Axis Bank raised a massive ₹12,500 crore through a qualified institutional placement (QIP) without breaking a sweat and investors who made that happen deserve good news.
To make them happy, the third largest private lender will have to show an improvement in asset quality and convince the market that its balance sheet growth will trump that of rivals.
Improving asset quality won’t be easy and that could make balance sheet growth a challenge, too. “The QIP is a positive for the bank and the funds will be obviously used for more provisioning and even growth," said Suresh Ganapathy, analyst, Macquarie Capital Securities. “But asset quality is still unresolved and fresh stress has emerged," he added.
Moreover, since it is de-risking its portfolio, margins are going to be under pressure. So, there isn’t much earnings upside for the stock to price in.
Axis Bank has exposure to a handful of stressed companies that have of late shown deeper troubles. Some of these, such as companies belonging to Reliance Anil Dhirubhai Ambani Group and Essel Group, are yet to see some resolution.
Axis Bank also has exposure to real estate developers that were downgraded by rating agencies due to stress. Its exposure to small and medium enterprises (SME) stands at 12% and the increased stress on small businesses due to the economic slowdown has increased risk on this portfolio.
To be sure, the bank showed improvement on asset quality in the June quarter with a 10% year-on-year drop in its bad loan stock. That said, the lender also reported an increase in fresh slippages.
Analysts said some of the newer stressed exposures are not included in the watch list and so could throw a negative surprise for the lender.
To be fair, the bank has made it clear that it will have enough insurance against fresh risk. It has beefed up provisions and is likely to continue doing so.
That brings us back to the fact that if more money is set aside for provisions, less is available for growth.
Even so, the QIP money will increase its Tier-I capital by over two percentage points, which should bring some cheer.
Also, much of the negatives seem to be priced into the stock, given that it is down 3.4% over the past two months despite the 10% rise post the corporate tax cut announcement by the government on Friday.
“Our analysis shows the potential stress at Axis Bank is only marginally higher on corporate assets than at ICICI Bank, and given its underperformance, we believe it presents a good buying opportunity," analysts at Jefferies India Pvt. Ltd said in a note.
The stock trades at a modest multiple of two times its estimated book value for FY21, lower than rivals such as HDFC Bank and even ICICI Bank.