Axis Bank: Bad loan divergence troubles

When Axis Bank, along with other private banks, reported sharp divergences from the asset classification and provisioning of the RBI norms last year, the bad loan issue appeared to be bottoming out.

But after reporting bad loan divergences to the tune of ₹9,478 crore pertaining to FY16, Axis Bank has reported another ₹4,867 crore of divergences pertaining to FY17 in the latest September quarter.

This has led to a sharp rise in quarterly slippages, taking the gross non-performing assets as a per cent of loans to nearly 6 per cent as of September 2017. Given that the risk-based supervision or RBS (another acronym to watch keenly after AQR) is an annual exercise conducted by the RBI, further slippages on this count are unlikely this fiscal.

But continual sharp divergences in asset classification from the RBI norms, year after year, highlight gaps in the earlier clean-up exercise, not lending much comfort to investors.

Also, continued stress from outside the bank’s watch list, a substantial rise in write-offs and significant fall in net interest margin remain a cause for concern.

Slippages into NPAs that peaked in the September quarter last year, had since moderated. From ₹8,772 crore in September quarter last year, gross slippages had tapered to ₹3,519 crore in June 2017.

But with the bad loan divergence reported for FY17, the slippages are back to ₹8,936 crore in the latest September 2017 quarter.

Axis Bank, like other lenders such as ICICI Bank and SBI, that have a higher exposure to stressed sectors, had created a watch-list (key source of future stress in the corporate loan book) in the beginning of FY17.

With over 70 per cent of accounts under the watchlist slipping into NPAs, the outstanding accounts under the watchlist have fallen from around ₹22,600 crore as of March 2016 to ₹6,052 crore as of September 2017. While this was on expected lines, the incremental stress quarter-on-quarter from outside the watchlist remains worrisome.

In the September 2017 quarter, only 30 per cent of the ₹8,110-odd crore of corporate slippages came from the watchlist. As the watchlist shrinks, more of the bank’s slippages will come from outside this list.

But the pace of slippages is worrisome.

Remember, quarterly slippages averaged ₹1,500-2,500 crore until September quarter last year. Since then, aside from the sharp spikes in a quarter or two, slippages have been in the ₹3,500-4,500 crore range.

Axis Bank’s core performance has also been subdued over the past year. The bank saw a muted 1 per cent y-o-y growth in core net interest income.

This is mainly on account of reversal of interest income owing to a rise in bad loans. In September last year, loan-loss provisions had grown five-fold.

On such a high base, relatively lower provisions in the latest September quarter have led to 36 per cent y-o-y growth in net profit.