Buy This Banking Stock, It Has The Potential To Gain 45%

Improved net interest margins over the medium term

Sharekhan expects improvement in net interest margin over the medium term, which will be driven by loan growth skewed towards higher yield segment and start of the rate hike cycle, which will help floating rate loans to reprice faster (Over the past years, the share of floating rate loans and repo-linked loans within that has improved sharply for the bank), while liabilities are expected to reprice with lag and with less quantum.

"Improvement in low-cost granular deposit base; d. Reduced share of low yielding RIDF bonds (at 3.54% of total assets in FY2022, down from 4.75% of total assets in FY2021). However, there would be marginal impact on net interest margin due to CRR hike. Overall, there should be upward trajectory seen in margins over the medium term," the firm has said.

Good turnaround in franchise

According to the firm, the Bank's stock performance is a function of ROE, cost of equity, and long-term growth. "All three variables moved against Axis Bank in the past decade. Bad loan cycle has been a problem for multiple years for the bank. Like in the past, there were two or three quarters of good asset quality, post which the bad loans cycle spikes up again. However, we do not expect this to recur. Despite weak macro and Covid-related disruptions, the bank has shown strong improvement in impaired loans. Its gross impaired loans fell from 7.9% in FY2019 to 3.9% in FY2022," Sharekhan has said.

Legacy bad loans have been recognized

The coverage on bad loans is up to 75% from sub-optimal levels in the past. "Most of the legacy bad loans have already been recognised and there is adequate provision buffer of 1.76% of loans. Its A- and above-rated loan book is now at 88% of the total. Incremental share of high-rated borrowers (A- and above) is ~92%. This should prevent sharp rise in NPL. Covid-related restructured loans stand at 0.5% of the total customer assets (as of March 2022). Its BB and below outstanding (in terms of fund based, non-Fund based and Investments) has reduced to 1.2% of total customer assets in FY2022 versus 4.7% in FY2017.," Sharekhan has said.

Target price of Rs 940 on the stock of Axis Bank

"We maintain our Buy rating with an unchanged price of Rs. 940. Axis Bank currently trades at 1.3x/1.1x its FY2023E/FY2024E core ABV. We believe its valuations are reasonable, given structural improvement in the franchise. The bank is on an accelerated growth path in terms of advances growth, led by retail, SME, and mid-corporate segments in a granular manner. New digital products, both in assets and liability segments, are growing well, as reflected in the strong acquisition growth. The bank is focusing on sustainable and granular growth, leaving behind the legacy burden and higher spending on technology. The bank's continuous building up of its digital initiatives and franchise with improving asset quality is likely catalyse its growth going ahead. With high PCR and strong balance sheet, the bank can absorb shocks from any unanticipated future risk," Sharekhan has said.