Stock Fundamentals

Axis Bank: Counting on better times

Radhika Merwin | Updated on March 16, 2019 Published on March 16, 2019

Reduction in the bank’s stressed book and improving core performance are key positives

Since fiscal 2016, when the RBI had undertaken the asset quality review (AQR), earnings of most public sector banks and a few private sector banks with higher exposure to corporate loans, were under pressure. Sharp bad loan divergences revealed after the RBI’s annual risk-based assessment over the past two years also exacerbated these banks’ asset quality woes.

Axis Bank had a relatively higher exposure to stressed sectors compared to peers. In line with the overall trend in the banking sector, the bank’s asset quality too deteriorated between FY16 and FY18. Over the past three quarters, however, the tide appears to be turning gradually.

Substantial reduction in the bank’s stressed book, steady improvement in core performance and strong traction in high-yielding retail loans are key positives that have led to the stock being re-rated sharply over the past nine months.

While the steep rally can limit the upside in the near term, Axis Bank’s large network, thrust on digitalisation, diversified loan book, and strong retail franchise are long-term drivers for earnings.



At the current price, Axis Bank trades at 2.5 times its one-year-forward book value. This is significantly higher than the 1.8-2 times that the bank had been trading at over the past two years. But prior to FY16, when the bank had a strong track record of earnings, the stock used to trade at 2.8-3 times its one-year-forward book value.

Hence, from the current levels, there is scope for further re-rating, if there is substantial improvement in earnings. The bank’s return on equity (ROE) was in the 17-18 per cent range between FY14 and FY16, which slipped considerably in the past two fiscals. A significant re-rating of the stock hinges on scaling up profitability and return ratios, and improving asset quality.

Long-term investors with a three-five-year horizon can consider buying the stock on declines linked to the broader market.

On a good footing

On the core business front, pick-up in the bank’s net interest income growth in recent quarters has been heartening. From flat to low single-digits, growth in net interest income had inched up to 12 per cent in the June quarter, aided by a one-time impact of interest realisation from recovery on an IBC account. In the September quarter, the bank’s NII has grown by a higher 15 per cent (no one-off recoveries). In the December quarter, NII has grown by a healthier 18 per cent.

While the bank’s growth in corporate loans remained muted at 4 per cent Y-o-Y (as of December 2018), retail loans grew at a healthy 20 per cent, driving the overall loan growth. The growth in retail loans has been driven by segments such as personal loan, credit cards etc, with their share in the overall retail loan mix inching up over the past two years.


The higher share of these high-yielding loans will aid margins (net interest margin - NIM), compensating to some extent for the pressure on yields (on loans) on account of the bank’s decision to focus on higher rated corporates.

The bank’s NIMs (domestic) have remained steady in recent quarters, at 3.6 per cent. An overall weak deposit growth within the banking sector and intensifying race to garner low-cost savings deposits could, however, exert some pressure on NIMs.

The move to peg lending rates on retail loans to external benchmarks (as per the RBI’s mandate), as and when it happens, could also impact earnings, though the extent of pain is unclear as of now.

Asset quality: A mixed bag

For Axis Bank, the uncertainty over asset quality is not completely out of the way.

It reported sharp slippages of ₹16,536 crore in the March quarter, while gross slippages fell to ₹4,337 crore in the June quarter and further to ₹2,777 crore in the September quarter. In the latest December period, however, slippages inched up to ₹3,746 crore, which may need to be monitored in the coming quarters.

The bank’s BB and below-rated book has shrunk substantially over the last two years. From a peak of ₹27,411 crore in the June 2016 quarter, the low-rated book is now reduced to ₹7,645 crore. Given that about 90 per cent of slippages (on an average) in the past several quarters have come from BB and below-rated book, the significant shrinkage is a positive. About 98 per cent of the corporate slippages in the December quarter came from the bank’s BB and below-rated book. After reporting bad loan divergences to the tune of ₹9,478 crore pertaining to FY16, Axis Bank had reported another ₹5,600-odd crore of divergences as of FY17. While the indicative list from the RBI for FY18 suggests a much lower ₹225 crore of divergence, any deviation in the final annual risk-based supervision report may need monitoring.

For Axis Bank, aside from steady improvement in core performance, significant easing of asset quality pressure is imperative to drive earnings over the medium term. The bank’s healthy capital ratios, however, lends comfort as they provide cushion to the incremental stress. As of December 2018, the bank’s Tier I capital ratio stood at 13 per cent.

Published on March 16, 2019

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