Axis Bank regaining lost ground

Following mega fundraising plans, analysts have upgraded their rating

After being a laggard among private sector banks for a long time, things are reversing for Axis Bank. The stock has gained 11 per cent in the past one month, outperforming its peers and the broader markets. The recent Rs 11,600-crore fundraising plan announced by the lender and signs that asset quality stress could likely ease in the next four–five quarters have lent support to the stock price.

Interestingly, even as the capital infusion entails reasonable equity dilution — pegged at eight-nine per cent on a fully dilutive basis — the Street is quite upbeat with the progress. That the money will not come to the bank at a valuation discount is another factor that many appreciate. Moreover, top-notch names such as Bain Capital subscribing to nearly 60 per cent of the fresh issue is perceived as a sign of confidence.

Manish Karwa of Deutsche Bank in a note says that as the overhang of a likely capital raise goes away, it should provide a clear path for growth. “Our confidence has increased,” he adds, while raising the target price on the stock by eight per cent to Rs 620 apiece. Many brokerages, including Maybank KE, Quant Capital and Motilal Oswal Financial Services, turned positive on the bank after the fundraising plan, while Morgan Stanley turned overweight prior to the announcement.

The optimism is despite a significant portion — about 50 per cent of fresh capital — likely to be consumed to meet the provisioning requirement under the new accounting standards applicable from FY19. Nonetheless, there is better comfort over the bank’s asset quality. From the September ‘16 quarter when the Reserve Bank of India’s asset quality review was under way, to now (September ‘17), the bank’s gross non-performing assets have expanded almost fivefold. Consequently, analysts at JP Morgan state the peak of stress has passed and FY18 will be the last year of below-par return on equity. Even doubts about the bank’s watch list or assets identified as potential stressed ones are somewhat easing.

Therefore, with capital unlikely to be an impediment for Axis Bank in the medium term, the focus would shift to monitoring its loan book growth.

Analysts believe at least Rs 5,000 crore of fresh equity would be available towards this purpose. “Fresh capital issuance should help divert focus towards loan growth revival, strong Casa (current account saving account) and fee income growth,” Karwa spells out. Lending to the small and medium enterprises and retail borrowers are seen as drivers of growth. Axis Bank is also pruning its exposure to large corporate borrowers which would prepare it for the next phase of growth. These augur well for the lender and justify the return of optimism on the bank’s stock.

Yet, with gains of 11 per cent in the past month, the stock seems to have discounted these positives a bit too much. Valuations have risen to 2x FY19 price-to-book and at these levels, Axis Bank is at a premium to its peers such as ICICI Bank and State Bank of India. A meaningful correction could be a good entry point.