Axis Bank targets 18% ROE as investors take a second look
By Suhani Adilabadkar Axis Bank (which is in 19 stock screeners) is back on investors radar. After a tumultuous 2016-18, analysts and brokerages have been upgrading the stock for the last three quarters. The rising share price of Axis Bank has raised investor wealth by 37% vis-à-vis, the Bank Nifty moving up by 18% YoY. Though dislodged by Kotak Mahindra in terms of profitability and market capitalization, Axis Bank still remains the largest Indian Private Sector Bank by assets. The Bank seems out of the woods galloping on the long green runway of Indian economy. Quick Takes Axis Bank had reported GNPA ratio of 6.77%, Net NPA of 3.40% and Net Loss of Rs. 2189 cr for the first time in Q4 FY18. Axis Bank paid a heavy price for pursuing unbridled loan book growth by lending to risky, low rated companies. In December quarter BB & Below pool has been reduced to 1.4% of Gross Customer Assets against 7.3% in Q1 FY17. Back on the growth path, in Q3 FY19, Net profit galloped 131% YOY to Rs. 1681 crores, NII stood rose 18%, Non-interest income grew 54%, Deposits were up 26% YOY and retail loan book 20% YOY. Forgettable years of de-growth The Hows and Whys of share price shits are important questions in the mind of a layman investor. Axis Bank peers such as HDFC Bank and IndusInd did not exhibit this roller coaster ride in their financials. One reason was because they saddled up the growth stallion before riding through the economy's volatile domestic and global scenario. And that is what happened to Axis Bank - It toppled for about four consecutive quarters of FY17. Net Profit shrunk 21% in the June quarter, 83% in September and fell 73% and 43% YoY in last two December and March quarters FY17. A complete wash out continued as skeletons kept coming out exhibiting inefficient credit risk management practices followed by the bank. It was an astounding decline for the third largest player with one of the best NIMs, CASA and robust loan book in the industry ending up with GNPA ratio of 6.77%, Net NPA of 3.40%, Provisions trebling to Rs. 7180 cr and Net Loss of Rs. 2189 cr for the first time as PAT declined 278% YoY in Q4 FY18. Axis Bank especially suffered from the “Banking Sector Clean Up” which started in early 2016. As a result all banks were handed over brooms to clean up years of cobwebs and put their house in order. Followed by IBC code, upgrading NPA recognition regulations and stringent Asset Quality Review under taken by the RBI, made the underlying weather hot and humid for the Indian Banking Sector for the last three years. As for Axis Bank, heavy price was paid for pursuing unbridled loan book growth by lending to risky, low rated companies especially in troubled power, iron & steel, infrastructure and textile sectors to name a few. Gross NPA formation in the fourth quarter FY18 was Rs. 16,536 crores, of which Rs. 13,938 crores was from the corporate lending book. And of all corporate slippages, 90% came from the low rated BB & below pool. Axis Bank On the Mend The recovery work started in the fourth quarter FY18 itself as the Bank significantly accelerated NPA recognition in its corporate lending book. The fountain of NPA mess, BB & Below pool was reduced to 1.8% of Gross Customer Assets against 7.3%, the unrivalled peak in Q1 FY17. After realizing the root cause of this entire NPA mess exercise, there has been a fundamental shift in terms of credit underwriting and the Bank’s corporate lending segment is now based on four dimensions, reducing concentration risk, creating a highly rated lending book, increasing the share of working capital loans and transaction banking revenues and moving towards deeper bond markets through our DCM franchise. The Bank is aiming to enhance its deposit growth to fund strong loan growth, as its market share stands at a low 4% for deposits and roughly 5% for loans. On the Profitability front, Axis bank aims to reduce its credit costs below its long- term averages, significant portfolio mix decisions to be based on assessment of Risk Adjusted Return on Capital, strive for higher cost efficiency by reducing cost to assets ratio to 2% and focus on higher margins and fee income. For the Sustainability strategy, the Bank is looking to strengthen its core operations, processes, reinvest in risk management architecture and reorient its organizational structure. MD & CEO Amitabh Chaudhry said, “Our goal at Axis Bank is to deliver 18% ROE on a sustainable basis by focusing on these three vectors Growth, Profitability and Sustainability across the Axis Franchise”. And all of this is to be achieved in the next three years. Sounds ambitious, but the third quarter results have been encouraging, where Net profit galloped 131% YOY to Rs. 1681 crores, Operating profit grew 43% and core operating profit jumped 41% YOY. NII stood at Rs. 5604 crores, rising 18%, Non-interest income grew 54%, Deposits were up 26% YOY, NIM came out at 3.66%, CASA at 46% and Retail and SME book comprising 62% of total loan book grew 20% and 13% respectively. Last but not the least, 82% of corporate exposure is ‘A’ rated or higher, BB & Below corporate portfolio has declined to 1.4% of Gross Customer Assets, RWA to Total Assets ratio at 71% improved 600 basis points YoY and GNPA and Net NPA improved 21 and 18 basis points sequentially in Q3 FY19. If this growth momentum is maintained, an 18% ROE target looks achievable.18-03-2019