 "Liquidity overhang a negative in Axis Bank stake sale")
It made little sense for the government to hold on Axis Bank through the investment vehicle Specified Undertaking of the Unit Trust of India (SUUTI). In fact selling all its holding in SUUTI would have helped garner more money for the government rather than selling its stake in a number of PSUs at a huge discount to the market price. But that is a different story, our main concern now is what does the stake sale mean to the investor.
Fundamentally speaking – nothing. Government had no say in the functioning of Axis Bank despite its high holding in the company. Technically speaking, it is an advantage for the government since the stake sale has come after a nearly 25% run up in the stock over the past one month.
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The biggest concern that this stake sale brings is of excess supply of shares in the market. Though the shares will be cornered by institutional investors including of course LIC, these shares are bought with an intention to sell at the appropriate time to make a profit. There will thus always be an overhang of extra supply coming in from these investors as price moves higher. Also, in case of a sharp correction some of the funds might want to exit if the stock falls below their maximum pain point.
For retail investors, nothing has changed in the fundamentals of the bank. It is cheaper than its private sector peers like HDFC Bank and ICICI Bank. Like most other private sector banks Axis Bank is also increasing its focus on retail segment. The company already has a sizeable share of corporate portfolio but the focus is clearly in increasing share of retail loans which have already moved up from 20% in 2011 to 33% in the third quarter of current fiscal.
Axis Bank has high level of low cost funds from current and savings account (CASA), which stands at 42-43%, comparable with its peers HDFC Bank and ICICI Bank and much ahead of other private sector banks. This helps in keeping its cost of deposits low at nearly 6.2% and its net interest margin at 3.4%. The only concern is the relatively high restructuring on account of a high corporate loan book. But the important point is none of these changes with government’s stake sale.
Also the impact on increased liquidity will not be immediately felt though the overhang will have some impact. But if the buyers of government stake are mostly insurance companies or long only funds then even the liquidity issue will no longer be a concern.