Short-Term Pain Likely For Axis Bank Investors, Analysts Say

Investors cheered Axis Bank Ltd.'s Managing Director and Chief Executive Officer Shikha Sharma's move to cut her new term to just seven months instead of three years with shares rising nearly 5 percent—the most in more than two months.

Still, analysts said, the decision will lead to some short-term pain for investors as bank tries to allay concerns on its asset quality. Japanese brokerage Nomura even went to the extent of saying that this presents an opportunity for Kotak Mahindra Bank Ltd. to take over Axis Bank to create India's second-largest private bank, just behind HDFC Bank Ltd.

“From Axis Bank's perspective, we believe there would be limited pushback this time for any merger,” Nomura said in a note. That's because of the “loss of confidence that the regulator has expressed by not approving the renewal of the CEO's term and a vacuum in top management.”

Multiple media reports in February last year had said the Kotak Mahindra Bank had approached the government seeking to buy a stake in Axis Bank from the Specified Undertaking of The Unit Trust of India. Axis Bank had denied it as “baseless and unsubstantiated” speculation while Kotak Mahindra Bank refused to comment.

Also Read: Axis' Merger With Kotak Mahindra Bank A Positive If It Happens, Says BofA ML

Sharma will exit as the head of Axis Bank in December, cutting short the three-year term that starts from June, it's board said in an exchange filling yesterday. That comes after the Economic Times reported earlier this month that the RBI had sent queries to the board on its decision to reappoint Sharma.

The bank has seen its advances rise from Rs 81,557 crore at the end of the March 2009 to Rs 3.73 lakh crore as of March 2017 with Sharma at the helm. The lender's gross bad loans ratio too rose during the period from 0.96 percent to 5.04 percent.

Here's what brokerages had to say about Sharma's decision:

Nomura:

• Hunt for an external CEO presents the best opportunity for Kotak Bank to acquire/merge with Axis Bank
• Deal would be highly EPS/BPS accretive for Kotak Bank even after paying meaningful premium to Axis Bank shareholders
• Merger would make Kotak + Axis Bank combined a close second largest private bank after HDFC Bank in terms of advances and also absolute CASA
• Merger would make Kotak + Axis Bank largest in terms of number of branches
• Timing is right for Kotak Mahindra Bank as Axis Bank has ramped on the NPA recognition process and since majority of the bad news is now known
• Deal would be over 25 percent accretive for Kotak Bank even after paying a 10-30 percent premium for Axis Bank

Macquarie Research:

• Maintain Outperform with a target price of Rs 651
• Management transition needs to now be managed well, failing which there could be near-term challenges to operations & growth
• Appointment of a credible successor will be critical for the bank's performance hereon
• With a sudden management vacuum at the top, there may be significant challenges to growth and operations of the bank

Goldman Sachs:

• Announcement could increase key investor concerns on balance sheet clean up and growth prospects in the near term
• Significant delays in succession planning could have a bearing on the company's balance sheet clean up, growth and human capital
• Investors likely to focus on whether the successor will be from within the organization or from an external organization

IDFC:

• Change in top management is positive in the long run
• New CEO would join at a time when most of the clean-up is done and can focus on reviving earnings growth.
• Change in CEO would lead to short term pressure on asset quality and growth
• Will be important to know the profile of the new CEO who will join after Mrs Sharma's new term ends

Kotak:

• Upgrade to Add with unchanged estimates and target of Rs 600
• Expect the bank to continue its journey towards de-risking the business
• There could be short-term pressure on asset quality and provisions
• Key risk to Return on Equity improvement is a prolonged non performing loan resolution leading to higher-than-expected credit costs