Event update: Axis Bank (Outperformer) - A well laid out strategy for 18% RoE

AXIS Bank hosted an analyst day where the top management of the bank and subsidiaries interacted with analysts. Mgmt gave granular details of the business strategy that was first communicated on the 3Q earnings call.

Conclusion: We believe AXIS has a well laid out strategy which has addressed short comings and risks of the previous business model. We also believe that the new CEO has strong execution skills to ensure proper implementation of the strategy. With lower risks, a stronger organisation structure and higher profitability, we believe AXIS Bank deserves a higher premium to the sector. We are upgrading out TP to Rs870 from Rs750 earlier. We value the core business at 2.5x PBVFY21E and the subsidiaries at Rs45.

Key takeaways

• The bank reiterated its target of 18% RoE in 3 years. While this was announced earlier as well on the 3Q earnings call, what was new is that the RoE target is after including a mid-sized equity issuance which would add 150 bps to CET1. The bank could raise capital in the next 9 months in our view. The current capital is sufficient to fund a year’s growth.
• There have been concerns after the 3Q earnings call that AXIS Bank will make huge accelerated provisions in 4Q. While this meeting was not about earnings guidance, from our interactions we do not see lumpy provisioning in 4Q.
• The bank does not have any concrete plan of M&A in banking or in insurance right now. The bank could look at taking a minority stake in insurance. Getting RBI approval on buying even a minority stake in insurance may not be easy given that RBI is working on hold co guidelines for banks. The bank has no plans to manufacture insurance.
• There is no plan to list/extract value from subsidiaries right now. The plan is to have the subsidiaries move up to be amongst the top 4-5 players in their segment and then extract value.
• Managing operational risk is a key focus and the new CEO has made a lot of changes to improve compliance and win confidence of the regulator.

Asset quality: The BB portfolio is now granular with only one big account – a  power account of Rs5bn. There is unlikely to be any large additions to the existing BB portfolio. No big telecom guarantee is likely to be invoked in the next 1-2 quarters. Stress in residential real estate is low and manageable.