Q2 COMMENT. Axis Bank: Remains on the watch-list of investors

Axis Bank delivered above-industry growth on the back of strong growth in retail loans, healthy margins and good traction in deposits in the September quarter. But then for the third-largest private lender, growth has hardly been an issue.

The bank has been on investors’ radars for its sharp rise in bad loans over the past year, and the latest September quarter results offer little respite on the asset quality front.

Axis Bank added a whopping ₹8,772 crore to bad loans during the September quarter, over double the ₹3,638 crore added in the June quarter. With this, the bank’s gross non-performing assets have shot up to 4.17 per cent of loans from 2.5 per cent in the previous quarter.

The increase in bad-loan provisioning has led to earnings shrinking by a steep 83 per cent year-on-year in the September quarter. What’s more, going by its September quarter performance, the bad loan issue appears far from over.

Axis Bank had created a watch-list at the end of March 2016, which it believed could be the key source of future stress in the corporate loan book.

Outstanding accounts of around ₹22,600 crore were put on the watch list. Hence, it was known that there would be a rise in bad loans in the ensuing quarters. But the slippage numbers over the past two quarters throw up some additional concerns.

For one, the management had, when it first created the watch list, indicated that 60 per cent of such loans were expected to flow into bad loans in the next eight quarters. But going by the recent figures, the pace of slippages is far higher than anticipated earlier. The management acknowledged this, post the September quarter results.

Two, in the June quarter, of the ₹2,680-crore of corporate slippages, 92 per cent came from the watch-list. But in the September quarter, of the ₹7,288 crore of slippages, a lower 89 per cent came from the watch-list. While the chunk of the slippages are still coming from the watch-list, incremental stress from outside the watch-list may need monitoring.

While the watch-list has now shrunk by 39 per cent to ₹13,789 crore, it still forms about 9 per cent of the bank’s corporate loans. Corporate loans for Axis Bank are about 45 per cent of total loans. With significant slippages from iron and steel and textiles in the September quarter, there has been a significant shift in the sectoral composition of the watch-list. Iron & steel and power constituted a chunk of this list (26-27 per cent each) in the June quarter. Now the watch-list portfolio is dominated by power (41 per cent).

Axis Bank with its higher exposure to troubled sectors, such as power and infrastructure, has been embroiled in the bad loans tangle over the past year. It first took a sharp hit after its September 2015 quarter earnings, when investors were disappointed by the sale of two large accounts to asset reconstruction companies (ARCs), as this meant a substantial jump in its stressed assets. Stressed addition of about ₹7,300 crore for FY16 has been a cause for worry. The bank is likely to see some more pain in the current fiscal.

Despite the weak earnings performance, the bank is well capitalised with tier I capital ratio at 12 per cent. This will provide cushion to earnings (due to increase in bad loan provisioning) and also fund its next leg of growth.

The bank’s retail segment has been on a strong wicket. The bank’s loan growth in the September quarter of 18 per cent was driven by 25 per cent growth in retail loans. Building a healthy deposit base has also helped Axis Bank maintain its net interest margin within a band of 3.5-3.8 per cent over the last five years.

While performance on the core operational front has been sound, the management’s still cautious stance on asset quality for the current fiscal will keep investors on tenterhooks.

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