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AXIS BANK’S analyst day presented a compelling investment argument, highlighting the work done thus far. There is convergence in products and strategy with best-in-class banks, but execution is perhaps an area where there is more work to be done. There is less focus on loan growth and more focus on delivering a better customer experience. The payoffs of such a strategy are usually slow but long lasting. We see Axis Bank as a strong player in this leg of the cycle. Maintain BUY.
Meeting with the business heads of various departments
Axis Bank conducted an analyst day where we had the opportunity to meet with Amitabh Chaudhary, MD & CEO, followed by business heads in digital banking, business intelligence, IT, strategy and transformation, customer engagement, Bharat banking, SME, strategy and the CFO. The various presentations broadly offered the rationale for the bank to build the respective businesses and the journeys taken to make them competitive, which in turn would help deliver superior growth and profitability.
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One of the challenges is to break down the meeting takeaways from a short-medium-and long-term perspective. It is challenging to be critical of these presentations, as it presents the bank in the best possible light, and yet one can argue that there are gaps. A fair conclusion to be made at this point is that Axis Bank is as strong as the other frontline banks in building capabilities. However, understanding its outcome is a journey that needs time as execution is slow. There are two sections that perhaps looks quite promising, if they are executed as well as management wants them to be. (i) Employee engagement and monitoring: The bank has spent a considerable amount to build tools that help employees increase engagement with clients as well as tools for management to monitor employee performance. (ii) There appear to be significant efforts to build products that meet customer requirements and less focus on growth through balance sheet products. The premise that a better customer experience would build more stickiness, better revenue at lower risk with more data to monitor would perhaps differentiate the bank in this cycle through better risk-adjusted returns.
We maintain BUY on Axis Bank with an unchanged fair value of Rs 1,000. At our fair value, we are valuing the bank at 2X book and 17X September 2024 estimates earnings per share for RoEs (return on equities) closer to ~15% levels and healthy earnings growth. While Axis Bank has converged on loan growth, RoE or credit costs with the frontline banks, the sustainability of this performance is perhaps a key concern.
A common chain of thought that came through the analyst meet was that the bank is not looking at any short-term measures to boost profits. The previous cycle of focusing on building the bank through a phase of strong loan growth, especially in the corporate segment, gave a brief period of strong return ratios but had negative outcomes during the downturn.
Hence, it was pleasantly comfortable that the analyst meet had very limited discussion on loan growth or choices of loan mix. The key message was that the bank was looking to compete in the market with the best-in-class banks with the right products, focus from senior management and execution by all the employees. Management was categorical that the outcomes are not easily measurable in the short term and one is likely to see the bank being stronger in the long term.
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