Axis Bank’s rating downgrade a temporary headache for investors

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Axis Bank shares dropped 4.5% on Monday, outpacing the losses in the broad market which fell by just 1.4% and the sector index down 2.2%.

The 4.5% fall in Axis Bank’s shares has made it the top loser in the Nifty Bank index on Monday.

What gives?

Investors are worried that the rating downgrade for Axis Bank and four other financial institutions will mean additional pain for these lenders.

Last week, S&P downgraded Axis Bank to non-investment grade, also called junk in bond market parlance. “While Axis’ asset quality is superior to the Indian banking sector average, its level of non-performing assets (NPAs) will likely remain high compared to international peers,” the rating agency said in its release.

Ratings of Bajaj Finance Ltd, Shriram Transport Finance Ltd, Manappuram Finance Ltd, and Power Finance Corp. Ltd were also cut. For issuers that depends on foreign borrowings, a rating below investment grade automatically cuts off a swathe of funding sources. So for investors to be wary of such a move is understandable.

The damage to Axis Bank would be limited to its foreign currency notes that it issued in the past under the medium-term note programme. As of December 2019, Axis Bank had an outstanding foreign currency notes of $1.9 billion, the bank said in an investor presentation in November last year. To be sure, some long-term investors who no longer can hold Axis Bank foreign currency notes because of the rating downgrade may dump them in the market. Here too the effect seems to be minimal. The lender’s notes maturing in 2027 last changed hands on 26 June at 6.96%, which was marginally higher than 6.95% dealt the previous day.

Beyond this, however, there is no material effect on the bank.

For one, the bank has not made any plans of raising capital from overseas. In fact, capital raising is likely to be through equity. Here, the bank’s operating performance comes into the picture.

Investors have already taken note of the pressure on the lender’s over asset quality from the pandemic. In fact, S&P too noted that Axis Bank’s capital levels remain strong.

What is key is how Axis Bank is able to navigate the asset quality pressures once the moratorium given to borrowers ends in August. In that, it is not an outlier in the banking system.

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