Here's why private banks may have shown interest in Axis Bank

Moneycontrol BureauAxis Bank was in the news on February 21 when CNBC-TV18 reported that Kotak Mahindra Bank had informally approached the government for a merger. Following this, other private players also threw their hat in the ring and had asked the government for a competitive bidding field. Based on the reactions, the stock soared 5 percent in late trading hours on Tuesday.

Morgan Stanley feels that the lender could have seen interest from private banks based on its retail deposit franchise, but concerns on its profitability remain as well. 

The brokerage feels that the market is under-appreciating the deposit franchise of the bank. "Axis is one of the few banks with a strong retail deposit franchise. Its current account savings account (CASA) market share has increased from 3.9 percent to 4.9 percent between FY11 and FY16. Retail deposits now make up almost 80 percent of funding. It is not very far from the best in class—HDFC Bank,” Morgan Stanley said in a report. Among private banks, only HDFC Bank, Axis Bank and ICICI Bank have good retail deposit franchises. While other private banks have shown strong CASA (current and savings account deposits) growth in recent years, that it has been driven by offering significantly higher interest rates, implies that their savings deposits are essentially fixed deposits with on demand characteristics, Morgan Stanley said.

On its financials, the brokerage feels that the bank has been under pressure for the last one and a half year due to concerns around asset quality. While Axis Bank has reported large bad loans and provided for them, the concern is behind the curve. “Investors have been worried especially after the last two-quarter surge in bad loans that there is a significant amount of NPL's yet to be recognised. This would hurt profitability.”