Axis Bank shares at 30-40% discount to HDFC Bank, ICICI Bank; Morgan Stanley ups target

Morgan Stanley has retained its 'overweight' rating on Axis Bank, while upping its target price to Rs 1,450 from Rs 1,325 earlier, implying a 25 per cent potential upside on the counter. On price to book value basis, Axis Bank trades at discounts of 30 per cent and 40 per cent to HDFC Bank and ICICI Bank, respectively, the foreign brokerage said adding that this valuation gap may narrow gradually.

Axis Bank shares are up 10 per cent in the past one month but are down 1.22 per cent for the one-year period. The stock settled at Rs 1,161.40 apiece on Wednesday.

While both ICICI Bank and Axis Bank strengthened their balance sheets at the same time, ICICI Bank was 3-5 years ahead in the investment cycle on technology and retail liabilties. Further, Axis Bank has a weaker starting point of challenges - a lower share of corporate salary deposits, higher reliance on govemnment deposits, and a different culture, Morgan Stanley said.  This amid tough macro conditions has weighed on the pace of turnaround, it said.

Morgan Stanley said the lender has taken significant additional steps over the past year and should get traction as the macro climate improves. It said any re-rating relative to large private banks will be gradual.

"We think these could be visible over the next 2-3 years, but until then, we expect the valuation gap to remain wide.
In the near term, we expect business momentum to pick up, helped by the bank's nev digital initiatives, and the drag around government deposits will moderate," it said.

Cyclically, the worst will be behind after the quarter ending December 2025, Morgan Stanley said. 

It expects margins to bottom in Q3F26 and credit costs to improve in H2F26. It expects NIMs and credit cost to stablise at 3.75 per cent and 80 basis points, respectively, over the next 12 months, which could lift RoA to 1.7 per cent.

Morgan Stanley said Axis Bank's turnaround has been a big debate, the weaker starting point against large banks and a late start amid tough macro conditions have weighed on its pace. That said, Axis Bank appears to be at a cyclical inflection point. Morgan Stanley expects trends in all three drivers – i.e. net interest margin (NIMs), growth, and credit costs – to turn positive. The extent will be linked to the pace of macro recovery, it said.

"We think the benefits of the bank's strategic decisions could be visible over the next 2-3 years, but until then, we expect the valuation gap to remain wide," it said.

Key drivers for structural re-rating will be narrowing of retail deposit growth differentials and loan spreads against large banks, it said.