In a quarter when the actual impact of the Covid-led lockdown was felt, Axis Bank has delivered a sound performance. Healthy growth in core net interest income, good traction in deposits, strong capital ratios and prudent provisioning lend comfort to investors. The significant fall in loans under moratorium during the quarter is also a positive trend.

Axis Bank delivered 20 per cent YoY growth in its net interest income in the June quarter, on the back of 17 per cent growth in loans (including TLTRO investments), though net interest margin (NIM) fell sequentially owing to surplus liquidity weighing on profitability. The bank’s 16 per cent growth in deposits, alongside a healthy liquidity position, is also a key positive.

After the bank made sizeable provisions of ₹3,000 crore related to Covid during the March quarter, it has incrementally provided ₹733 crore towards the pandemic in the June quarter. The bank making substantial provisions would provide buffer to absorb losses on account of defaults in the coming quarters. Its provision cover has increased substantially to 75 per cent in the June quarter from 69 per cent in the March quarter.

That said, the unprecedented pandemic crisis that has impacted individuals and businesses across sectors, has thrown up a huge uncertainty for the banking sector. With the moratorium period extended until August 31, the trend around loans under moratorium could change in the coming quarter. The Covid induced slowdown could also delay the normalisation of Axis Bank’s stressed book — its BB & below book (fund based) stands at ₹6,420 crore, which is notable.

The bank had made certain accounting policy changes in the June quarter that impacted its core operating profit and profit after tax. Excluding these, the bank would have posted a 19 per cent YoY growth in PAT (as against a 19 per cent decline reported in the June 2019 quarter).

Persisting risk

While the bank has seen significant fall in slippages in the March and June quarters, the actual picture on asset quality will be known only after the moratorium is lifted in September (in the third and fourth quarter of the current fiscal).

In the March quarter, the management had reported that a sizeable 25-28 per cent of loans (by value) were under moratorium. In the June quarter, the proportion of loans under moratorium fell substantially to about 9 per cent of loans, which is heartening. The management has stated that repayments by corporates and improved collection efforts have helped. However, given that the business environment remains highly uncertain, the moratorium picture could change notably in the coming quarter (even increase).

Aside from this, the bank’s stressed book and recoveries would also need a watch in the coming quarters. Much before the Covid led disruption, Axis Bank’s asset quality had been under pressure, with slippages steadily rising in the first three quarters of FY20 (to ₹6,200 crore in the December quarter). In the latest June quarter, while slippages have fallen to ₹2,200 crore levels, upgradations and recoveries too have declined sharply. Write-offs remain elevated at ₹2,200 crore.

All these trends will be keenly watched in the second half of the current fiscal, which will present a clearer picture on the bank’s asset quality.

What lends comfort though is the bank’s substantial provisions and strong capital ratios. As of June, its Tier I capital ratio stood at around 14.4 per cent. This should help fund the bank’s growth as well in the coming quarters.

Healthy loan growth

As of June 2020, the bank’s advances including TLTRO investments grew 17 per cent YoY. Retail loans grew 16 per cent (though disbursements fell sequentially). Corporate loan book including TLTRO investments grew 26 per cent YoY. Within the corporate book, the bank has been focussing on better rated entities and short term loans.

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