Axis Bank suggests that there is a meaningful change led by astute top management revamp. There is a clear focus on profitable growth, driven by a well-articulated strategy.
Conscious efforts to trim costs evidenced by declining branch size (down ~60% in the last 5 years) and superior efficiency metrics makes it one of the top pick among the private banking space.
HDFC Securities highlights the following points:
Asset quality issues peaked out:
After accelerated recognition during FY16-18 where GNPAs stood at 6.8 percent in Mar-18, asset quality has improved substantially and will continue to improve.
The improvement will be led by (1) a paradigm shift in credit risk practices, (2) decreasing proportion of the BB and below rated book and (3) better retail asset quality (vs. peers). HDFC Securities has already factored in slippages of 3.6 percent over FY19-21E.
Attracting new talent:
The appointment of various industry veterans at key positions, such as Deepak Maheshwari, Credit, ex-HDFC Bank, Ganesh Shankaran, Corp banking, ex, FB and a compliance head, demonstrates credible efforts. Further, as per the management, new retail and digital Heads are expected to join soon.
Paradigm shift in credit culture:
Addition of fresh talent is supported by a change in credit/risk practices. Credit/ risk heads now report to the MD (vs. business heads earlier).
Further, they are no longer bound by NII (net interest income) and fee targets. The domestic brokerage firms believe this will materially improve underwriting quality.
Drivers in place for 18% RoE:
The management reiterated its 18 percent RoE guidance (after a capital infusion) led by (1) Improving margins: rising share of high yielding loans, (2) Improving oplev: C-AA drop of ~15bps and (3) a sharp drop in LLPs with an improvement in asset quality given its more than sufficient coverage.
While achieving 18 percent RoE is an uphill task, the aforementioned changes lend credibility to this target.
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