After surprise Q4 loss, the worst seems over for Axis Bank as shares rise

Axis Bank's outgoing MD and CEO Shikha Sharma addresses a press conference after the company reported a net loss of Rs 2,188.74 crore for the quarter ended March 2018 due to higher provisioning for bad loans, in Mumbai on Thursday.

Axis Bank Ltd. rose the most in six months as an unprecedented recognition of bad loans prompted investors to overlook the Indian lender’s first-ever loss.

Provisions climbed to Rs 7180 crore ($1.1 billion) in the three months ended March from Rs 2810 crore the previous quarter as an additional Rs 16500 crore of fresh defaults were identified after the implementation of tighter regulations, the bank said in an exchange filing late Thursday. The Mumbai-based bank reported a loss of Rs 2190 crore, the first in data going back to 2006, and compared with a Rs 662 crore profit predicted in a Bloomberg survey of 15 analysts.

With this, the recognition of bad loans in this cycle is “nearly complete,” said outgoing chief executive officer Shikha Sharma. The lender’s so-called watchlist shrank to 0.1% of its total loan book from 1.3% the previous quarter and 2.5 percent the previous financial year.

“The worst seems to be over for Axis Bank,” Gaurang Shah, head investment strategist at Geojit Financial Services Ltd. in Mumbai, said by phone. “We expect the lender to step up stressed loan recovery after recognizing the stressed assets this quarter.”

‘Return to normalcy’

Bad-loan formation will be lower in the year through March 2019 and resolutions of stressed accounts should be expected in the first half, analysts at Prabhudas Lilladher, led by R. Sreesankar, wrote in a note. “Margins look bottomed out.”

The Mumbai-based brokerage cut its target price on India’s third-largest private bank to 585 rupees from 621 rupees with a recommendation to buy the stock. Emkay Global Financial Services Ltd. cut its target to Rs 560 from Rs 591 with a recommendation to accumulate. BOB Capital Markets cut its forecast to Rs 595 from Rs 660 with a call to add.

Axis’s CEO Sharma will step down at the end of 2018, more than two years before the proposed end of her term, after the regulator reportedly question the lender’s performance.

“Currently, we do not factor any disruptions due to change in management and shall wait for the event to play out,” Ravikant Bhat, an analyst in Mumbai at Emkay Global Financial Services Ltd., wrote in a note. Despite the bank’s upfront recognition of stressed assets, “residual pain is still left” and he expects Axis “to return to earnings normalcy” in the year ending March 2020.

Axis Bank shares fell as much as 3% early on Friday before rebounding to trade 5.07% higher at Rs 519.10 as of 11.15 am in Mumbai. It was the most traded Indian stock by value and volume, and the best performer on the nation’s main equity indexes. Axis Bank saw 1.02 million shares change hands in single block on the National Stock Exchange.