Axis Bank and ICICI Bank, which constitute the chunk of the total NPAs of all private banks, have been under focus over the past one to two years, given their relatively higher exposure to stressed sectors and sharp rise in NPAs.

Hence, the performance of Axis Bank in the latest September quarter, just as in the case of ICICI Bank, has lent comfort to investors on the back of a notable fall in slippages.

That said, while the decent growth in Axis Bank’s core net interest income and moderation in slippages are positive signs, there are still some aspects that need watching. The bank’s still sizeable lower-rated corporate book (from which chunk of the corporate slippages have happened in the past), RBI’s risk-based supervision report on bad loans pertaining to FY18, and moderating loan growth, remain key factors to watch out for in the coming quarters.

Also, the bank’s 83 per cent year-on-year growth in net profit in the September quarter has been on a low base, with earnings shrinking substantially two years ago. Hence, sustainability of earnings growth will be critical for investors in the coming quarters. Some trends on the asset-quality front are indeed comforting. After Axis Bank reported sharp slippages of ₹16,536 crore in the March quarter, gross slippages fell to ₹4,337 crore in the June quarter, and further to ₹2,777 crore in the latest September quarter.

Low-rated book

The bank’s BB and below-rated book has also shrunk substantially over the last two years. From a peak level of ₹27,411 crore in the June 2016 quarter, the low-rated book has now reduced to ₹8,860 crore. Given that about 90 per cent of slippages (on an average) in the past several quarters has come from BB & below-rated book, the significant shrinkage in this book is a positive. Eighty eight per cent of the corporate slippages in the September quarter has come from the bank’s BB and below-rated book. There are, however, a few things that need monitoring. Despite the sharp fall in low-rated loan book, it is still a notable figure. Further slippages from this book will keep provisioning high for the bank.

Also, after reporting bad loan divergences to the tune of ₹9,478 crore pertaining to FY16, Axis Bank had reported another ₹5,632 crore of divergences for FY17. The RBI’s annual risk-based supervision in the coming quarters for FY18 will need watching. On the core business front, pick-up in the bank’s net interest income (NII) growth is a positive. From flat to low single-digit, growth in NII had inched up to 12 per cent in the June quarter, aided by a one-time impact of interest realisation from recovery on an IBC account.

In the September quarter, NII has grown by a higher 15 per cent (no one-off recoveries). However, sustainability of this will be critical. Also, the growth in domestic advances has slowed from the March quarter level (19 per cent) to 15 per cent in June and September quarters. Thus, the trend on loan growth front will also be keenly watched in the coming quarters.

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