Stock Fundamentals

Why you should hold on to Axis Bank till Covid-19 impact blows over

Radhika Merwin | Updated on May 03, 2020 Published on May 02, 2020

Near-term risks to earnings persist, owing to slower loan growth and lower fee income

Amid the Covid-19-caused disruption in businesses and the market mayhem, it has been a rough ride for investors so far in 2020.

With uncertainty persisting in corporate earnings, investors could face more pain ahead in the coming months.

Axis Bank’s commentary post its March quarter results is indicative of the challenging times ahead for the banking sector.

The management stated that the country was facing an unprecedented crisis and the financial impact could be high across sectors. Therefore, in a bid to be conservative and prudent, Axis Bank made large Covid-19-related provisions during the March quarter, which led to the bank reporting losses for the January-March period.

The key takeaway for investors from the bank’s March quarter results is that, aside from loan growth faltering in the coming months, stress is likely to build up, weighing on earnings.

The Covid-19-induced slowdown would delay the normalisation of the bank’s stressed book and could lead to further downgrades into the BB and below-rated book this fiscal.

On the positive side, the bank has significantly ramped up its provision cover and sported a healthy capital adequacy ratio, which can help it tide over the increased stress in the coming quarters.

At the current price, the stock is trading at 1.5 times price-to-book, much below the 2.7 times it traded a year ago. While the stock has lost about 41 per cent so far this year and is trading at attractive levels, near-term risks to earnings estimates persist, owing to slowdown in loan growth, lower fee income, higher slippages and provisioning in the coming quarters. Hence, investors can continue to hold the stock and wait for more clarity around the Covid-19 situation before accumulating the stock.


Providing for stress

Based on an internal stress-testing exercise, the bank has made large provisions related to Covid-19 during the March quarter. From ₹3,471 crore in the December quarter, total provisions more than doubled to ₹7,730 crore in the March quarter. Of the ₹7,730 crore of provisions made, ₹1,338 crore pertains to standard assets, which include RBI-mandated 10 per cent provision on overdue loans where moratorium is granted. Another ₹2,116 crore of provisions include additional provision for Covid-19. In effect, Axis Bank made ₹3,000 crore provisions related to Covid-19 during the March quarter. This, along with additional ₹4,200 crore of bad loan provisions, resulted in the bank reporting a ₹1,388-crore loss during the March quarter.

However, the bank making huge provisions is a prudent move and will provide some buffer if credit quality across corporate firms worsens. The bank’s provision cover has increased substantially to 69 per cent in the March quarter from 60 per cent in the December quarter.

That said, provisioning could continue to move up in the coming quarters.

Much before the Covid-19 caused disruption, asset quality for Axis Bank had been under pressure, owing to its relatively high exposure to stressed sectors. Since the March 2019 quarter, slippages for the bank have been steadily rising. In the previous December quarter, slippages had spiked to ₹ 6,214 crore.

While in the latest March quarter slippages have fallen to ₹3,920 crore, in the absence of the moratorium, slippages could have been higher by ₹691 crore.

A better picture on the overall asset quality can be ascertained only after the three-month moratorium is lifted in June. As of March 2020, the bank’s GNPA ratio stood at 4.86 per cent.

A sizeable portion of loans falling under the moratorium and a notable stressed book (BB and below-rated book) warrant a close watch in the coming quarters. The management stated that as on April 25, 10-12 per cent of customers in number and 25-28 per cent of customers by value opted for moratorium.

During the March quarter, the bank’s BB and below book (fund-based) increased to ₹6,528 crore from ₹5,128 crore in the December quarter. Significant downgrades during the quarter include clients in the cement, medical services, automobiles and ancillaries sectors. The top four sectors (infrastructure construction, cement, power generation and distribution, hotels) comprise 61 per cent of the fund-based BB and below outstanding book.

The ongoing Covid-19 crisis could lead to significant downgrades in the stressed book in the coming months.

Loan growth to moderate

On the core performance front, Axis Bank has been delivering a healthy performance thus far.

As of March 2020, the loan book grew by 15 per cent y-oy, led by 24 per cent growth in retail.

Within the corporate book, the bank has been focussing on better-rated entities and short-term loans. The bank’s net interest income for the full year (FY20) grew by 16 per cent YoY.

Loan growth is most likely to moderate substantially in the coming quarter, as the full impact of Covid-19 is felt. This will impact earnings significantly, along with higher provisions.

Comforting trends

Axis Bank’s strong capital position, healthy deposit flow and liquidity position lend comfort.

The bank’s total capital adequacy stood at 17.5 per cent as of March 2020, with tier 1 at 14.5 per cent. The bank’s liquidity coverage ratio stood at 120 per cent.


Unlike some of its peers in the private sector, Axis Bank has not seen a drawndown in its deposits, which is a positive.

In fact, deposits grew by 8 per cent q-o-q to ₹6.4-lakh crore in the March quarter.

Max Life deal

Axis Bank announced its decision to acquire an additional 29 per cent stake in Max Life, the fourth-largest private life insurer.


Axis Bank currently has a minor stake (about 2 per cent) in the life insurance company and would hold 30 per cent in Max Life, post-transaction.

For Max Life, its bancassurance partnership with Axis Bank has been a key growth driver, contributing about 55 per cent to its new business APE (annualised premium equivalent).

Axis Bank’s entry into the life insurance space can add significant value to its underlying business, besides providing a boost to its fee income.

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Published on May 02, 2020
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