Axis Bank Vulnerability Compared to ICICI, Kotak: New Share Price Targets Revealed

Axis Bank Target Prices Revised: Nuvama at Rs 1,215, Motilal Oswal Downgrades to ‘Neutral’ with Rs 1,175 Target

In the December quarter, Axis Bank Ltd experienced a slowdown in profit growth, primarily attributed to higher operating expenses. Despite this, the growth figure aligned with the expectations of the market. Analysts observed that unsecured lending is not currently a cause for concern, but they anticipate challenges in the form of increased funding costs and a potential further decline in net interest margin (NIM) in the future.

Furthermore, analysts predict ongoing deposit challenges for Axis Bank throughout FY25. In comparison to other banks such as ICICI Bank Ltd and Kotak Mahindra Bank Ltd, Axis Bank is perceived as more vulnerable in terms of loan growth and NIM.This vulnerability suggests that Axis Bank may face more challenges in expanding its loan portfolio and maintaining a healthy net interest margin compared to its peer banks.

Nuvama Institutional Equities, quoting Axis Bank’s CEO, highlighted that challenges in deposits are expected to persist through FY25. In the third quarter of FY24, 65% of the incremental deposits for Axis Bank were categorized as bulk deposits. The higher proportion of bulk deposits, coupled with the ongoing deposit challenges, leads Nuvama to perceive Axis Bank as more vulnerable in terms of loan growth and net interest margin (NIM) compared to ICICI Bank and Kotak Mahindra Bank.

The brokerage expresses a viewpoint that Axis Bank exhibits greater vulnerability in two key areas compared to certain peer banks:

1. Loan Growth: Axis Bank is considered more vulnerable in terms of loan growth, indicating potential challenges or limitations in expanding its loan portfolio compared to banks such as ICICI Bank Ltd and Kotak Mahindra Bank Ltd.
2. Net Interest Margin (NIM): Axis Bank is also perceived as more vulnerable in terms of Net Interest Margin, suggesting potential challenges in maintaining a favorable spread between interest earned and interest expended compared to its counterparts.

The statement highlights several key points about Axis Bank:

1. Operating Expenses (Opex): Excluding one-off items, the operating expenses continue to be high at over 2.5%, ranking among the highest in the private sector.
2. Common Equity Tier 1 (CET1) Capital: Despite being self-funded, Axis Bank’s CET1 capital is among the lowest.
3. Credit Cost: The credit cost, which represents the cost of potential default by borrowers, is suggested to have reached its bottom level.
4. Earnings Challenges for FY25E: The brokerage foresees challenges in earnings for the financial year 2025 (FY25E).
5. ‘BUY’ Recommendation: Despite the identified challenges, the brokerage maintains a ‘BUY’ recommendation on Axis Bank based on its valuation.

Additionally, the brokerage has revised its target price for Axis Bank’s stock to Rs 1,215, up from the earlier target of Rs 1,130. This implies a positive outlook on the stock despite the anticipated challenges in earnings.

Motilal Oswal has provided additional insights into Axis Bank’s situation:

1. Funding Costs: The management of Axis Bank has indicated that funding costs are expected to rise in the next two quarters.
2. FY25E EPS Reduction: In response to the potential increase in costs and margin pressures, Motilal Oswal has reduced its earnings per share (EPS) estimate for FY25 by 8%.
3. Loan Growth Expectation: With a high Current and Savings Account (CASA) deposit ratio of 93%, Motilal Oswal anticipates that Axis Bank will achieve a Compound Annual Growth Rate (CAGR) in loans of 15.7% over the period from FY24 to FY26. This projection suggests a slower loan growth compared to peers.
4. FY25 Return on Assets (RoA) / Return on Equity (RoE): The brokerage estimates the RoA for FY25 to be 1.7%, and the RoE to be 17.4%. These figures reflect the expected financial performance of Axis Bank for the fiscal year 2025.

The brokerage, Nirmal Bang, has made the following adjustments and decisions based on its assessment:

1. Rating Downgrade: Nirmal Bang has downgraded its rating on Axis Bank to ‘Neutral,’ indicating a more neutral stance on the stock.
2. Revised Target Price: The brokerage has set a revised target price of Rs 1,175 for Axis Bank’s stock.
3. Earnings Estimates Adjustment: After taking into account the Q3 results and considering potential margin moderation in a declining interest rate scenario in FY25E, along with the normalization of credit costs, Nirmal Bang has adjusted its earnings estimates. The estimates for FY24 and FY25 have been tweaked by 4.5% and 12.6%, respectively.

Nirmal Bang’s updated outlook on Axis Bank includes the following points:

1. Return Metrics Expectation: The brokerage anticipates that Axis Bank will maintain an average Return on Assets (ROA) of 1.7% and Return on Equity (ROE) of 16.6% over the period from FY23 to FY26.
2. Buy Rating Retained: Nirmal Bang has decided to maintain its ‘BUY’ rating on Axis Bank, indicating a positive recommendation on the stock.
3. Revised Target Price: The brokerage has revised its target price for Axis Bank to Rs 1,256, up from the earlier target of Rs 1,181. This revision reflects the updated valuation assessment.
4. Valuation Method: Nirmal Bang values Axis Bank at 2 times the Adjusted Book Value (ABV) estimated for December 2025.

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