Axis Bank's multi-year low valuations a worry for investors

In addition, there's also growing stress in the bank's SME (small and medium enterprise) loans, a segment which was fast growing until FY20

Axis Bank is among the few lenders to have closed two successful rounds of capital raise (approximately Rs 25,000 crore) in less than a year, as well as grow its business at 13 per cent in the June quarter (Q1).

However, the Street doesn’t seem to have been too enthused, which reflects in its 41 per cent year-to-date price erosion, and multi-year low valuation of 1.3x its FY22 estimated book.

Instead, its multiples may be reflecting parameters on which the lender has failed to meet expectations.

For instance, Axis may be way off its earlier stated 18 per cent return on equity (ROE) target for FY22. This may have upset investors who had turned positive on Axis with the appointment of Amitabh Chaudhry as MD and CEO.

Though Chaudhry had in April indicated that these targets were hard to meet, the revised targets are yet to be announced. The best-case ROE projection for FY22 by analysts is 10-11 per cent.

Whether this was Covid-caused, or there was trouble regardless of the pandemic, is the real question. A reading into the bank’s trajectory of slippages and watch-list indicates the latter, and that Covid may have only added to woes.

 

 

Following the sharp reduction in slippage ratio to 3.28 per cent in FY19, Axis saw an uptick to 4.12 per cent in FY20; projected figure for FY21 is 4.3-4.6 per cent. With the loan recast set to kick in by the December quarter, stress is unlikely to ease next financial year.

Its watch list, or loans classified as stressed (Rs 15,500 crore), remains unabated at 2.8 per cent of total loans, according to JM Financial.

There’s also growing stress in SME (small and medium enterprise) loans, a segment that was fast-growing until FY20. Suresh Ganapathy of Macquarie Capital notes that the bank’s SME non-performing asset (NPA) ratio, at 6.4 per cent, is higher than the system’s 4.7 per cent.

Retail loans, up 16 per cent year-on-year in Q1 but off the 20 per cent-plus run-rate, and the corporate book (up 16 per cent), have lent much strength. Over the last two years, Axis has decided to focus more on retail loans, than corporate.

While investors may not punish it for slowing growth, Goldman Sachs says Axis Banks’s ‘loan-loss provisioning to operating profit’ ratio, estimated at 67 per cent in FY21, makes profitability more vulnerable to an increase in credit cost, if asset quality deteriorates or provisions are hiked.

Simply put, the timing may have gone wrong for Axis with respect to changing its lending strategy, and asset quality correction. Undoing these may be an uphill task in the present environment.