Axis Bank: After rise in NPAs, recovery hopes shift to FY18

In Q2, with loans turning into non-performing assets jumping to Rs 7,288 crore, concerns increase significantly

Axis Bank was among the few corporate lenders that won investors’ trust two quarters ago, when it first announced a ‘watch list’ (loans which could potentially turn bad) of Rs 22,628 crore.
 
But, in the past two quarters, it is the watch list that is creating issues for Axis Bank. In the first quarter (Q1) of FY17, when Rs 2,680 crore of loans turned bad, representing 12 per cent of the total watch list, it raised concerns on the bank’s asset quality picture. In Q2, with loans turning into non-performing assets jumping to Rs 7,288 crore, concerns have increased significantly.
 
Further, the bank has forecast higher pain from the watch list against the previous projection of 60 per cent of assets under watch list turning bad. Adding to the earnings trouble, credit costs at 300 basis points (earlier 150 bps) could remain elevated for most of FY17. And, the recovery in earnings and improvement in asset quality, earlier expected by the second half of FY17 has been deferred to FY18.
 
These developments explain why Axis Bank’s stock tanked eight per cent on Wednesday’s trade to Rs 485. This single-day fall has significantly reduced the year-to-date gain of the bank to 8.3 per cent.
 
Consequently, analysts are reducing their expectations from Axis Bank. JM Financial has sharply cut its FY17 earnings estimate by 40 per cent to build in the revised guidance. Jefferies expects the net interest margin at 3.5 per cent, with an expense ratio around 43 per cent, implying 8.9 per cent growth in FY16-19 earnings per share.
 
However, not all analysts are in a rush to downgrade their recommendation. Brokerages such as JP Morgan, Credit Suisse and Jefferies retain their ‘buy’ rating, as they say their expectation for FY18 remains largely unaffected for now.

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