Investors can’t stop piling up on the stock of Axis Bank Ltd, India’s third-largest private sector lender. Part of this is driven by the hope that the bank’s new CEO will narrow the gap with the top private sector lender, HDFC Bank Ltd.
Axis Bank’s stock has risen 20% so far this year, while HDFC Bank and second-ranked ICICI Bank Ltd haven’t managed to notch up more than 9% increase, each. Axis Bank’s new managing director and chief executive officer (CEO), Amitabh Chaudhry, is making all the right noises on strategy, and analysts seem to have bought the idea that the bank’s return on equity target of 18% by 2021-22 is achievable.
The bank’s management made a presentation to analysts last week, wherein Chaudhry outlined a cautious game plan, which was laced with enough aggression.
“I did not come here and appear for the interview to remain No. 3. Let me put it that way," Chaudhry told The Hindu Business Line newspaper. This reveals much about his aggression. But he is not willing to compromise on the quality of the assets either, which is a heartening sign.
Especially so, since the lender saw its worst year in FY18, which ended with a massive loss of ₹2,188 core for the March 2018 quarter. This was a direct fallout of its past mistakes of taking on too much risk. Axis Bank has been on the mend ever since, consciously hacking off the dodgy BB-rated loans and bringing down the share of even loans rated BBB. Its slippages have been on the decline, and it has built a reasonable insurance against risk, with a provision coverage ratio of 75%.
Under the new leadership, the lender is clear that project financing is a strict no-no and new borrowers need to be strong, if not pristine, on credit quality. At the same time, the bank is firing on all cylinders to grab retail business as well as growth in working capital financing.
But falling risk tempers returns. Axis Bank is chasing good credit and more retail loans at a time when interest rates are poised to slip. Ergo, analysts are expecting margins to compress going forward.
Besides, a superior performance under the new leadership has already been factored in by the Axis Bank stock when Chaudhry took over in January. In fact, the recent surge in the stock price looks like an overkill. The stock trades at 2.5 times its estimated book value for FY20, more expensive than ICICI Bank’s 2.1 valuation. This is beginning to make some investors edgy.
Also, not all analysts believe that Axis Bank’s performance would improve markedly from previous quarters. Citing that the stock is priced to perfection, Centrum Broking Ltd said, “While we are optimistic that management will deliver on guidance for the long term, we remain circumspect about the near to mid-term outlook."