Axis Bank may report big loss in Q4, yet analysts see up to 48% upside for stock. Here's why

Axis Bank is all set to report big losses in March quarter, mainly after earlier-than-expected completion of Rs 11,603 crore worth acquisition of Citi Bank's consumer business. The expensing of acquisition cost (including goodwill) would hit the March quarter's profit and loss account and networth of Axis Bank, but should provide a boost to the bank's retail assets growth, said analysts, as they see up to Rs 48 potential upside for the stock going ahead.

The key impact would be in the goodwill amortization, resulting in a loss in Q4FY23, said Kotak Institutional Equities.

"We continue to highlight that the key issues to monitor would be employee-level integration after the merger, especially in middle- and senior-level management, and the relative difference in brand perception when customers start experiencing it after the merger. These are still the early days of the merger, and it would probably take a year to understand the full benefits or challenges," it said while suggesting a target of Rs 1,100 on the stock.

The acquisition comprised of Citibank’s consumer businesses in India, covering its loans, credit cards, wealth management and retail banking operations. Emkay Global said the acquisition is return on equity (RoE) accretive, given the higher leverage. The domestic brokerage has suggested a target of Rs 1,250 on Axis Bank.

"We believe the higher deposit run-down, coupled with optically higher loss in Q4, could weigh on the stock performance. However, we remain long-term positive on the stock, given its improving retail orientation/core profitability, healthy provisioning buffer and reasonable valuations. We retain BUY, with revised target of Rs 1,250 per share," Emkay Global said.

Nuvama Research said while Citi's retail loan portfolio has remained broadly stable at Rs 27,300 crore, there has been a sharp attrition of 21 per cent in deposits and 15 per cent in wealth asset under management (AUM) since the deal was announced.  While upfront merger costs are high, sustainable RoE from the Citi portfolio would be higher than Axis Bank's standalone RoE, it noted.

The Citi acquisition is seen strengthening  Axis Bank's  growth journey by enhancing its deposit, credit card and wealth franchise and giving it access to salary accounts of 1,600 corporates, which would serve as an easy base to cross-sell Axis products. The deal will be funded through internal accruals, and the CEO reiterated that there are no plans to raise capital in the near future.

"In light of the value-accreting deal and improving standalone financials of Axis, we reiterate ‘BUY/SO’. Our Target of Rs 1,150 is based on 2 times BV FY25E. We had earlier expected deal closure in FY24E. Given that the deal has closed earlier (in Q4FY23) and goodwill needs to be written off in Q4, we are cutting FY23E EPS by 105 per cent and increasing FY24E EPS by 54 per cent," Nuvama said.

JM Financial said the bank may not see immediate requirement to raise capital to support organic growth plans post the closure of the transaction.

"We will revisit our earnings estimates post Q3FY23 results, incorporating the charge-off of goodwill and higher opex for FY24/FY25. On a post-integration basis, the book would be RoE accretive to Axis Bank on a steady-state basis. We believe Citi’s acquisition gives access to an upwardly mobile customer base and Axis gets opportunities to upsell/cross-sell to this base. We monitor the sustainability of the key parameters disclosed on the Citi portfolio and synergies thereof," it said while suggesting a target of Rs 1,120 on the stock.

Elara Securities said Axis Bank has stitched together a strategy to strengthen fundamentals in the past three years, but the volatile performance, first led by softer aspects, then on asset quality strain, have taken the sheen off fundamental changes, thus undermining underlying valuations.

"Progress in underlying business reinforces our belief of improved delivery, but establishing consistency in the core business is the key. We maintain BUY with an unchanged target of Rs 1,097," it said.

Axis Bank is trading at a discount to its peers, given that the execution has room for improvement. But it is unlikely that the discount is likely to widen from current levels, said Kotak Institutional Equities.

 

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