Rise in slippages impacts Axis Bank’s performance

Ever since asset quality woes began at Axis Bank about eight quarters back, the worry for investors has been when the bad loan issue would bottom out for the bank.

With the bank reporting a whopping ₹16,536 crore of slippages in the latest March quarter, the management appears to believe that the NPA recognition cycle is nearly complete.

The sheer size of slippages, the fact that the bank has done accelerated NPA recognition in its low-rated loan book and also taken a one-time impact on account of the RBI’s new framework for stressed assets, does indicate a substantial reduction in the bank’s stressed assets pool.

However, given the sharp bad loan divergences that the bank has reported for two consecutive fiscals (FY16 and FY17), and the uncertainty over the impact of the RBI’s norms requiring banks to report one-day default, asset quality will need monitoring in the ensuing quarters as well.

Clean-up

There are a number of factors that point to a substantial clean-up of Axis Bank’s books. For one, 90 per cent of the corporate slippages (₹13,938 crore) in the March quarter has come from the bank’s BB & below rated book. The low-rated book has now been reduced by 44 per cent to ₹8,994 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.

Two, 41 per cent of the corporate slippages in the March quarter has come from the troubled power sector. The exposure of the bank to the sector has fallen substantially in the March quarter.

Axis Bank, like other lenders such as ICICI Bank and SBI, that have a higher exposure to stressed sectors, had created a watchlist (key source of future stress in the corporate loan book) in the beginning of fiscal 2017. With the accelerated recognition, the watchlist has become negligible – from ₹22,600 crore as of March 2016 – to ₹428 crore as of March 2018.

There has been a one-time impact of the RBI’s new framework for stressed assets (that essentially does away with all the old restructuring schemes), driving recognition in the bank’s restructured book. These accounts have fallen to about ₹2,000 crore from nearly ₹7,000 crore in the December quarter.

The overall stressed book is now a low 1.8 per cent of customer assets.

Needs monitoring

While a number of reasons point to the bottoming out of the NPA cycle, there are a few points to keep in mind. 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 quarter. The RBI’s annual risk-based supervision in the coming year will need watching.

Also, while the bank has taken a one-time hit on account of the RBI’s circular in its restructured book, the framework requires banks to report even one-day defaults and draw up resolution plans thereupon.

The potential impact where cases may get referred to the IBC on failure of a resolution plan still needs to be seen.

While on the core business front, healthy traction in loans and sound capital base are positives, how the asset quality picture pans out will drive valuations for the stock. After trading at 2.2-2.5 times book two years ago, the stock has been under pressure, with its valuation de-rating to 1.8-1.9 times.

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