Why Axis Bank shares fell over 8% today

Axis Bank results have spooked the markets, not because of its numbers which were in line with analyst expectation but more on account of a sharp increase in impairments.

What has perturbed some analysts is that details of impairments were not provided in the profit and loss (P&L) account posted on the stock exchanges. Instead, a link in the auditor note was given to the bank's website where the details were mentioned.

There is nothing wrong in what Axis Bank did; it did not try to hide the numbers and made the entries well within the prescribed norms, providing for the residual provisioning in the P&L account. But analysts seem to be taken aback by the disclosure.

Commenting on the results, Kotak Securities has pointed out that any large slippage in corporate loans like what happened in the current quarter, and pressure on revenues due to extremely subdued growth environment, are some of the key business challenges at this stage. Prabhudas Lilladher said in its report that they expected the stock to remain under pressure in the near term but maintain a positive stance from a medium-term perspective.

The impairments in question are two power sector accounts worth Rs 1,820 crore, which Axis Bank’s management pointed out in the conference call that they had to sell it as they did not see a near-term solution to revive the assets.

Axis Bank sold the assets to Asset Reconstruction Companies (ARC) for Rs 550 crore in security receipt and Rs 100 crore in cash, thus taking a hit of Rs 1,170 crore. It provided Rs 336 crore as NPA (non-performing asset) provision and utilised Rs 800 crore of floating assets to settle the remaining.

However, concerns remain. SBI Cap Securities pointed out that the bank’s asset quality is not out of the woods. The report points out that given Axis Bank’s exposure to stressed segments like infrastructure iron and steel, it is susceptible to corporate delinquencies. While headline gross NPA remained steady at 1.6 per cent of advances, including the asset sold to ARCs, annualised slippages during the quarter increased sharply to 4.1 per cent. This is as high as those of some of the public sector banks. So, why should the bank deserve a high valuation?

Further, the bank did fresh restructuring of Rs 463 crore taking the restructured book to 2.65 per cent and 5/25 refinancing (for long term infrastructure projects) of around Rs 1,500 crore while slippages from restructured assets amounted to Rs 90 crore. The bank’s management maintained its credit cost guidance of 90 basis points, while has guided for lower stressed asset formation in FY16.

Most of the analysts however are sceptical of similar surprises in the near future. Axis Bank was supposed to be among the more transparent banks in the private sector. Other private sector banks like ICICI Bank who were known to have bigger NPA issues are now under the limelight.

Though there are very few downgrades from the analysts, most of them have reduced their target price of the bank.

Spark Capital, the most bearish of the brokers on the bank, has a price target of Rs 442 on the bank with a ‘Sell’ rating. The report says they continue to expect significantly higher slippages of around 2.2 per cent for the year, up from 1.2 per cent in FY15, owing to structural issues persisting in the infrastructure space in addition to incremental stressed asset formation in the form of sale to ARCs & 5/25 refinance scheme.

Market perhaps fears more skeletons in the cupboard from the Axis Bank as is seen in the stocks reaction. The only stock in the sector that is nearing its all-time high is HDFC Bank, one of the costliest banks in the world let alone India, which explains why markets reward transparency and quality.