Q1 Comment. Axis Bank reports lower slippages but earnings to remain under pressure

On the face of it, Axis Bank’s lower slippages and relatively better loan growth in the latest June quarter vis-a-vis that in the previous quarter, should offer some respite to investors. Persisting concerns on asset quality and importantly, sharp divergences observed in asset classification and provisioning from RBI norms (pertaining to FY16) have been weighing on the stock. But while slippages into NPAs (non performing assets) that peaked in the September quarter last year, have since moderated, continued stress from outside the watch list, a substantial rise in write-offs in the latest June quarter, pressure on net interest margin and relatively slow growth in loans when compared to few other private banks—all indicate more pain for Axis Bank in the coming quarters. The bank saw a muted 2 per cent y-oy- growth in core net interest income and a 16 per cent decline in net profit in the latest June quarter. Earnings had shrunk by 55 per cent in the 2017 fiscal, owing to sharp increase in the bank’s bad loans.

Axis Bank, like other lenders such as ICICI Bank and SBI, that have a higher exposure to stressed sectors, had created watchlist (key source of future stress in the corporate loan book) in the beginning of the 2017 fiscal. With around 60 per cent of accounts under watchlist slipping into NPAs, the outstanding accounts of around ₹22,600 crore as of March 2016 are down to Rs 7941 crore as of June 2017. While this was on expected lines, the incremental stress, quarter on quarter, from outside the watch list remains worrisome. Starting with 92 per cent of the corporate slippages coming from the watchlist last June, the bank reported a lower 83 per cent of corporate slippages from the watchlist by March 2017 (or 17 per cent from outside the watchlist).

In the latest June quarter, just Rs 797 crore of the Rs 2300-odd crore corporate slippages are from the watchlist, implying a significant 60 per cent and above from outside the watchlist accounts.

To be fair, with the watchlist itself shrinking sizeably over the past year, incremental slippages would come from outside this list. However, the size of such slippages remain a concern and will need watching in the coming quarters.

Write-offs too have been inching up in recent quarters. From Rs 1194 crore in the March quarter, write-offs stood at Rs 2462 crore in the June quarter.

Axis Bank’s core performance has also been subdued over the past year. The bank managed just a 10 per cent growth in loans in 2016-17. While this has inched up to 12 per cent in the latest June quarter, it lags some of its other private peers. While some mid-sized players have managed to report a higher, upwards of 20 per cent growth, HDFC Bank, too delivered a loan growth of 23 per cent in the June quarter, despite its size. With corporate book consisting of predominantly working capital financing, HDFC Bank has been fairly insulated from the investment slowdown.

While growth in Axis Bank’s corporate book in the June quarter was driven by strong growth in working capital loans, the overall growth in corporate lending remained subdued at 2.6 per cent (as against 25 per cent for HDFC Bank). Retail loans for Axis Bank though remained on a strong footing, reporting a growth of 22 per cent.

On the margin front though, a substantial part of the variable loans moving from base rate to MCLR has impacted Axis Bank’s net interest margin. From 29 per cent in March quarter, MCLR linked loans now constitute 36 per cent of loans. The sharp fall in MCLR over the past year has impacted yields and hence margins. For HDFC Bank that has managed to maintain stable margins, fixed rate loans constitute the chunk—70 per cent of its loans.