Despite being a well known private lender, Axis Bank underperformed peers over the last decade on the back of legacy corporate loan book issues, that weighed heavy on the investor sentiment around the stock. However, over the recent quarters, the bank has shown remarkable improvement in its bad loans, both in terms of healthy recoveries and containing slippages. Besides owing to a gradual drop in its high risk loans (corporate loans with BB and below ratings), minimal restructuring and normal collection efficiency (overall), slippages are likely to be in check even in the coming quarters.

Adding to that are its adequate unused provisions (covering for 124 per cent of bad loans) and sufficient capital buffers (CAR at 20.04 per cent) that could help aid growth aside from covering for any plausible unanticipated loan losses, going ahead.

With its legacy issues of weak asset quality waning, while Axis Bank may appear a good long term bet, any immediate re-rating in the stock, hinges upon improvements in its operating metrics (NIMs and operating profits).

In the recent quarterly results, where other private lenders witnessed improvements in NIMs, Axis Bank saw a drop due to loan mix. Given its current valuations which (despite the recent correction over the last one month) appear to factor in its good long term prospects, investors can hold the Axis Bank stock .

The Axis Bank stock currently trades at 1.9 times its book value (consolidated), which is closer to its three-year average of 2.03 times.

Asset quality improves

In its recent September quarter results, Axis Bank posted lowest Gross Non-Performing Assets (GNPA) in last 20 quarters, at 3.53 per cent of its loan book. Apart from contained slippages, minimal restructuring and healthy recoveries in written off accounts helped achieve this feat. The bank’s restructured loan book is at 0.64 per cent of overall loans (0.8 per cent of retail loans have been restructured), indicating a lower likelihood of stress going ahead. Besides the bank has provided for 24 per cent on the restructured book.

Recoveries and upgrades from non-performing assets also were strong at ₹4,757 crore –– up 135 per cent from corresponding quarter last year. The bank’s fund-based exposure to riskier corporates (comprising of loans rated BB and below), fell to ₹6,697 crore (3 per cent of corporate loans) in the second quarter of FY22, from ₹8,042 crore (4 per cent), in the September 2020 quarter . This decline was led by both strong recoveries and (rating) upgrades in loans amounting to ₹660 crore, and slippages amounting to ₹685 crore (which the bank had already provided for).

Apart from lowering its riskier corporate book, the bank also strategically shifted towards a more secured and granular retail loan book, that in turn helped contain further slippages.

Compared to an overall bank credit (data from RBI) growth of 6.7 per cent in September 2021, Axis bank’s loan book grew by 10 per cent y-o-y to ₹10.5 lakh crore, largely led by 16 per cent y-o-y growth in its retail book (which now comprises 56 per cent of its advances). With its growing digital presence, the bank has also garnered a good deposit base of ₹7.36 lakh crore (up 18 per cent y-o-y in September 2021 quarter). Driven by increased recoveries (including in fully written off accounts) and lower provisions, the bank’s consolidated net profits also surged by 84 per cent in the recent September quarter, to ₹3,387.7 crore.


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However, despite the improving signs in asset quality the stock fell 21.5 per cent after its recent September quarter results. The correction was triggered by other emanating weaknesses in its operating metrics, further intensified by broader macro factors. The bank’s operating profit (net interest income less operating expenses) dropped by 11 per cent y-o-y to ₹5,928 crore in the recent quarter. While much of the decline came largely due to a one-off increase in staffing costs (up 36 per cent y-o-y) owing to ESOPs, other operating expenses (comprising collection expenses, IT expenses, Priority Sector Lending Certificates (PSLC) purchases and DICGC premium), also grew 37 per cent y-o-y. Without any resurgence in Covid cases while collections are expected to streamline, costs related to PSLC may tend to be higher in the absence of required loan growth in these segments.

Besides, a 7 basis point (bps) q-o-q drop in its net interest margins (now at 3.39 per cent when compared to other top private lenders, whose NIMs are at 4 per cent) was also a contributing factor. In fact, due to changes in loan mix (shift towards AA and above rated corporate loans) the bank saw a 13 bps drop (q-o-q) in its yields in the recent September quarter, which was offset by a 6 bps (q-o-q) impact on account of interest reversal. The management expects improvements in NIMs over the medium term to be driven by loan mix changes, continued improvement in low-cost deposits and reduced share of low yielding Rural Infrastructure Development Fund bonds (currently at 4 per cent of the bank’s balance sheet size).

However, we feel that with cost of funds already at 3.87 per cent for the bank (in September 2021 quarter), further improvement may be limited. Hence, improvement in NIMs largely hinges on asset mix. Besides, the upcoming policy meeting may also decide the spate of the bank’s margins – this is because nearly 31 per cent of its advances are repo linked, which respond quickly to changes in policy rates. Its remaining advances are fixed rate loans (32 per cent), MCLR linked (28 per cent), floating rate foreign currency loans (6 per cent) and base rate linked loans (3 per cent).