Strong growth in advances (30 per cent year-on-year), treasury gains and improved operating efficiency (lower cost-to-income ratio) aided Axis Bank’s net profit growth of 22 per cent during the June quarter. But this better-than-expected performance was overshadowed by asset quality pressures for the bank.
The non-performing assets and restructured loans rose. The net interest margins (NIM) of the bank also declined during the June quarter.
The gross non-performing assets of the bank rose form 0.94 per cent in the March quarter to 1.06 per cent.
Additionally, the restructured asset proportion of the bank also rose from 1.58 per cent to 1.95 per cent, predominantly driven by large- and mid-corporate accounts.
The infrastructure sector witnessed rise in restructured assets.
Protecting factors
Large and mid-corporate loans, which account for more than half of the book, has increasingly been witnessing internal rating downgrades. Corporate accounts with rating of A and above now account for only 64 per cent of the portfolio — down 11 percentage points in a year.
This increases the risk of asset quality slippages going forward.
Two factors which might protect Axis Bank from significant rise in slippages will be higher proportion of secured advances and good provision coverage.
Margins decline
Costly wholesale deposits raised during the March quarter and falling proportion of low-cost deposits (especially current account deposits) have taken a toll on Axis Bank’s cost of funds. The cost of funds was up 25 basis points .
The NIM fell from 3.55 per cent in March 2012 to 3.37 per cent in June .
Axis Bank hadn’t cut its base rate during the current quarter. Yet the margins came under pressure due to the rising share of overseas loans.
Retail loans
Increasing proportion of retail loans (currently 24 per cent of the portfolio) didn’t help the matters as a majority of the loans were low-yielding mortgage loans. Going forward, sharp fall in wholesale deposit rates may help reduce the cost of funds.
The fee income of the bank suffered from lower activity in the large and mid-corporate segment and fall in capital market activity. Non-recurring income such as trading profits aided the bottom line.