Why Axis Bank Surged Despite Surprise Q4 Loss, Brokerage Downgrades
Shares of Axis Bank Ltd. rose the most in 11 weeks in early trade today even after the bank reported its first quarterly loss since it listed.
The stock rose as much as 5.9 percent to Rs 522.8, becoming the top gainer on the S&P BSE Sensex and NSE Nifty 50 indices.
Analysts chose to focus on the bank’s decision to speed up recognition of stressed loans and the relatively high provision coverage ratio maintained by the bank.
A large part of the bad loan pain during the quarter was driven by front-ending of bad loan recognition, Japanese brokerage Nomura wrote in a note. “The slippages were higher but were largely from the known stress pools which now is reduced to Rs 11,500 crore.”
Investors are positive as the bank is cleaning up the balance sheet, Siddharth Purohit, research analyst at SMC Institutional Equities, told BloombergQuint. “Most of these [fresh slippages] have come from the known sources, watchlist or low-rated corporates. There is much more predictability in terms of asset recognition compared to a couple of quarters back, and that is what the market is recognising right now.”
The management was confident that their credit costs will start normalising from the second quarter. That, Purohit said, was also a positive sign.
Axis Bank reported a net loss of Rs 2,188.7 crore in the January-March quarter compared to a profit of Rs 1,225 crore a year ago. Analysts tracked by Bloomberg had estimated a Rs 663 crore profit. The bank's provisions for bad loans jumped to Rs 7,179.5 crore compared with Rs 2,811 crore in the previous quarter. It reported slippages worth Rs 16,536 crore during the quarter.
While some analysts chose to focus on the bad loan clean-up being accelerated, others were skeptical as to whether the bank has completed the recognition process. “Don’t think it is the end of the bad loan recognition yet,” said Saswata Guha, director of financial institutions at Fitch Ratings, told BloombergQuint in an interaction.
Credit Suisse, in its report, also pointed out that some stress remains on the bank’s balancesheet.
Residual stress is still at close to 3 percent of loans and elevated non-corporate slippages will continue to weigh on profitability.Credit Suisse
Some other analysts pointed to the reasonable valuations of the stock as one reason for the bounce in its share price.
The stock trades at 1.7 times its book value for the next financial year through March 2020, according to Manish Ostwal, senior research analyst, Nirmal Bang Securities. That does not look expensive, he said.
About 55 percent of the analysts polled by Bloomberg have a ‘Buy’ rating, 15 suggest ‘Hold’, while the rest have a ‘Sell’ recommendation. The Bloomberg consensus one-year target price is Rs 595.9—an upside of 20 percent from April 26 close.
Here is what the brokerages had to say on Axis Bank:
- Tough quarter for the bank with non-performing loans’ recognition finally coming through.
- While this results in an earnings cut, it doesn't change Jefferies’ view of the NPL cycle.
- Cut estimates owing to lower net interest margin, lower loan base and higher credit costs.
- The stock has corrected sharply and thus provides a good buying option.
- Retained ‘Buy’; reduced the target price to Rs 655 from Rs 710—suggesting potential upside of 32.8 percent.
- The underlying operating and asset quality trends are weaker than expected but a large part of the pain is also driven by front-ending of pain.
- Slippages were higher but were largely from the known stress pools which now is reduced to Rs 11,500 crore.
- Cut net profit estimates for the current financial year by 37 percent and for next financial year by 9 percent to factor weaker pre-provisioning operating profit.
- Still expect return on equities to normalise to 15 percent or more by March 2020.
- Current valuation at 1.5 times the book for financial year 2020 is not demanding with a possibility of credit costs undershooting long term average.
- Maintained a ‘Buy’; lowered the target price to Rs 630 from Rs 675 with an upside of 27.7 percent.
- Big clean-up quarter for the bank.
- Cited higher credit costs for lowering its earnings estimates.
- Expects profit to normalise from the next financial year.
- Little upside at 1.8 times the expected book value for the current financial year.
- Maintained ‘Neutral’ stance and raised the target price to Rs 595 from Rs 530 with a potential upside of 20.6 percent.
- Healthy growth in CASA, up 14 percent year on year to 54 percent of the deposit.
- Elevated pace of fresh stress loan formation at 3 percent of past-year loans during the fourth quarter is disappointing.
- Lowers earnings estimates due to higher credit costs and expect earnings to normalise from the next financial year.
- Well capitalised with common equity tier-1 ratio of 12 percent.
- Expect credit costs to stay elevated.
- A key positive surprise could arise from recoveries from NCLT loans (18 percent of NPLs) and the bank carries 67 percent coverage against these.
- Stability of asset quality and transition at the CEO level will be key to earnings and valuations.
- Retained 'Buy', but lowered the target price to Rs 610 from Rs 730 with a potential upside of 23.7 percent.
- Cut earnings on sharp deterioration in asset quality, driving 9 percent decline in financial year 2020’s adjusted book value.
- However potential improvement in Tier-1 on building in the warrant conversion and steady trends in core business will help expand return on assets to 1.1 percent by March 2020.
- Maintained ‘Buy’ and reduced the target price to Rs 600 from Rs 650 with a potential upside of 21.7 percent.