Prudent lenders like Axis Bank & Kotak Bank should keep some powder dry: SBICap Securities

‘The valuations at this point of time are fairly attractive across the financial sector’

As the lockdown gets extended, the income shocks are likely to go up as well and will play out in the credit cost, says Krishnan ASV, vice-president.

What are you anticipating from the Kotal QIP today? We are looking at floor price based on the Sebi formula which could be at a 5% discount.
They have very clearly worked out a truce with the regulator. This was anticipated and was on the cards; merely the timing is something that has surprised us. Given the kind of environment we are in, the financials obviously have been under pressure. But within that, this remains a classy franchise to own as it is in the top quartile. Kotak is already well-capitalised. This allows them to come on the right side of the regulator as well and adds roughly about 200 bps to tier I capital, which was anyway not a problem even before this capital raise. But the more dry powder you have in this environment the better off you are. So that is how I would read it. For investors, this is a very good time as it is a very attractive price point to enter into a very high quality franchise like Kotak Mahindra Bank.

Given the interest around this, what are the kind of valuations you feel the bank is trading at? In terms of the numbers and commentary that we have seen, provisions have surged but they are also looking at already preparing for the impact of Covid and these funds will only help?
Yes, that is true. I think most banks that we have heard from so far are or have claimed that roughly a little over one-fourth of the loan book is under moratorium. Kotak has a fixed percent. There are other banks at different points of time which have anywhere between 25% to 33% and they are carrying roughly about 0.3% to 0.5% of their book as provisions at this point of time. I suspect that number will inch up as the moratorium gets extended. I think the risk of default only goes up. As the lockdown gets extended, the income shocks are likely to go up as well. So all of that is going to play out in credit cost.

As I said, the more dry powder you have in this environment, it always gives you that much more ammunition. Remember, Kotak is a financial sector power house at this point of time. They are the market leader in many of the subsidiaries that they own and this dry powder also gives them a little bit more material when it comes to consolidation opportunities in those particular subsidiaries. All in all, good capital and excess capital is what we generally complain about Kotak Bank. Now with that regulatory truce being called, at least that overhang is gone and the franchise will continue to build out. They already have one of the most impressive CASA franchises and they are slashing down rates. So they have tailwinds coming in. All that should hold them in a very good state.

The big news is coming from Axis Bank as Carlyle is looking to invest apparently $1 billion. This is going to be via primary issue and post infusion Carlyle is going to own about 5% to 8% in Axis. What are your thoughts on the same?

So again, Axis Bank is a private sector lender which has had about 28% of its book under for moratorium and that number is not going down in a hurry. The longer the lockdown continues, the larger the book will be under moratorium and the larger the default risk as well. So as any prudent lender, if you can arrange for dry powder and be better prepared for when the provisions are going to hit you and if you can be prudent about that, that will always hold the lender in good stead. It is not going to be different with Axis Bank. The valuations as I said at this point of time are fairly attractive across the financial sector.

You take an HDFC Bank, Kotak Mahindra Bank, Axis Bank and ICICI Bank; these remain top decile franchises worth owning in this environment. This is a risk-off environment. These are very solid deposit franchises and these are going to be even better capitalised. I think the story is the same with Axis Bank as well. It remains to be seen as to what part of the book is likely to see moratorium risk play out but irrespective of that, one would like to have more dry powder on hand. So a primary issuance does not surprise me. I think every bank or every lender is supposed to be looking for equity at this point of time and carrying surplus liquidity and surplus capital at this stage is not going to be a problem.