Digital Banking And Branch Expansion Will Create Exciting Opportunities

Key Takeaways

• Focus on high-return business segments and digital investments is set to drive growth, improve margins, and enhance customer retention.
  
• Strategic premium customer acquisition and asset quality improvements could boost fee income and stabilize provisions, supporting earnings growth.
  
• Geopolitical uncertainties and cautious provisioning may affect revenue growth and net earnings, with challenges in deposit growth hindering effective loan funding.

Catalysts

Engages in the provision of various banking and financial products and services.

• Axis Bank's focus on high-return businesses such as small businesses, SME, and mid-corporate segments is expected to drive future growth, potentially enhancing both revenue and net margins.
  
• The bank's strategic initiatives in premium customer acquisition and the private wealth management segment (Burgundy AUM growth) could lead to higher fee income and improved earnings.
  
• Continuous investments in the digital banking ecosystem, including fraud prevention and customer experience improvements, are anticipated to bolster customer acquisition and retention, positively impacting revenue.
  
• Plans to expand the branch network and enhance customer engagement strategies should drive deposit growth and improve the loan-to-deposit ratio, supporting revenue growth.
  
• Improvement in asset quality measures, such as more stringent classification and provisioning, suggests stabilization in asset quality in the near future, potentially reducing provisioning costs and improving net margins.

Axis Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Axis Bank's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.6% today to 34.5% in 3 years time.
• Analysts expect earnings to reach ₹367.5 billion (and earnings per share of ₹118.0) by about May 2028, up from ₹280.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.8x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the GB Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to grow by 5.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.01%, as per the Simply Wall St company report.

Axis Bank Future Earnings Per Share Growth

Risks

• The normalization cycle in retail asset quality, especially in unsecured products like personal loans and credit cards, may take time to stabilize due to over-leverage and credit-hungry units, potentially impacting net margins and increasing delinquencies.
  
• Deposit growth remains a concern as it lags behind industry averages, which could strain the bank's ability to fund loan growth effectively, impacting revenue growth.
  
• Any change in provisioning policies, while focused on prudence, might increase provisioning costs marginally, affecting net earnings negatively.
  
• A cautious stance due to geopolitical uncertainties and their potential impact on business growth could lead to unforeseen costs or revenue declines.
  
• The bank's emphasis on maintaining deposit quality and cost could limit the acceleration of deposit growth rates, which could restrict the bank's asset growth potential, thus impacting revenue growth.

Valuation

• The analysts have a consensus price target of ₹1359.116 for Axis Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1630.0, and the most bearish reporting a price target of just ₹1042.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹1064.5 billion, earnings will come to ₹367.5 billion, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of ₹1183.9, the analyst price target of ₹1359.12 is 12.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.