Axis Bank shares crash 9.4% as asset quality worsens

Brokerages cut price target and earnings forecast

Shares of Axis Bank dropped on Wednesday by the most in two years, after the third largest private sector lender’s profit missed Street expectations, amid worsening of asset quality. The stock declined 9.4 per cent to close at Rs 465, with a little more than Rs 10,000 crore of value getting eroded.
 

Source: Brokerage reports

Axis reported gross non-performing assets (NPAs) of 5.9 per cent for the quarter ended September, compared with 4.17 per cent for the same quarter last year. It reported net profit of Rs 430 crore on Tuesday, after the market closed, much lower than the analysts’ forecast of Rs 1,320 crore.
 
The disappointing results spooked investors and sparked concerns about the recovery of stressed assets in the banking sector. Most banking stocks also saw sharp declines, even as the benchmark indices remained flat.
 
ICICI Bank fell four per cent and State Bank of India declined three per cent. The BSE Bankex, a gauge for performance of stocks in the segment, fell 1.8 per cent. In comparison, the benchmark BSE Sensex fell 0.1 per cent.
 
The 12-month consensus price target for the Axis Bank stock saw a five per cent cut, accordint to  data provided by Bloomberg.
 
At least half a dozen brokerages, including Morgan Stanley, BNP Paribas and JP Morgan, cut their price target on the stock by five to 12 per cent.
 
Analysts see pressure on profit, as the bank expects credit costs to go up. Chief Financial Officer Jairam Sridharan, in a conference call, said these costs for the year would amount to 220 to 260 basis points (bps), higher than earlier estimate of 175 to 225 bps, due to higher slippage in bad loans.
 
The results were “the most disappointing quarterly earnings” as it missed on all key operating parameters, according to a note from Goldman Sachs Group, which cut its price target on the stock by three per cent to Rs 431.
 
“Continued disappointment from outside watch-list slippages has rattled investors’ confidence, as the sanctity of watch-list claims stands challenged. Not only was stress creation much higher than anticipated but the road to recovery is also expected to be arduous,” said a note by Edelweiss.
 
The brokerage cut its FY18 earnings estimate by 30 per cent and downgraded the stock to ‘hold’, from ‘buy’. It cut the price target to Rs 545, from Rs 638 earlier.
 
“The quarter was marred by higher non-performing loan (NPL) recognition and provisions. However, the pool of below investment grade exposure is steadily trending down, at 5.9 per cent of exposure ex-retail. The new business franchise remains robust, although NPL pains will be visible the next two quarters,” said Jefferies, which maintains a ‘buy’ recommendation, with a revised price target of Rs 635.