Bain Capital readies a $1 billion bet on Axis Bank
, ET Bureau|
Updated: Oct 31, 2017, 08.32 AM IST
MUMBAI: Bain Capital is in advanced talks with Axis Bank to invest between $750 million and $1 billion (Rs 4,800-6,400 crore), in what could be one of the largest private equity investments in the Indian banking sector.
India’s third-biggest private lender is in talks to raise money amidst worsening asset quality and regulatory glare.
Bain’s proposed investment will come as a primary issuance of shares through a preferential allotment that will allow the PE fund to own up to 5% of Axis.
However, some of the sources mentioned above said there could be a subsequent secondary deal as well, through which the Bain may grab another 5% stake from existing investors. This may increase its exposure to nearly 10%, taking the total investment to close to $1.5 billion. The deal will have to be approved by the Reserve Bank of India.
The transaction will help Axis meet capital requirements for the medium term as competition intensifies in Indian banking. JPMorgan is working with Axis for the transaction, which is expected to be concluded within a few weeks, sources said.
Foreign Investors Eyeing Indian Banks
“Bain has started meticulous diligence on Axis’ books. The formal process is on and a deal is likely very soon,” said one of the sources mentioned earlier.
Spokespersons for Axis Bank and Bain Capital declined to comment.
The Indian banking sector has, in recent times, seen Canadian pension players like Canada Pension Plan Investment Board (CPPIB) and Caisse de dépôt et placement du Québec (CDPQ) buy into private lenders such as Kotak Mahindra Bank.
From ICICI Bank to Yes Bank, and from ING Vysya to Centurion Bank of Punjab, private sector lenders have always attracted foreign private capital. Even Axis in its earlier avatar of UTI Bank had seen investments from PE fund ChrysCapital.
Axis Bank’s current market cap stands at Rs 1.16 lakh crore. The promoters (Specified Undertaking of Unit Trust of India, or SUUTI) own 30.35% while foreign portfolio investors, including the Government of Singapore Investment Corp and Abu Dhabi Investment Authority, hold 49.13%. Foreign investors can automatically own up to 5% in a bank in India, which with RBI approval can go up to 10%.
“Increased corporate NPLs (non-performing loans) drove the overall NPL increase,” Moody’s said in its result commentary on Axis Bank.
“Overall, based on the trends in the quarter that ended September 2017, the extent of deterioration in the bank’s asset quality over the next 12-18 months may be more than what we previously expected. In addition, compared to the other rated Indian banks, we believe that the bank has been laggard in recognising its asset quality problems, a credit negative for its credit quality,” it added in the report dated October 17.
However, Axis Bank CEO Shikha Sharma had told ET that the bad loans issue is short term and the lender is expected to get into normal credit cost cycle by next year.
“I guess the regulator is looking at fortifying balance sheets of banks or they want us to take a more conservative stance. Will there be further pain? We have said there will be a few more quarters where we may see elevated levels of stress. But going into the next year, we believe that we should be getting back to a normal credit cost cycle,” Sharma told ET on October 27.
Sharma, whose term was recently extended till 2021, said the recognition cycle for much of the asset quality is more or less complete, and that the bank is getting into a resolution cycle.
BAD LOAN TROUBLE
However, analysts expect a normalisation of stressed loans and credit costs to aid earnings and improve adjusted core book value. "We expect earnings to normalise from FY19 and lift ROE to mid-teen levels. Its retail business continues to grow and has scope for operating efficiencies that will improve earnings. Valuations are close to the five-year historical average. Strong CASA franchise will aid asset growth and margins," CLSA analysts Aashish Agarwal and Prabhakar Sharma said in a note on Oct 13.
According to Bloomberg estimates, Sharma, who was appointed the bank’s CEO in 2009, has overseen shareholder returns of 252%, less than the Bankex index at 270%. Under her watch, $250 million of bad loans have swelled to more than $4 billion, even as total assets have merely tripled.
Axis Bank shares have fallen 4.6% during the past month because of the bad loans issue, bucking the overall trend in banking shares. Most public sector banks rallied after the government’s Rs 2.11 lakh crore recapitalisation plan, with the Bank Nifty index rising 3.1% to a fresh peak this month.
On Monday, Axis Bank shares closed down 0.04% at Rs 484.3 on the BSE compared with a 0.33% gain in the Sensex.
