Axis Bank: Sentiment will take a while to improve

Street doesn't attribute much to reports of fraud in a few accounts but the air of uncertainty could weigh on its stock

Despite a lot of negative news surrounding Axis Bank, its stock price has declined only by 4.3 per cent since November 8, when old high-denomination notes were demonetised. Peers ICICI Bank, HDFC Bank and IndusInd Bank have ceded 6-10 per cent of their market capitalisation in this period. Analysts say they aren’t too surprised with the Axis Bank stock’s resilience, as they believe the allegations of fraud in a few bank accounts don’t give them much ground to believe the procedures followed by the bank are not prudent. 

One more reason the stock hasn’t fallen much since the currency recall is that in the past three months, the scrip is down 21 per cent, while the other names have fallen by 4.5-9 per cent in this period. The steeper fall in Axis Bank’s stock might be attributed to the likely stress ahead due to the ongoing clean-up of its books. Axis Bank’s net profit was down sharply in the September quarter, thanks to the ongoing asset quality review (AQR) process. As the deadline to fulfil AQR is nearing (March 31, 2017), the Street is divided on whether much of the pain is done with for the bank. 

Lately, a few foreign brokerages have been turning a tad positive. Analysts at Citi feel there are reasons to look beyond non-performing assets. “Axis Bank’s asset quality problem is fairly well defined, with a large part of the slippages coming from the watch list. Total stressed assets, including the watch list, have remained stable,” the analysts highlight in their report. Those at Nomura, while upgrading their recommendation on Axis Bank from ‘neutral’ to ‘buy’, state that the asset quality risk now seems to be factored in by the Street. But, they also warn that the bank’s watch list, despite reducing by 40 per cent due to loan accounts classified in the watch list turning bad (slippages), is still not conservative. 

According to Nomura’s report, 75 per cent of Rs 5,070 crore of the refinanced book and 35 per cent of the Rs 6,700 crore of restructured book are not included. “Also, some large exposures like Jindal Steel and Power, which are not part of even State Bank of India’s watch list but have debt-servicing issues, could turn stressed if the commodity cycle reverses,” the analysts add. 

The ongoing pullback of old notes might also dent the picture more for the bank. Analysts at Citi have factored in a slowdown in Axis Bank’s loan growth to 9-10 per cent in FY17. Prior to demonetisation, the consensus was the bank would expand its loan assets by 21 per cent in FY17. 

Interestingly, some domestic brokers, too, are renewing their optimism on the Axis Bank stock after the steep correction since September. But, they are not in a rush to change their stance. While Siddharth Purohit of Angel Broking feels while most of the pain is priced in, he doesn’t expect any sharp rise in the stock price until more clarity emerges on the weak loan assets. 

“We have a ‘neutral’ rating on Axis Bank and would have to wait and watch how the watch list and other fundamental aspects pan out,” says Alpesh Mehta of Motilal Oswal Securities. 

The many moving parts still clouding over the bank explains why only 41 per cent of analysts polled on Bloomberg feel the bank’s stock is a ‘buy’, against 63 per cent six months ago.