29 Apr 2023, 00:44 am
Axis Bank Ltd.'s capitalization will remain adequate despite a one-off loss associated with the acquisition of Citigroup Inc.'s consumer portfolio in India. Our outlook on the bank remains stable.
The loss stems from the writing off of goodwill and intangibles generated on the acquisition.
Axis Bank's risk-adjusted capital ratio will likely decline to 7.0%-7.5% from the 8.4% level of March 31, 2022. This follows the loss the bank reported in the fourth quarter of fiscal 2023 (year ending March 31, 2023). Despite the decline, the bank's capitalization remains adequate for the rating (BBB-/Stable/A-3).
The bank's Indian rupee 54 billion loss in the fourth quarter caused return on assets to fall to 0.9% for fiscal 2023 compared with 1.3% a year ago. This was in line with our forecasts.
The bank has fully amortized goodwill and intangibles generated on the Citigroup acquisition. This protects the bank's ability to pay dividends because as per Indian banking regulations, banks carrying intangible assets on their balance sheet are restricted from declaring dividends.
The bank also sustained non-recurring special expenses on stamp duty related to the acquisition and harmonization of provisioning and expense policies. Its reported return on assets for fiscal 2023 excluding these exceptional items was 1.8%. The bank's reported net credit costs have declined to 0.4% (from 0.7% in fiscal 2022) due to recoveries and lower new non-performing loans. Credit costs could stay below 1% given asset quality risks are manageable and provisioning coverage is adequate.
We forecast Axis Bank's operating expenses to stay elevated over the next 18 months because of integration costs. Return on assets are likely to be 1.5%-1.6%. The bank's profitability will derive support from contained credit costs, margin upside from higher interest rates, and increasing share of unsecured retail loans