Deutsche Bank downgrades Axis Bank, indicates high stress

Deutsche Bank has downgraded Axis Bank to hold but not changed the target to Rs. 590 per share. The firm has warned the stock to lack near-term triggers as it remains one of the structurally strong banks considering a weak transitionary phase.

The stock witnessed an uptick of 51 percent in the last six months outperforming Sensex (up 22 percent) and Bankex (up 42 percent).

Deutsche Bank is cautious that its stress is likely to remain elevated resulting in higher credit costs and expects recovery only in FY19.

It expects slippages to rise to three percent in FY17 and will remain elevated in FY18 as well.

There are non-fund limits (one percent), restructured loans (two percent), SDRs (one percent) and the SME exposures, which will continue to impact asset quality. Deutsche Bank believes that 60 to 70 percent of this should turn into non-performing loans (NPLs) and will require elevated credit costs.

Axis Bank Q1 was disappointing with profit falling 21.4 percent to Rs. 1,555.5 crore on yearly basis, impacted by sharp surge in provisions. Its net interest income, the difference between interest earned and interest expended, grew by 11.4 percent to Rs. 4,516.92 crore in the quarter ended June 2016 compared with Rs. 4,056.23 crore in the same period last fiscal.

During the quarter, the bank added Rs. 3,638 crore to gross NPAs; recoveries and upgrades were Rs. 140 crore and write-offs during the quarter were Rs. 32 crore.