Why you should look at Axis Bank now
The Axis Bank stock has been in the thick of action, crashing after the quarterly results highlighted asset quality divergence in FY17 after the RBI’s inspection report, and then recovering a lot of lost ground after it announced the infusion of fresh capital. Is it still worth a buy?
Asset quality – down but not out
FY17 was a difficult year for the bank that saw gross NPA (non performing assets) rising from 1.67 percent to 5.04 percent with a gross slippage of Rs 21,781 crore. The moderation of slippage in the first quarter of FY18 at Rs 3,519 crore was certainly not an end of the pain. With an asset quality divergence of Rs 4,867 crore, the total gross slippage climbed to Rs 8,936 crore in Q2 FY18.
While the road ahead may be still bumpy, there is definitely light at the end of the tunnel. Since a large part of the slippage is coming from the lower-rated (BB and below) pool of assets, we focus on this and the outstanding assets that are either restructured or under various dispensations (like SDR, S4A and 5:25).
Our estimates suggest a likely (worst case) slippage of close to Rs 17,227 crore over the coming four quarters. The normalisation of the stress should commence from the second half of FY19. With the resolution assuming a definitive system-wide timeline, we focus on the various positives that position the bank well, post-crisis.
A strong liability franchise
The bank has built a stable retail-focused deposit base. The share of retail as well as low-cost current and savings account (CASA) is one of the best in the industry.
Diversified asset book
The asset book is diversified with a focus on retail and hence much more granular. The share of retail in total advances has gone up to 45 percent now from 42 percent a year ago. In the quarter gone by, while the overall loan growth was of the order of 16 percent, the retail segment grew much faster at 23 percent.
The bank has identified more profitable segments within retail like microfinance, personal loans, small business banking, loan against property etc that should counter the margin pressure coming from working capital-driven incremental corporate lending.
The competitive advantage of a strong liability
The bank has seen steady reduction in the cost of funds. While it has seen a moderation in margins (NIM) due to a sharper fall in lending yields and interest reversals due to NPA, we believe the competitive cost of funds has helped the bank in participating in lending that is now dominated by MCLR (marginal cost of funds based lending rate). Incidentally, the proportion of MCLR linked lending has touched 40 percent from 4 percent in June 16.
Gaining market share
Amid the pain in the asset book, Axis Bank, nevertheless, is steadily improving its market share, gaining at the cost of capital-starved PSU banks who are weighed down by asset quality woes. In overall advances, the market share of Axis is now 5.2 percent (4.8 percent in the year-ago period) and its share in incremental advances is over 10 percent.
De-risking incremental lending
The lending book is getting de-risked. Close to 70 percent corporate exposure is rated at least ‘A’ and 85 percent of incremental sanctions is rated ‘A’ or above. Nearly 78 percent of SME exposure is towards working capital and the incremental corporate lending too is largely driven by working capital.
Capital infusion – arsenal for future growth
Axis Bank has recently announced it is raising close to Rs 11,626 crore, of which equity is Rs 9,063 crore and the remaining is warrants to Bain Capital & affiliates, and Life Insurance Corporation. The equity dilution would be of the order of 9 percent. Besides boosting the capital adequacy ratio, the additional capital provides enough ammunition once growth makes a comeback.
Albeit the compression in margin, we expect the earnings traction to come from growth in advances and reduction in provision as credit cost normalises on the back of falling incremental slippages.
The stock of Axis Bank has underperformed the benchmark Nifty (15 percent return against 30 percent of Nifty) in the past one year. Although at the current market price the stock is 3.5 percent away from its 52-week high, there is enough head room in the context of the valuation and fundamental moats.
Prior to the asset quality crisis, in March 2015, the stock price of Axis was Rs 647 – at a one-year forward price to book multiple of 2.9X when the ROE (return of equity) was 17.5 percent.
In the current context, while the return of equity would be suppressed despite profitability improving on account of the capital raise, the valuation at 1.8X FY19 book has immense scope for a rerating.
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