Axis may have found itself a white knight

MUMBAI: Almost three years after it got a $1.8 billion “confidence capital” boost, Axis Bank might see a rerun. Private equity group Carlyle has initiated discussions with the country’s third-largest private lender for a fund infusion as rising systemic level stress and the economic slowdown are forcing banks and shadow lenders to build provision buffers to tackle future asset slippages. The investment could be around a billion dollars, according to people with knowledge of the matter. The fund-raising is likely to be in the form of a primary issuance of shares through a preferential allotment route that may lead to the PE fund owning up to 5-8% of the bank, similar to the structure used by Bain in November 2017, said the people.The promoters own 16.35% while foreign institutional or portfolio investors, including the Government of Singapore Investment Corp, Fidelity and Vanguard hold 45.49%. Foreign investors can automatically own up to 5% in a bank in India, which can rise to 10% with Reserve Bank of India (RBI) approval. The promoters are Specified Undertaking of Unit Trust of India (SUUTI) and state-owned insurers such as Life Insurance Corp of India (LIC), as per BSE data. 76021869In November 2017, Boston-headquartered Bain led a consortium to invest $1.8 billion (₹11,626 crore) in the private lender — the largest private equity transaction in India since the 1991 liberalisation — to help shore up Axis Bank’s capital base after a string of disappointing earnings. In September 2019, Axis raised another ₹12,500 crore through qualified institutional placements (QIP). Stock has lost 22% in a monthAt current prices, a 5-8% stake would translate to Rs 4,820-7,712 crore. A 5-10% premium over that would mean Rs 5,302-9,641 crore.However, talks are preliminary and may not lead to a deal, said the executives cited above. The discussions are also believed to be bilateral and not part of any formal sale process as yet.Axis Bank and Carlyle declined to comment.“The conversation has been ongoing for almost a month. The Axis stock has been volatile. The brass seems to be warming up to the idea of another deep-pocket marquee investor in recent weeks,” said one of the persons.The Axis stock has fallen 22% in the past month and almost 54% in the last three.In recent months, lenders such as IndusInd, RBL, IDFC First and Yes Bank have all sought liquidity from institutional and strategic investors. Kotak Mahindra Bank is looking to raise as much as Rs 14,500-15,000 crore ($2 billion) through the primary and secondary sale of shares, ET reported May 26.Banking on banks While Carlyle has delivered good returns investing in non-banking financial companies (NBFCs), it has had a mixed experience with deposit-taking institutions. Its successful bank investments were made during financial crises, often backstopped by government support. This includes the acquisition of Koram Bank in partnership with JP Morgan during the 1997 Asian financial crisis, its debut deal in South Korea, and the acquisition of Florida-based Bank United in partnership with Blackstone in 2008.But its purchase of 100% of Ta Chong Bank in 2007 in Taiwan did not fare well. Carlyle sold the bank nine years later at a loss. Similarly, it lost most of its capital on the 2014 investment in Diamond Bank in Nigeria.In India, the PE firm has been an active investor in financial services to the tune of about $2 billion backing companies such as Housing Development Finance Corp, PNB Housing, SBI Life Insurance and SBI Cards. Investment banking sources believe that, unlike IndusInd, there is no single promoter-shareholder in Axis and therefore, with Bain already in the bank, the chances of steering the company could be higher. Bain has its representatives on the Axis board as well.Stress test Axis under CEO Amitabh Chaudhry has been undergoing a business transformation with a greater emphasis on retail and digital. Chaudhry has said this is part of the plan to expand the balance sheet and acquire customers.Overall growth is expected to slow in the near term in retail - where the focus will be on secured lending - and in wholesale, where predominantly higher-rated corporate will be targeted.“But the bank’s aspirational growth and ROE targets are likely to take a back seat over the next few quarters,” said Anand Swaminathan and Nidhi Singh, analysts with Bank of America Merrill Lynch in a May 5 report. “The bank’s relatively higher exposure to SME and mid corporate segment (although de-risked to some extent) is our key concern over the next 6-12 months.”Earlier this month, Axis Bank posted a net loss of Rs 1,387 crore in the March quarter against a profit of Rs 1,505.6 crore in the same period last year.

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