At $17.6 billion, PE investments into the country during the first nine months of the year have already created a fresh record. The number dwarfs the previous high of $17.3 billion seen during the entire 2015, according to data compiled by Venture Intelligence. The banking and financial sector has seen maximum PE investments so far this year.
India’s third-biggest private lender is in talks to raise money amidst worsening asset quality and regulatory glare.
Bain’s proposed investment will come as a primary issuance of shares through a preferential allotment that will allow the PE fund to own up to 5% of Axis.
However, some of the sources mentioned above said there could be a subsequent secondary deal as well, through which the Bain may grab another 5% stake from existing investors. This may increase its exposure to nearly 10%, taking the total investment to close to $1.5 billion. The deal will have to be approved by the Reserve Bank of India.
The transaction will help Axis meet capital requirements for the medium term as competition intensifies in Indian banking. JPMorgan is working with Axis for the transaction, which is expected to be concluded within a few weeks, sources said.
Foreign Investors Eyeing Indian Banks
“Bain has started meticulous diligence on Axis’ books. The formal process is on and a deal is likely very soon,” said one of the sources mentioned earlier.
Spokespersons for Axis Bank and Bain Capital declined to comment.
The Indian banking sector has, in recent times, seen Canadian pension players like Canada Pension Plan Investment Board (CPPIB) and Caisse de dépôt et placement du Québec (CDPQ) buy into private lenders such as Kotak Mahindra Bank.
From ICICI Bank to Yes Bank, and from ING Vysya to Centurion Bank of Punjab, private sector lenders have always attracted foreign private capital. Even Axis in its earlier avatar of UTI Bank had seen investments from PE fund ChrysCapital.
Axis Bank’s current market cap stands at Rs 1.16 lakh crore. The promoters (Specified Undertaking of Unit Trust of India, or SUUTI) own 30.35% while foreign portfolio investors, including the Government of Singapore Investment Corp and Abu Dhabi Investment Authority, hold 49.13%. Foreign investors can automatically own up to 5% in a bank in India, which with RBI approval can go up to 10%.
“Increased corporate NPLs (non-performing loans) drove the overall NPL increase,” Moody’s said in its result commentary on Axis Bank.
“Overall, based on the trends in the quarter that ended September 2017, the extent of deterioration in the bank’s asset quality over the next 12-18 months may be more than what we previously expected. In addition, compared to the other rated Indian banks, we believe that the bank has been laggard in recognising its asset quality problems, a credit negative for its credit quality,” it added in the report dated October 17.
However, Axis Bank CEO Shikha Sharma had told ET that the bad loans issue is short term and the lender is expected to get into normal credit cost cycle by next year.
“I guess the regulator is looking at fortifying balance sheets of banks or they want us to take a more conservative stance. Will there be further pain? We have said there will be a few more quarters where we may see elevated levels of stress. But going into the next year, we believe that we should be getting back to a normal credit cost cycle,” Sharma told ET on October 27.
Sharma, whose term was recently extended till 2021, said the recognition cycle for much of the asset quality is more or less complete, and that the bank is getting into a resolution cycle.
BAD LOAN TROUBLE
However, analysts expect a normalisation of stressed loans and credit costs to aid earnings and improve adjusted core book value. "We expect earnings to normalise from FY19 and lift ROE to mid-teen levels. Its retail business continues to grow and has scope for operating efficiencies that will improve earnings. Valuations are close to the five-year historical average. Strong CASA franchise will aid asset growth and margins," CLSA analysts Aashish Agarwal and Prabhakar Sharma said in a note on Oct 13.
According to Bloomberg estimates, Sharma, who was appointed the bank’s CEO in 2009, has overseen shareholder returns of 252%, less than the Bankex index at 270%. Under her watch, $250 million of bad loans have swelled to more than $4 billion, even as total assets have merely tripled.
Axis Bank shares have fallen 4.6% during the past month because of the bad loans issue, bucking the overall trend in banking shares. Most public sector banks rallied after the government’s Rs 2.11 lakh crore recapitalisation plan, with the Bank Nifty index rising 3.1% to a fresh peak this month.
On Monday, Axis Bank shares closed down 0.04% at Rs 484.3 on the BSE compared with a 0.33% gain in the Sensex.
At $17.6 billion, PE investments into the country during the first nine months of the year have already created a fresh record. The number dwarfs the previous high of $17.3 billion seen during the entire 2015, according to data compiled by Venture Intelligence. The banking and financial sector has seen maximum PE investments so far this year.
