As Axis Bank draws up plan to raise capital, focus remains on asset quality

AXIS BANK

India’s banking canvas is rife with examples of what happens if capital is scarce. From the long standing troubles of stymied public sector banks to the precipitous fall of Yes Bank, the reason has been capital.

Ergo, every fund raising announcement by a bank is taken as a show of strength by investors, especially during times of crisis such as the present.

Axis Bank’s ?15,000 crore fund raising plan through equity is seen with a similar view. Investors are not wrong in taking the lender’s plans positively given that the bank already has a strong capital position. The private sector lender’s capital adequacy ratio was 17.53% as of end March and analysts believe that the bank would maintain these levels if not boost. Its more important Common Equity Tier-1 capital ratio was 13.34%, far above the regulatory minimum.

Media reports suggest that the lender is in talks with private equity funds to raise money.

So what will ?15,000 crore do to the bank’s balance sheet?

Analysts at Jefferies India Pvt. Ltd believe that the bank’s net worth would increase markedly if the bank raises money. Its Tier-1 ratio may increase by 200 basis points.

The key factor is how much of this capital the bank is able to use for growth and how much would end up getting provided for delinquencies.

In its guidance post March quarter results, Axis Bank had said that the stress from the pandemic would be long drawn and its pile of dodgy loans could increase in the coming quarters.

The bank has refrained from giving a numerical outlook on either slippages or even loan growth.

As of March, its watchlist of stressed loans totalled ?6528 crore. While much of the watchlist is made up of companies, fresh pain points in the wake of the pandemic would be loans to small businesses and retail.

Besides, the lender’s valuations would determine the dilution level. The bank’s share price is down a massive 41% from its peaks in February, outpacing the loss of 31% in the sector index. Jefferies estimates the equity dilution to be 12% if ?15,000 crore is raised through fresh issue of shares.

“The capital raise could potentially drive dilution of 12% and lift FY21 net worth by 20% with some near-term dilution to ROE (return on equity),” the brokerage said in its report.

Considering the potential dilution, the bank’s shares slipped over 1% today.

News Source:- livemint

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