Axis Bank: One-off recovery, fall in slippages help

Ever since the bad loan issue blew up about three years ago, ICICI Bank and Axis Bank – with relatively higher exposure to stressed sectors – have been dragging the overall performance of private sector banks. Given that these two banks constitute more than 70 per cent of the total NPAs of all private banks, the asset quality performance of these banks has understandably been under focus.

In light of this, Axis Bank reporting a sharp fall in slippages in the latest June quarter, vis-à-vis the massive additions to bad loans in the March quarter, is no doubt welcome. While this was expected as banks had taken a one-time impact on account of the RBI’s new framework for stressed assets, in the March quarter, the steep fall in provisioning alongside, has helped Axis Bank swing back into the black. A one-off realisation of interest from recoveries, has also aided earnings. Given that ICICI Bank reported a loss in the June quarter last week, owing to steep rise in provisioning despite sharp fall in slippages, Axis Bank’s performance comes as a relief.

That said, the sustainability of the improvement in asset quality and net interest income, will be key to drive earnings in the coming quarters. The slight increase in the bank’s lower-rated corporate book, further impact of the RBI’s February circular, and divergence report will also need watching.

Fall in slippages

There are trends on the asset quality front that are heartening. For one, Axis Bank had reported a whopping ₹16,536 crore of slippages in the March quarter.

The gross slippages have fallen sharply to ₹4,337 crore in the June quarter. Two, 88 per cent of the corporate slippages in the June quarter have come from the bank’s BB & below-rated book.

From a peak level of ₹27,411 crore in the June 2016 quarter, the low-rated book has now reduced to ₹10,396 crore. Given that about 90 per cent of slippages (on an average) in the past several quarters have come from BB & below-rated book, the significant shrinkage in this book is a positive.

There are, however, a few things that need monitoring.

While the overall low-rated loan book for the bank has shrunk significantly from levels seen two years back, there has been a slight increase in this book over the March quarter. From ₹8,994 crore in the March quarter, the bank’s BB & below-rated book has inched up to ₹10,396 crore. While this has been due to the downgrading of BBB-rated loan book, which the management believes has normalised, it may need some watching.

Also, after reporting bad loan divergences to the tune of ₹9,478 crore pertaining to FY16, Axis Bank had reported another ₹4,867 crore of divergences pertaining to FY17, impacting its performance in the September 2017 quarter. The RBI’s annual risk-based supervision in the coming year will need watching.

Also, on the core business front, Axis Bank’s net interest income growth has been flat to low single-digit in the past few quarters.

While this has inched up to 12 per cent in the June quarter, it has been aided by a one-time impact of interest realisation from recovery on an IBC List 1 account. Sustainability of this will be critical to drive earnings.

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