We maintain our ?add? rating on Axis Bank and raise 12-month target price to Rs 1,375 (Rs 1,200 earlier). We marginally revise our near-term estimates upwards primarily on lower credit costs and marginal benefit on operating leverage. At our price objective, the bank would trade at 1.5x book and 10x EPS giving a marginal upside from current levels. We expect RoEs, which are currently at ~18%, to moderate to 15-16% over FY15-16e. We maintain our negative view on loan impairment, which is reflected through muted earnings performance. Our positive rating is driven by a few factors like an inexpensive valuation at a discount to peers, well-capitalised with tier-1 ratio at ~12% to meet growth and regulatory capital and strong performance on the liability side with steady decline in wholesale deposits and ability to maintain Casa ratio at current levels.
Over the past few quarters, the valuation discount to the frontline private banks has increased largely reflecting the possibility of higher loan-impairment risk. Axis Bank is currently trading (5-year average) at ~20% discount to ICICI Bank and ~10% discount to HDFC Bank, both these stocks are currently expensive in our view. We believe that the risk of loan impairment or impact of slowdown on revenue growth due to high growth in corporate portfolio between ICICI Bank and Axis Bank is broadly similar and we note that the return ratio is marginally higher for Axis Bank. This discount that we are seeing today could converge in our view, which is broadly driving our current rating.
Kotak Institutional Equities
