Sensex Opens 217 Points Up; Axis Bank & Yes Bank Top Gainers

Fri, 27 Apr 09:30 am

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Asian stock markets are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 0.4% while the Hang Seng is up 0.2%. Meanwhile, the Shanghai Composite is trading down by 0.6%. US stocks rose sharply on Thursday, helped by strong quarterly results from some of the biggest US companies.

Back home, India share markets opened the day on a strong note. The BSE Sensex is trading up by 217 points while the NSE Nifty is trading up by 60 points. The BSE Mid Cap index and BSE Small Cap index both opened the day up by 0.3%.

Barring information technology stocks, all sectoral indices have opened the day in green with bank stocks and capital goods stocks witnessing maximum buying interest. The rupee is trading at 66.83 to the US$.

In the news from the banking sector. Axis bank reported its first ever quarterly loss on Thursday after a surge in bad loans, capping a troubled year for the country's third-biggest private sector lender by assets.

While the bulk of India's 9.5 trillion-rupee soured-loans as of end-2017 were with the country's dominant state-run banks, among the private sector lenders Axis and its bigger rival ICICI Bank also account for large chunks.

Reportedly, stricter rules enforced by the Reserve Bank of India in February are set to push the industry's non-performing loans even higher.

Axis' net loss was 21.9 billion rupees (US$328 million) for the fiscal fourth quarter to 31 March. The results were a reflection of the bank's desire to accelerate non-performing asset (NPA) recognition.

Axis has seen its non-performing loans jump more than eight times in the past three years to Rs 342.5 billion, or 6.8% of its loan book, at the end of March.

In the March quarter alone, it added Rs 165.4 billion in incremental bad loans, which was driven by the recent central bank rule changes.

For the March quarter, the bank's loans grew 18%, driven by a 23% rise in loans to retail customers. Its net interest income growth was flat in the quarter, and rose 3% for the full year leading to a net interest margin of 3.4%.

One shall note that, the RBI has tightened the bad debt resolution framework by scrapping numerous loan restructuring programmes. The RBI replaced all the schemes by the Insolvency & Bankruptcy Code (IBC).

With this, a loan worth over Rs 2.8 trillion, with payments outstanding for 60-90 days, carry the risk of slipping into the category of non-performing assets (NPA). This will result in a surge in NPAs and may put additional pressure on the banks to make provisions.

NPAs Set to Rise Further with New RBI Rules

The new framework specifies that banks must report defaults on a weekly basis in the case of borrowers with more than Rs 50 million in bank debt. Further, for accounts with an exposure of Rs 20 billion or more, banks will have to put a resolution plan in place within 180 days after a default has been noted. If the resolution plan is not implemented within 180 days, the account must be referred to the IBC within 15 days.

The strict timelines could mean that a larger number of accounts will go into insolvency. Haircuts that banks may need to take and the probability of liquidation in some accounts may also rise. Similarly, under the new scenario, corporate lenders, which have already been under pressure due to rising bad loans and increased provisions, could take another hit.

The new framework is expected to help with early recognition and resolution of bad loans. While this may be positive for the banking sector in the long run, in the short run, banks may come under additional pressure.

Axis Bank share price surged 3.7% in the opening trade.

Moving on to the news from IPO space. As per an article in a leading financial daily, real estate firm Lodha Developers Ltd on Thursday filed for an initial public offering (IPO), expected to be one of the biggest stock market debuts in India this year.

The company will sell new shares worth Rs 37.5 billion (US$561.8 million) in the IPO, while its shareholders will sell up to 18 million shares, the reports noted.

Kotak Mahindra Capital, CLSA India, JM Financial and Morgan Stanley India are the global co-ordinators for the IPO.

Indian firms have raised about US$2.8 billion from IPOs so far this year, following a record of more than US$11 billion in 2017.

Kolkata-based Bandhan Bank, which debuted in the market late March, was the biggest IPO in India this year, raising as much as US$691 million.

Speaking of IPOs, the demand for IPO's has reached sky-high levels. Avenue Supermarts was seen as the first company last year to cross the 100-time subscription mark swiftly followed by CDSL and Dixon technologies, among others.

This euphoria is something similar to what was seen in 2007-08. When everyone around you is clamoring to get a piece of the IPO pie, it makes sitting tight difficult. And, why should you sit tight when stocks like Avenue Supermart lets you pocket a cool 100% gain from day 1 of the listing?

History suggests that these cases are few and far between. More than 70% of the IPOs listed in 2007 and 2008 are in the red, even today when the Sensex is at an all-time high.

A merit-based selection primarily including valuation, business, and management quality is the logical way to go about investing in IPOs. If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often than not.

You can also download our FREE report - How to Get Rich with IPOs. This guide will show you how to safely profit from the ongoing IPO rush.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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