Can Axis Bank match the price multiple of HDFC Bank?
We expect Axis growth and profit differential with HDFC Bank to narrow over FY19-22, driven mainly by Axis's favourable loan mix change, gains from its physical/digital network and lower credit costs, UBS said
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Private banking is one of the most lucrative sectors as of now and it seems smart money has already picked its bet—Axis Bank. The lender has rallied over 20 percent so far in 2019 compared to a little over 6 percent rise in its peer HDFC Bank, data showed.
On a one-year basis, Axis Bank has gained nearly 40 percent while HDFC Bank has risen 18 percent in the same period. Axis Bank is well placed to generate best-in-class return ratios, a global investment bank said in a report.
UBS examined whether Axis Bank can deliver strong growth and profitability at a lower risk when compared to HDFC Bank. Well, the result suggests former is due for a re-rating and is the preferred pick among the financials.
“We expect Axis growth and profit differential with HDFC Bank to narrow over FY19-22, driven mainly by Axis' favourable loan mix change, gains from its physical/digital network and lower credit costs,” it said.
So, will it get re-rated to 3x P/BV? UBS feels that it could, but only if it reduces its risk profile over the next two to three years.
“We lower our FY19 earnings estimate by 24 percent due to higher provisions, and raise it by 4 percent for FY21,” the report added.
UBS maintained its buy rating on Axis Bank but raised its 12-month target price to Rs 1,010 from Rs 780 earlier, which translates into an upside of over 30 percent from April 11 close of Rs 752 on the BSE.
Can Axis Bank bridge the ROA differential with HDFC Bank?
Axis Bank return on assets (ROA) differential with HDFC Bank is due largely to the gap in the net interest margin (NIM) and credit costs whereas fee income and opex are small contributors.
UBS analysis suggests that a 128bps ROA differential in FY19E could narrow to 20bp by FY22E. UBS includes a potential capital-raising of $2.75 billion (10 percent equity dilution) which would add 330bp to its Tier-1 capital.
Potential for share price to double in 3 years:
A quick look at the history suggests that HDFC Bank's success over the past 20 years has been linked to consistent performance. The bank sustained a 3x P/BV (or 18x PE).
Going forward, UBS is of the view that the bank should deliver 20 percent EPS growth, 18 percent ROE and have steady earnings (low credit/liquidity risk) in addition to solid management. In the past five years, HDFC Bank has traded at an average 3.4x P/BV and 18.5x PE.
UBS believes that Axis Bank could gradually re-rate to 2.9x P/BV. It will also track: 1) consolidation stage; 2) reacceleration of growth and cost efficiency; 3) higher profitability, and 4) evidence of a reduced risk profile.
In the next 30 months, UBS believes that the stock could be valued at Rs 1,500 that is 2.9x FY23E PBV. On the other hand, the key risk to the thesis is execution failure, which is UBS downside scenario, where UBS value the stock at Rs 660, implying 1.8x FY21E P/BV (without capital-raising).
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