After the massive clean-up of books last year that led to a substantial loss, Axis Bank’s March quarter results, as expected, are optically pleasing. Added to this, a substantial reduction in the bank’s stressed book and steady improvement in core performance is likely to offer a much-needed respite to investors.

After reporting a loss of Rs 2,189 crore in the March quarter last year, the bank has registered a profit of Rs 1,505 crore in the March quarter of FY19. Importantly, after reporting steep bad loan divergences in the previous two fiscals, Axis Bank has not reported any divergence pertaining to the FY18 fiscal, which is comforting.

The bank had tweaked some of its provisioning norms. Rather than making contingent provisioning towards possible slippages from low rated corporate loans, the bank has adopted a more stringent policy towards provisioning of standard corporate loans. The bank also made additional provisioning of Rs 535 crore towards land held as a non-banking asset; the balance Rs 1,605 crore of provisioning in this respect will be charged to the P&L over the coming three quarters.

Coming off from huge slippages

Axis Bank had reported a steep Rs 16,536 crore in slippages in the March quarter last year, owing to accelerated NPA recognition in its low-rated loan book and one-time impact on account of the RBI’s February 2018 circular on stressed assets. While this had led to huge losses, the substantial reduction in the bank’s stressed assets pool, had led many to believe that the bad loan issue had bottomed out for the bank. Four quarters hence, the steady improvement in asset quality has certainly played out in favour of hopeful investors.

The bank’s gross slippages fell to Rs 4,337 crore in the June quarter and further to Rs 3,012 crore in the latest March quarter. The bank’s BB and below rated book has also shrunk substantially over the last two years, from a peak level of Rs 27,411 crore in the June 2016 quarter to Rs 7,467 crore in the March 2019 quarter. Given that about 87 per cent of slippages (on an average) in FY19 has come from BB & below rated book, the significant shrinkage in this book is a positive.

Uncertainty over bad loan divergences and impact of RBI’s Feb circular requiring banks to report one day default, were key overhangs for the bank. On the former, there has been a respite after two fiscals of sharp divergences. Banks are required to make disclosures where the additional provisioning for NPAs as assessed by the RBI exceeds 10 per cent of reported profit before provisioning or additional gross NPA identified by the RBI exceeds 15 per cent of the published figure. The bank has stated that it has not had to make any disclosure on divergence on this count.

On the Feb circular, while the bank awaits the revised framework by the RBI, the management stated that it will continue to be conservative and does not expect any substantial write-back owing to changes in RBI’s norms.

Core performance

On the core business front, pick-up in the bank’s net interest income growth in recent quarters has been heartening. From flat to low single-digit, growth in net interest income had inched up to 12 per cent in the June quarter. In the latest March quarter, the bank’s net interest income grew by 21 per cent. While the bank’s growth in corporate loans remained muted at 5 per cent YoY (as of March 2019), retail loans grew at a healthy 19 per cent, driving overall loan growth.

The growth in retail loans has been driven by segments such as personal loan, credit cards, etc., with their share in the overall retail loan mix inching up over the past two years. The higher share of these high-yielding loans have aided the net interest margin, compensating to some extent the pressure on yields (on loans) on account of the bank’s decision to focus on higher rated corporates.

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