Axis Bank: Banking on core performance

The growing stress in the banking sector has spared few. Even private banks that managed to keep their bad loans under check through most of 2014 have been weighed down by the slow pace of investment activity in 2015.

Axis Bank that has a higher exposure to troubled sectors, such as power and infrastructure has seen asset quality worsen in the last one year. This has weighed on the stock, which has tumbled over 30 per cent in the last one year. However, the sharp correction in valuation offers a good buying opportunity for investors with a long-term horizon. At 1.6 times one-year-forward book, the stock is trading lower than its five-year historical average of 2.1 times. At these levels, value is clearly emerging in the stock, given its ongoing strong core performance and ability to ride the economic recovery, when it happens.

Axis Bank took a sharp knock after its September quarter earnings, when investors were disappointed by the sale of two accounts worth Rs.1,820 crore to asset reconstruction companies (ARCs), because this meant a substantial jump in its stressed assets. In the December quarter too, the bank added Rs.2,082 crore to bad loans.

About half of the slippages during the quarter have been due to the recognition of bad loans in accordance with the RBI’s assessment of stressed accounts in the banking system. Further stress in loan book cannot be ruled out, with the management expecting slippages in the March quarter to the tune of Rs.1,300 crore.

Key positives

But strong retail loan portfolio, sound profitability and healthy deposit base are key positives. Axis Bank has been de-risking its loan portfolio by focussing on the retail segment over the last two to three years.

Healthy traction in the bank’s retail loans has kept earnings in good stead. In the latest December quarter, Axis Bank delivered 21 per cent growth in loans, driven by a healthy 27 per cent growth in retail loans.

Despite the sharp rise in bad loan provisioning, the bank managed to deliver 17 per cent growth in earnings in the first nine months of this fiscal.

Axis Bank is also well placed to ride the economic recovery; corporate loans that constitute about 47 per cent of loans are likely to get a leg-up. The bank is also well-capitalised to fund its next leg of growth.