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Stock pick of the week: Why analysts believe worst is over for Axis Bank

Healthy operational performance like good domestic credit growth, increase in retail loan growth and strong performance on the income side have made it top pick.

, ET Bureau|
Aug 12, 2019, 06.30 AM IST
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Increased operational efficiencies should help Axis Bank tide over small uptick in stressed assets and provisioning.
Market participants were upset with Axis Bank’s ‘negative surprise’ in the first quarter results. As against an expected net profit growth, its net profit for the quarter fell on a q-o-q basis because of 54% q-o-q increase in provisioning. Axis Bank’s disclosure of its exposure to eight stressed groups to the tune of Rs 12,200 crore or 1.6% of its outstanding loans, also upset investors.

Out this, only Rs 2,200 crore is already classified as NPA and Rs 2,900 crore as stressed asset book (BB rating or below). This means the remaining Rs 6,900 crore exposure to these stressed groups is still treated as standard asset and not provided for. Since some of these assets may turn into NPAs in future, increased provisioning will continue during the remaining quarters of 2019-20.

However, analysts believe that worst is already behind Axis Bank in terms of asset quality issues and a small increase expected in 2019-20 will not change the asset quality improvement direction. This phase of increased provisioning will also not last long because the management continues to take conservative stands for recognising stressed assets and providing for them. For example, its net non performing assets came down by 2% on q-o-q due to this increased provisioning. That means the bank will be able to face the ongoing macro headwinds comfortably.

Analysts are also getting bullish on this counter because the higher provisions are getting offset by healthy operational performance. For example, its domestic credit growth continues to remain healthy and the weakness in corporate and SME loan growth is offset by retail loan growth.

Due to 6% q-o-q and 23% y-o-y increase in retail loan growth, retail share in the overall loan book has crossed the 50% mark and is now placed at 51.9%. Strong performance on other income side, because of the higher treasury profits that jumped eight times y-o-y due to fall in bond yields and 26% increase in fee income, are other positive factors. The cost of funds and net interest margin (NIM) are expected to remain stable due to the ongoing fall in term deposit rates.

Analysts are also positive on the management’s effort to build a sustainable franchise. Since the management is aggressive on provisioning and maintaining the asset quality, its valuation (price to book ratio of 2.59) is also reasonable.

Analysts’ views
  • Buy: 44
  • Hold: 8
  • Sell: 2

Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.
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