Axis Bank - Deposit Mobilisation Remains Key Focal Point: Systematix

Systematix Research Report

Axis Bank Ltd. hosted its ‘Analyst Day’ today to showcase its achievements and the various strategic projects currently underway at the bank. Key takeaways are:

1. Impact of the recent Reserve Bank of India regulations on unsecured lending: the bank expects the yields on these products to increase to compensate for the higher capital charge. Non banking financial companies/Fintechs are expected to be impacted due to higher capital requirements and anticipated higher cost of funds. The bank has always been cautious in terms of lending to NBFCs.

2. There is no plan to raise equity capital for the bank. Management believe current capital levels are adequate for growth (for next year) and protection (rating agency actions). Net CET1 accretion in H1 FY24 has been 54 basis points.

3. Deposit growth is important but so is maintaining current return on equity levels of 18%. Liquidity coverage ratio management has ensured that the bank didn't have to aggressively price its deposits.

4. Margins, which are currently at ~30 bps above its structural net interest margins of 3.8%, can be expected to remain above the 3.8% mark.

Overall, management presented the view of One Axis as a strong, future ready and all weather franchise. Key components of this franchise being viz, -

1. Self sufficient capital structure to fund growth,

2. Strong balance sheet and best in class asset quality metrics,

3. Structural improvement in quality of earnings with consistent delivery

4. Driven by higher growth in high risk-adjusted return on capital focus segments,

5. With significant improvement in in quality of deposit franchise,

6. With multiplicative forces to win across businesses,

7. Deliver world class customer experience through its SPARSH project ; build India's most profitable Bharat banking franchise ; leadership in Digital with best-in-class capabilities.

In our view, Axis Bank has all the ingredients in place to be a leading banking franchise in India. Over the forecast period, considering its credit-deposit ratio of 94%, strong deposit mobilisation would be the key to meet management's stated guidance of advances growth of 400-600 bps above sector average for FY24 maintain.

Taking into account the intense competition amongst the banks to raise deposits, margins of the bank should reflect the pressure on cost of funds (visible for the other larger private banks during Q2 FY24).

We retain our 'Buy' rating with Dec-24 target price of Rs 1,125 valuing the bank at 1.85 times December-25 adjusted book value per share.

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