Axis Bank disclosed its exposure towards the second list of accounts where RBI has asked banks to initiate a debt resolution process. In Jun-17, RBI had identified 12 large stressed accounts for debt resolution. More recently, RBI sent the second list (26-40 accounts) to the banks to initiate a debt resolution process: 60% of the total exposure is NPA for the system in these accounts. As per the disclosure, Axis Bank has exposure of Rs 25 bn (funded + non-funded) towards these accounts. While the total exposure is lower compared with the Rs 53 bn in the first set of accounts, the important thing is that the provision cover here is lower at 35% vs the 47% provision cover it had for the first list of accounts being referred to NCLT. This would mean Axis will need to provide another Rs 9 bn in addition to Rs 21 bn for the NCLT accounts (first list). Total provisioning requirement towards these accounts of Rs 30 bn implies 37% of our total provisions estimate for FY18F.
RBI’s second set of accounts
Recently, RBI identified a second set of stressed accounts, asking banks to initiate the debt resolution process by Dec-17. Failure to do so would lead to insolvency proceedings being initiated. RBI has asked banks to make the necessary provisions on the same by Mar-18. The provisioning requirement here will be similar to what RBI has asked banks to provide in the first set of accounts, i.e., 50% of the secured exposure and 100% of the unsecured exposure. These accounts include companies like Videocon Industries and Jaiprakash Associates, as per media reports (Mint). For the system 60% of the total exposure is an NPA as of Jun-17.
Axis Bank’s exposure in accounts
Axis Bank has a funded exposure of Rs 18.4bn and non-funded exposure of Rs 6.5bn, for a total exposure of Rs 25 bn towards these accounts. It has an exposure in 12 companies of the total 26-40 accounts identified by RBI, vs exposure in eight of the total 12 in the first set of accounts. While the quantum is lower vs the first list, the key thing to note is that the provision cover here is lower as well, at 35% of the total exposure vs 47% provision cover it had in the first set of accounts. Some 25% of its exposure is unsecured vs a 20% unsecured portion in the first set of accounts, where the RBI has asked banks to provide 100% provisioning.
Overall, Axis Bank will have to provide Rs 9 bn towards this exposure per our calculations, in addition to the Rs 21 bn it had to provide towards the first set of accounts. Total provisioning requirement is Rs 30 bn, which implies 37% of our total FY18F provision estimates for the bank. Target price and valuation. Our unchanged target price of Rs 630 is based on 2x adjusted Sep-19F book after deducting a subsidiary value of Rs 37.