Amid industry-wide challenges on credit offtake and deposit accretion (for a few private banks), Axis Bank put up a good show in the September quarter. Healthy growth in core net interest income, backed by improvement in disbursements across segments, good traction in deposits, higher fee income, strong capital ratios and prudent provisioning, are key positives that can hold the stock in good stead over the medium term.

However, as is the case for the entire banking sector, asset quality uncertainty continues to weigh on Axis Bank. As such, the bank’s asset quality was under pressure before the Covid-led disruption, with slippages steadily rising in the first three quarters of FY20.

In the latest September quarter, Axis Bank delivered 20 per cent growth in net interest income, backed by 14 per cent growth in advances (including TLTRO investments). Retail loans grew 12 per cent y-o-y (2 per cent q-o-q), with disbursements in home loans, LAP and auto loans close to 90 per cent of levels seen in the same quarter last year. Gold and small business loans were up 67 per cent and 17 per cent y-o-y, respectively, while corporate loan book, including TLTRO investments, grew by 22 per cent.

The bank’s 9 per cent y-o-y growth in deposits, alongside healthy liquidity position, is also a key positive. What also lends comfort is the bank’s substantial provisions and strong capital ratios. Bolstered by the ₹10,000-crore capital raise through QIP during the quarter, the bank’s Tier I capital ratio stood at a robust 16 per cent as of September. This should help fund the bank’s growth and help absorb higher provisioning cost in the coming quarters.

Axis Bank has made substantial provisions, which also offer cushion to earnings on account of possible rise in delinquencies in the coming quarters. The bank made incremental provisions of ₹1,279 crore towards loans under moratorium and ₹1,864 crore towards probable restructuring during the September quarter.

That said, asset quality trends will need a close watch in the second half of the fiscal, when the account standstill classification is lifted (post the Supreme Court verdict). The Covid-induced slowdown could also delay the normalisation of Axis Bank’s stressed book – the bank’s BB & below book (fund-based) stands at ₹9,118 crore, which is notable.

Asset quality risk

While the bank has seen significant fall in slippages in the June and September quarter, it has been due to the asset classification standstill during the six-month moratorium. As per the bank’s disclosures, at the end of the moratorium, accounts were asset classification benefit is extended amounts to ₹13,948 crore.

Aside from the actual picture on bad loans (when the classification standstill if lifted), what will also need a watch will be the bank’s BB and below-rated book. In the September quarter, BB and below-rated book (fund-based, non-fund based and investments) increased by 38 per cent over the June quarter. The management has stated that 75 per cent of the increase is on account of probable restructuring (assumed). Non-BB rated probable restructuring corporate book is about ₹3,053 crore and CBG and retail is about ₹2,500 crore.

The top-5 sectors – infra, construction, cement, hotels, power and food processing – account for 63 per cent of fund-based BB and below book. Increase in stressed book and within that restructuring pool can weigh on earnings in the coming quarters.

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