Even as Axis Bank delivered steady core performance in the latest March quarter, the steep rise in provisions made by the bank during the quarter, is indicative of the pain ahead for the entire banking sector amid the Covid crisis. In a bid to provide adequately for the likely build up in stress in the coming quarters, Axis Bank made a tidy ₹3,000 crore provisions related to Covid during the March quarter. This, along with another ₹4,200 crore of bad loan provisions, has resulted in the bank’s earnings slip into red, despite healthy net interest income growth and loan growth.

In the March quarter, Axis Bank reported ₹1,388 crore loss, on the back of steep rise in overall provisions to ₹7,730 crore (more than doubling from the December quarter). Given that the impact of the lockdown and Covid-led disruptions could be long drawn, the management believes that it was imperative to be prudent and make large provisions to tide over the increased stress in the coming quarters. While the bank reported a healthy loan growth of 15 per cent during the March quarter, led by 24 per cent growth in retail, growth could be challenging in the coming quarters.

For Axis Bank, given that its relatively higher exposure to stressed sectors has been impacting it’s asset quality over the past three to four years, slippages will need a close watch in the coming quarters. Also, the bank’s stressed book (BB & below rated) has gone up significantly during the March quarter. Downgrades to the stressed book will also be a critical trend to watch for as the economy continues to reel under the pandemic outbreak.

Prudent provisioning

Sharp rise in slippages in the December quarter had brought the focus back on the bank’s asset quality. In the March quarter, however, there has been a significant fall in slippages to ₹3,920 crore (from ₹6,214 crore). However, a clearer picture on asset quality will only emerge after the three-month moratorium granted on various loans is lifted in June.

In a bid to ensure adequate buffer for the likely increase in stress, Axis Bank has taken a prudent call to increase provisions sharply during the March quarter. Of the ₹7,730 crore of provisions made, ₹1,338 crore pertain to standard assets, which includes RBI mandated 10 per cent provision on overdue loans where moratorium is granted. The management, however, stated during its concall that the provision made by the bank is way above the requirement and offers additional cover if situation worsens. Another ₹2,116 crore of provisions relate to Covid.

Also, the bank’s provision cover has increased substantially to 69 per cent in the March quarter from 60 per cent in the December quarter.

The management’s move to increase provisions sharply is welcome, given the growing uncertainty around the Covid impact on the economy and various sectors.

There are, however, few trends that will need to be closely monitored.

One, the bank had seen sharp rise in slippages in the December quarter, indicative of the stress in its book even before the Covid crisis. The trend in slippages after the moratorium is lifted will hence be critical. Two, during the March quarter, the bank’s BB & below book (fund based) has increased to ₹6,528 crore from ₹5,128 crore in the December quarter. With significant downgrades expected in the coming months, owing to Covid crisis, this book could increase notably for Axis Bank.

Whether the large provisions made by the bank during the March quarter, would be adequate going ahead needs to be seen. Further rise in provisions can continue to weigh on earnings.

Core performance

In the March quarter, the bank delivered healthy 19 per cent growth in net interest income (NII), thanks to healthy retail loan growth. However, credit growth is likely to slow notably in the June quarter, when the full impact of lockdown will be reflected.

Also, the bank’s fee income fell 3 per cent YoY. Retail fee (64 per cent of overall fee) growth was modest as segments like card fees and third party distribution income got impacted in month of March due to Covid. The fee income is likely to be impacted significantly in the June quarter.

While weak core business earnings and rise in provisions can add pressure on the bank’s earnings in the near-term, strong capital adequacy ratio of 17.5 per cent as of March 2020, and sound deposit growth thus far, are key positives.

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