The bad loan issue for Axis Bank appears far from bottoming out, going by its June quarter performance.

After witnessing notable pressure on asset quality through last fiscal, a sharp rise in slippages in the June quarter is a cause for concern.

The bank added ₹3,638 crore to bad loans during the June quarter, up from ₹1,474 crore during the March quarter. With this, the bank’s gross non-performing assets have gone up to 2.5 per cent of loans.

The increase in bad-loan provisioning has led to a 21 per cent fall in profit for the June quarter.

The rise in bad loans is, however, not altogether unexpected given that the management, last quarter, had guided for 60 per cent of accounts under its watch-list to flow into bad loans in the coming eight quarters.

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

Loans outstanding in these accounts stood at around ₹22,600 crore as of March 2016. This book has reduced by 10 per cent in the June quarter, with ₹2,680 crore of such accounts flowing into bad loans.

Of the ₹2,911 crore of corporate slippages in the June quarter, 92 per cent arose from the watch-list.

Given that loans outstanding in the watch-list still stand at ₹20,295 crore, the coming quarters can see similar slippages and, hence, impacting earnings.

Loans in the watch-list are about 13 per cent of the bank’s corporate loans; corporate loans for Axis Bank are about 45 per cent of total loans. Iron and steel, and power constitute a chunk of this list (26-27 per cent each).

The level of stressed loan addition for the full year FY16 was about ₹7,300 crore. Given the expected slippages from the watch-list, the slippages for the current fiscal (FY17) are likely to be higher. Interestingly, about 72 per cent of restructured and SDR loans were on the watch-list in the March quarter.

Axis Bank restructured loans worth ₹3,740 crore under the 5:25 scheme and ₹575 crore under SDR in FY16. And, in the June quarter the bank restructured loans of about ₹252 crore under the SDR and ₹790 crore under the 5:25 scheme.

Silver lining

While the bank continues to witness stress in its corporate loan book, its retail segment has been on a strong wicket. De-risking its loan portfolio by focussing on the retail segment over the last two to three years has paid off.

The bank’s loan growth was a healthy 21 per cent in the June quarter, driven by 24 per cent growth in retail loans. The overall growth in loans has thus been far higher than the system’s abysmal 8-9 per cent growth levels.

Net interest margin (NIM) though has come off marginally to 3.79 per cent (domestic) from 3.8 per cent in the same quarter last year.

One reason for this is the sharp increase in bad loans due to which the bank has to reverse the interest income recognised on such loans.

Two, the bank has also seen a notable increase in operating expenses due to its investments in growth.

Axis Bank added 102 new branches in the June quarter, a total of 201 new branches in the last two quarters, compared with just 31 during the same period last year.

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