Axis Bank’s stress eases, recovery some time away

After many quarters of missing the Street's expectation, Axis Bank’s March quarter (Q4) results broke the jinx. Net profit in Q4 at ~1,225 crore, though down 43 per cent over a year, was significantly higher than the

Bloomberg estimate of ~891 crore. Net interest income (NII), the difference between interest earned and expended, grew four per cent to ~4,729 crore.

After many quarters of missing estimates, Axis Bank's results finally topped them. But, significant recovery will take some time.

To begin with, net profit in March quarter (Q4) at ~1,225 crore, though down 43 per cent year-on-year, was significantly higher than Bloomberg estimate of ~891 crore. Net interest income (NII), which is the difference between interest income and interest expended, grew four per cent year-on-year to ~4,729 crore. However, net interest margin (NIM) at 3.83 per cent was lower than 3.97 per cent a year ago. NIM also declined to 3.67 per cent in FY17 from 3.82 per cent in FY16. Jairam Sridharan, finance chief, Axis Bank, says that annualised NIM will continue to see a margin compression of 15-20 basis points in FY18 due to liquidity overhang and low loan offtake.

Provision for bad loans more than doubled to ~2,581 crore, though formation of non-performing assets (NPA) stabilised in Q4. The quarter saw Axis Bank make a provision of 25 per cent for one account operating in the cement industry. The provision was based on internal assessment. "It is a standard account on watch list showing signs of strain," says Sridharan.

Gross NPA ratio at 5.04 per cent was a bit lower than December quarter's 5.22 per cent, helped by recoveries and loan write-off of ~4,000 crore. Net NPA ratio came at 2.11 per cent. The silver lining is that the "non-watch list" slippages, which were the highest in December quarter, moderated in Q4. Watch list is the list of loans with potential to turn bad. Only 20 per cent of net fresh slippages (~2,008 crore of loans that defaulted) were not a part of the watch list as against 38 per cent in December quarter. Another positive is the bank's ability to expand its loan book, largely by better retail loan offtake. While the overall loan book grew 10 per cent year-on-year, retail book expanded 21 per cent to ~1.68 lakh crore in Q4. Loans to small and medium enterprises also grew 10 per cent, helping the bank offset the flat growth seen in its corporate book. Sridharan affirms that retail portfolio will continue to drive growth for the bank in the near term.

As with smaller peer IndusInd Bank, Axis Bank's low-cost current accounts and savings accounts increased to 51 per cent of overall deposits in Q4; overall deposits grew 24 per cent year-on-year. For these reasons, Rakesh Kumar of Elara Capital believes investors may okay the bank's performance in Q4 and the stock could trade in the positive territory on Thursday. But, that doesn't mean all is well yet for the bank. While gross slippages moderated from September quarter peak of ~8,772 crore, they still remain lofty at ~4,811 crore in Q4. Also, even if the watch list itself has reduced from ~22,628 crore in March 2016 quarter to ~9,436 crore in Q4, investors need to note that 58 per cent of this reduction may be attributed to accounts under watch list falling into NPA category. Based on this, ~4,000-4,500 crore of fresh NPA formation in FY18 cannot be ruled out, say analysts. For now, loans to power sector account for 60 per cent of the watch list. If the outlook for the power sector further deteriorates, asset stress could rise. What's also alarming is the credit cost (expected loss on loans given) is at all-time high of 2.82 per cent.

While the management guides for credit costs at 1.75-2.25 per cent in FY18, it still defers a strong improvement in profitability to FY19. Therefore, even as headline numbers suggest that the pain may have subsided for the bank, path to recovery from asset quality ailments may still be some time away.