First loss means worst is over for Axis Bank as shares surge: analysts

Axis Bank Ltd. jumped the most since 2013 as an unprecedented recognition of bad loans prompted investors to overlook the Indian lender’s first-ever loss.

Provisions climbed to 71.8 billion rupees ($1.1 billion) in the three months ended March from 28.1 billion the previous quarter as an additional Rs 165 billion of fresh defaults were identified after the implementation of tighter regulations, the bank said in an exchange filing late Thursday. The Mumbai-based bank reported a loss of 21.9 billion rupees, the first in data going back to 2006, and compared with a Rs 6.62 billion profit predicted in a Bloomberg survey of 15 analysts.

With this, the recognition of bad loans in this cycle is “nearly complete,” said outgoing Chief Executive Officer Shikha Sharma. The lender’s so-called watchlist shrank to 0.1 percent of its total loan book from 1.3 percent the previous quarter and 2.5 percent the previous financial year.

“The worst seems to be over for Axis Bank,” Gaurang Shah, head investment strategist at Geojit Financial Services Ltd. in Mumbai, said by phone. “We expect the lender to step up stressed loan recovery after recognizing the stressed assets this quarter.”

‘Return to Normalcy’

Bad-loan formation will be lower in the year through March 2019 and resolutions of stressed accounts should be expected in the first half, analysts at Prabhudas Lilladher, led by R. Sreesankar, wrote in a note. “Margins look bottomed out.”

The Mumbai-based brokerage cut its target price on India’s third-largest private bank to 585 rupees from 621 rupees with a recommendation to buy the stock. Emkay Global Financial Services Ltd. cut its target to 560 rupees from 591 rupees with a recommendation to accumulate. BOB Capital Markets cut its forecast to 595 rupees from 660 rupees with a call to add.

Axis Bank shares rose 9.2 percent to 539.20 rupees in Mumbai on Friday, the biggest gain since September 2013. It led a 2 percent rise on the 10-member Bankex index and a 0.7 percent advance on India’s main equity gauge.

Axis’s CEO Sharma will step down at the end of 2018, more than two years before the proposed end of her term, after the regulator reportedly question the lender’s performance.

“Currently, we do not factor any disruptions due to change in management and shall wait for the event to play out,” Ravikant Bhat, an analyst in Mumbai at Emkay Global Financial Services Ltd., wrote in a note. Despite the bank’s upfront recognition of stressed assets, “residual pain is still left” and he expects Axis “to return to earnings normalcy” in the year ending March 2020.

Separately, the lender said it plans to borrow as much as 350 billion rupees through local and foreign currency debt securities.