Loans to MSMEs, India lockdown to make Axis Bank's bad loans worse

SME slippages so far in FY20 are just little shy of FY19's Rs 11,200 crore, and may increase due to lock-outs imposed

Even when Axis Bank posted a few quarters of losses in the past years, its stock price didn’t come crashing as it did on Monday.

As early as March, there was optimism that things would turn around. But, as the country embraces lockdown to fight COVID-19, it sent the Axis Bank stock down to levels last seen in 2014. Monday’s 28 per cent price fall is the sharpest ever seen by the stock; it is also the biggest among S&P BSE Bankex components.

With 11 per cent of its loan book exposed to small and medium enterprises (SMEs), a lockdown ensures trade and commerce are brought to a standstill. This could impact the bank’s balance sheet in more ways than one.

While a lockdown may be the most efficient way of containing the pandemic, it comes at a quarter most critical to SME and SME lenders. “For banks, the March quarter (fourth quarter, or Q4) is typically the best in terms of SME loan growth. Hence, asset quality tends to be better than other quarters,” said an analyst tracking the financial services space.

While growth has been somewhat muted in the SME segment for most of the financial year (mirroring the country’s economic activity), a weak Q4 could further weigh on this parameter and cast doubts on the asset quality ability of the portfolio to hold up.

Axis Bank was among the first to turn cautious on SME loans. Accordingly, the lender has moderated its run rate in that segment since the June 2019 quarter. Yet, SME slippages in 2019-20 at Rs 11,020 crore are a little shy of 2018-19’s Rs 11,200 crore.

In a call with analysts, the bank also clarified that the overall COVID-19 impact of 30-45 days is already incorporated in the stress scenario and it won’t lead to significant impact on asset quality.

However, analysts remain cautious on the Axis Bank stock. “Non-performing assets in this segment (SME) have already been running at sub-12 per cent (for the system) and we expect them to rise further from the current levels. Among our coverage universe, Axis Bank and public sector banks have a larger exposure to the SME space,” says Suresh Ganapathy of Macquarie Capital.

Given the lockdown and expected growth deceleration in economic activity, there could be added stress in other loan segments too.

Waning ‘buy’ recommendations, according to analysts polled on Bloomberg — down from 45 ‘buy’ calls in September 2019 to 37 as on date — are also an indicator of how the Street is turning cautious on the stock.

Therefore, even if valuations of 1.4x its 2020-21 estimated book seem attractive, it’s important that investors don’t get caught on the wrong foot.