In FY2017, Axis Bank had its worst performance in two decades, where a combination of all negative factors led to its worst RoE. Many corrective steps taken today augur well for the next cycle. We expect fresh additions to decline; but we are still not comfortable with the bank’s exposure in the power sector. We note the bank’s underperformance and valuations closer to 2X offer limited upside; maintain our REDUCE rating. In many ways, in FY2017 the bank probably had its worst performance on many counts: Slippages were high and off the mark in terms of expected portfolio performance. Corporate banking reported its first loss due to high provisions for bad loans, benefit of demonetisation on CASA was relatively weak as it lost market share in savings, loan growth slowed down sharply to 10% YoY as the bank is in the midst of realigning its corporate book, RBI had to intervene at the sector level by asking banks to report their estimate of NPLs compared to their reported numbers. Axis Bank was at ~4.4% of gross NPLs compared to ~1.7% reported in FY2016.
(6) RoEs touched a two-decade low at 7% led by high credit costs and NIM compression. Axis Bank’s stock price broadly reflected our view of a possible risk of negative surprises from its corporate banking portfolio. This has resulted in relatively higher underperformance over the past 1.5 years. Multiples which peaked at ~2.7 to 3X PBR in this period steadily de-rated to 2 to 2.2X PBR, which in our view is closer to a fair multiple. The change in opinion, in our view, is probably warranted but we are waiting for a bit more comfort on the bank’s power sector exposure. We paint a similar picture for ICICI Bank and Axis Bank though the former has an advantage as in some its exposures M&A transactions were concluded and stake sale can be done of its subsidiaries, giving it an advantage as valuations are still relatively inexpensive. Axis Bank is making all the right decisions today with its strong liability franchise. We see a higher share of sanctions to better rated corporates, focus on low ticket, low-risk retail segment.