Jefferies sees over 26% upside in Axis Bank, reiterates ’buy’ call — key reasons why

Global brokerage Jefferies, in a recent report, reiterated its ‘buy’ call on private-sector lender Axis Bank, setting a target price of ₹1,500 per share, implying an upside potential of over 26 percent.

Jefferies, following a recent meeting with Axis Bank's CEO and top management, said they are reassured that the surge in credit costs during the first quarter could normalise, thanks to the bank’s conservative provisioning policy on unsecured loans. While deposit growth has been slower, Axis Bank has managed funding costs effectively, helping maintain its net interest margins (NIMs). 

The brokerage highlighted initiatives like premiumisation and the bank's focus on corporate salary clients as key strategies to gradually strengthen the bank's deposit franchise. Given that Axis Bank's valuations are currently trading at a discount compared to its peers, Jefferies ranks it as one of its top picks with a ‘buy’ rating.

Jefferies pointed out that while the SME book carries risks, Axis Bank's initiatives to mitigate these risks appear promising. Improvements in the deposit franchise and continued cost control should help both growth and profitability. Jefferies also noted that asset quality concerns have largely been reflected in the current valuations. A macroeconomic recovery could lead to a stock re-rating.

Base, Bull and Bear case scenarios

Base Case: In its base case, Jefferies projects a loan compound annual growth rate (CAGR) of 15 percent from FY24 to FY27, with average NIMs around 3.9 percent during the same period. For FY25, it expects gross non-performing assets (GNPA) at 1.4 percent and net non-performing assets (NNPA) at 0.3 percent. The sum-of-the-parts (SOTP) valuation values the core bank at 1.9x the September 2026 estimated adjusted price-to-book value (PB), translating to a target price of ₹1,500.

Bull case: In the bull case, the brokerage forecasts a loan CAGR of 17 percent from FY24 to FY27, with average NIMs around 4 percent during the same period. For FY25, it projects GNPA at 1.3 percent and NNPA at 0.2 percent. The SOTP valuation estimates the core bank to be valued at 2.1x the September 2026 estimated adjusted PB value, leading to a target price of ₹1,600. This target implies an upside potential of almost 35 percent.

Bear Case: In the bear case, it expects a loan CAGR of 13 percent between FY24 and FY27, with average NIMs of around 3.8 percent during this period. It expects GNPA to reach 1.5 percent and NNPA at 0.4 percent in FY25. Under this scenario, the SOTP valuation estimates the core bank to be valued at 1.4x the September 2026 adjusted PB value, resulting in a target price of ₹1,050.

Stock Price Trend

Axis Bank stock has climbed nearly 19 percent over the past year and about 8 percent year-to-date in 2024, outpacing the benchmark Nifty Bank index's 12 percent gain in the last year and nearly 6 percent year-to-date in 2024.

After reading a record high of ₹1,339.55 in July, the stock remains approximately 11 percent below that peak but is up nearly 25 percent from its 52-week low of ₹951.55, recorded in October of the previous year.

Investment Rationale

Credit costs: Jefferies noted that while there has been an abnormal surge in credit costs, these are expected to stabilise, with lower recoveries and upfront provisioning on unsecured loans contributing to this rise. 

Following the increase in net slippages and credit costs in the first quarter, trends are anticipated to normalise starting from the second quarter. Management remains optimistic about recovering corporate slippages from the first quarter throughout FY25. 

The retail unsecured loan segment is experiencing some rise in slippages, and the bank's conservative provisioning approach—providing 100 percent for loans that default within 90 days—will lead to upfront credit costs. 

Despite this, the stress is manageable, being relatively higher in credit cards and digital loans compared to personal loans. Credit costs for FY25-26 are estimated to be around 60-70 basis points of average loans, with a 10 basis point increase in credit costs potentially impacting earnings by 3 percent.

Deposit mobilisation: Axis Bank has shown slower growth compared to peers, with a 13 percent increase in 1QFY25, compared to 15 percent for ICICI Bank, 16 percent for Kotak Mahindra Bank, and 17 percent for HDFC Bank (excluding mergers). 

However, the bank has effectively controlled deposit costs and maintained NIMs around 4 percent, surpassing the guidance of 3.8 percent on a through-cycle basis. Axis Bank has opportunities to deepen relationships in the corporate salary segment, although this typically takes time. Efforts in premiumisation, corporate salary relationships, and Bharat Banking are expected to gradually improve the bank's franchise. Due to tighter control on the cost of funds and margins, moderate loan growth of 14 percent to 15 percent is anticipated for FY25-26.

Estimates

Earnings are expected to improve from the third quarter onwards. While 2Q earnings may remain soft due to higher credit costs, the integration costs from the merger will moderate, and credit costs should trend towards 60 basis points of average loans with stable NIMs. With valuations at 12x 12-month forward PE and 1.7x forward PB, Jefferies sees a favourable risk-reward profile. 

Axis Bank remains a top pick in the sector with a ‘buy’ rating and a target price of ₹1,500, reflecting a valuation of 1.9x the September 2026 adjusted price-to-book value.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.