Is the worst behind Axis Bank post disclosure?

Analysts say the disclosures by Axis Bank give better clarity on earnings going ahead

Some of the private sector banks are increasingly looking like public sector ones. After ICICI Bank declared that Rs 44,000 crore are at risk of turning toxic, it was the turn of Axis Bank to declare that it was monitoring Rs 22,600 crore worth of assets, 60% of which can turn non-performing. The result: ICICI Bank reacted negatively to the disclosure, but Axis Bank trades higher.

Part of the reason for no reaction in the market is that the news was already discounted because the disclosure was made at the time of results in April. Further, the maximum stress in Axis Bank’s books is in the power and iron and steel sector. Most of the issues in the power sector are sorted out, especially on the environment and fuel availability fronts. Similarly, iron and steel sector is in a revival mode with the government imposing heavy import duties on cheap imports from China, Japan and South Korea.

According to veteran banker KV Kamath,  the economic growth and asset resolution will take care of the challenge. Kamath pointed out that China, nearly 13 years back, had a non-performing asset of nearly 50% of its GDP. India’s NPAs were then only 5 to 10%, the same proportion as of now.

Indian banks have been disclosing their non-performing assets that were earlier hidden. The sharp rise in provisioning by banks across the board in the final quarter is a result of the change in norms.

In a conference call with analysts, Axis Bank said they are maintaining provision coverage of 70% which adds up to Rs 9,000 crore, much higher than the average of Rs 2,208 crore. Axis Bank’s management pointed out that there is scope of NPA’s increasing from outside the watch list. Accretion to the list can be from small and medium enterprises books and the retail book.

Motilal Oswal, in a note on the bank’s results, has said that with the disclosures, Axis Bank has identified nearly 14% of corporate loans as additional stress. Giving some colour to the watchlist, Motilal Oswal’s report points out that nearly 79% of these loans were disbursed between FY10 to FY12 and 17% were prior to FY09. Iron and steel account for 24% while Power accounts for 23%.

But what is worrying is that out of the known ‘leveraged groups’, nearly 75% of them are outside the watch list. Also, 28 per cent of loans of restructured assets are not in the list.

So is the worst behind Axis Bank now that it has transparently declared its problem assets?

As in the case of ICICI Bank, analysts downgraded their earnings estimate of Axis Bank. Motilal Oswal has downgraded its earnings estimates by 10% for the present fiscal and the next. But given the strength of the bank’s network and presence, the research firm says that the bank is geared up to ride the next growth cycle. Its strong presence in the retail and SME (small and medium enterprises), strong capitalisation of 12.5% and expanding liability franchise makes it rightly positioned to catch the next wave of growth.

Analysts have appreciated the transparency shown by the bank. Angel Broking in its note says that the disclosure by the bank gives better clarity on earnings going ahead; further, the core business of the bank continues to grow strong.

In the analyst community, all seems to have been forgiven for Axis Bank.