There’s been a lot of noise around Axis Bank’s asset quality in recent times. Given that the bank's bad loans are expected to surge, the stock price has come under much pressure. The bank is trading at a 56 per cent discount to HDFC Bank, compared to 33 per cent in the last five years, claim analysts. Though the price has seen some recovery in the last one month, the valuation is still considered to be cheap.
The bank's shares are available at lower than its trough levels. Systematix Institutional Equities says the bank is trading at 1.4 times FY14 adjusted book value (ABV) and in extreme trough scenarios, the bank is available at 1.8 times FY14 ABV assuming all the NPAs and restructured assets are written off from the book.
There’s no doubt that asset quality pressures would increase till the economy revives meaningfully. However, analysts don’t see any major risk to the balance sheet. Analysts believe healthy growth in operating profit would help the bank deal with any surge in non-performing loans. Also, the bank’s average current and savings account deposits at 39 per cent will also help the bank maintain margins.
Axis Bank’s net interest margin, which fell 38 basis points to 3.37 per cent in the first quarter of FY13, could expand, as the share of retail advances in its loan book goes up. Most analysts don’t expect any significant margin decline in FY13, as the asset-liability profile is not skewed against the bank. Also, nearly 65 per cent of the bank’s term deposits are bulk deposits, where interest rates have already come off by 250 basis points.
While corporate loans account for 55 per cent of total advances, its retail portfolio, at 24 per cent, is expected to go up to 30 per cent. The bank has also brought down its exposure to small and medium businesses over the last few years and increased exposure to large companies with good collaterals.
Avendus Securities believes provisions for bad loans are likely to stay high and pull down the FY13 return on assets by up to 16 basis points. The brokerage says, “We assume NPL to remain an overhang in FY13 with a 32 basis points rise in the incremental NPL to 0.45 per cent and NPL provision/loan estimated at 100 basis points. Despite all this, net profit is expected to increase at a CAGR of 17 per cent.”
