More NPA stress looms for Axis Bank, analysts cut target

KOLKATA|MUMBAI: Private sector lender Axis Bank is facing another Rs 9,000 crore of vulnerable loans which may spoil the lender’s financials in the next two quarters, analysts tracking the banking sector believe.

The third largest private lender reported its worst ever quarterly earnings Thursday while providing record sums of money to cover sticky loans, but analysts believe that the fear of reporting a full-year loss prevented it from a total clean-up.

“There was enough motivation for a kitchen sink, which would have been the best outcome, but reporting a full-year loss possibly weighed down on that decision, and now we believe the balance of Rs 9,000 crore will be classified as non-performing loans (NPL) in the following two quarters,” USbased brokerage firm Jefferies said in a note.

The poor performance in the March quarter coupled with uncertainty at top management will cap Axis Bank valuations in near to medium term, analysts said.

“We cut estimates owing to lower net interest margin and lower loan base and higher credit costs as the balance of stress is recognised as non-performing loans,” Jefferies analysts Nilanjan Karfa and Harshit Toshniwal said.

Axis reported a Rs 2,189-crore loss in the March quarter as Rs 16,500 crore of fresh bad loans rocked the boat surprising everyone in the market.

Axis Bank shares gained 9 per cent on Friday despite the downgrades by most of the brokerages. Investors cheered bank’s decision to speed up recognition of stressed loans. The stock ended at Rs 539 on BSE, up 8.98 per cent.

“The bank is starting on a clean slate as a major part of stressed assets is behind it,” said Aalok Shah, analyst, Centrum Broking. “We expect RoE to inch towards 14-15 per cent by end-FY20, but succession of a new CEO remains a near-term overhang.”

While IDFC Securities lowered the target price to Rs 475 from Rs 605, IDBI Capital set the new target price at Rs 505 revising it from Rs 611. Brokerages such as Morgan Stanley, SBI Capital, Credit Suisse, HDFC Securities and Nomura have also lowered price targets.

Axis indicated normalisation of credit cost from the second half of the current financial year as asset quality pressure is likely to remain in the next two quarters. Margin compression or higher than expected credit cost could impact earnings and thus the multiples, according to analysts.

“We cut our earnings on sharp deterioration in asset quality and higher operating expenses, thus driving a 9 per cent decline in our FY20 estimated adjusted book value,” said Nitin Aggarwal, analyst, Motilal Oswal Securities.

Axis shares have gained 7 per cent in the past one year compared to 22 per cent jump seen in HDFC Bank and 31 per cent rise in Kotak Mahindra Bank stock. The BSE Bankex gained 11 per cent during the period.
Its shares are currently trading at 1.9 times its FY20 estimated book value, which according to some analysts looks attractive. However, they expressed concerns over credit cost and succession plans.

“Recovery or resolutions hold key, which have been lower to our liking till now,” said Kunal Shah, an analyst at Edelweiss.

“Having said that, the bank has commendably maintained coverage of 65 per cent, despite higher stress and, consequently, credit cost rose to 6.7 per cent. This will lead to normalisation of credit cost by second half of FY19 by about 110-130 basis points,” he said.