AXIS BANK NET DIPS 16% IN Q1

Private sector lender Axis Bank reported a 16 per cent year-on-year (y-o-y) fall in net profit to ~1,306 crore in the June quarter (Q1) on the back of flat net interest income (NII). NII, which is interest earned minus interest expended, rose 2.2 per cent in Q1 to ~4,616 crore from ~4,517 crore a year ago. However, non-interest income at ~3,000 crore, up 9.6 per cent y-o-y in Q1, came in handy for the bank.

Net interest margins (NIMs; a key profitability indicator) stood at 3.63 per cent in Q1 against 3.67 per cent in the corresponding quarter last year. The dip in NIMs was due to customers migrating to marginal cost of funds-based lending rate or MCLR. The bank guided for another 20basis point (bp) reduction going ahead.

While the Q1 results were lower than its performance a year ago, it was better than what the Street anticipated. The Axis Bank stock rose by about two per cent in Tuesday’s trade to close at ~544.65 per share. As results came after market hours, and with numbers bettering expectations on core operations and asset quality fronts, analysts feel the Street may react positively to the results in Wednesday’s trade as well.

The bank’s asset quality saw a marginal improvement as gross non-performing assets (NPAs) stood at 5.03 per cent in Q1 as against 5.04 per cent in the March quarter. Gross NPA, in absolute terms, more than doubled to ~22,031 crore on a y-o-y basis, but on a sequential basis the increase was contained at 3.5 per cent. The watch list or loan accounts which require close monitoring (and have potential to turn bad) also reduced from ~20,295 crore a year-ago to ~7,941 crore in Q1 of FY18; in the March quarter, it was ~9,436 crore.

Creation of bad loans or slippages also took a marginal breather this quarter. Slippages stood at ~3,519 crore in Q1 as against ~3,683 crore a year ago. Nonetheless, slippages outside the watch list remained high at ~1,500 crore. Going ahead, Chief Financial Officer Jairam Sridharan, in a media call, said the trend of nonwatch list slippages may remain high as the watch list may gradually shrink. Nonetheless, analysts believed this was still a positive as about 75 per cent of the pain had been recognised from the watch list. “Going by Q1 performance, the worst may be behind Axis Bank,” said Asutosh Kumar Mishra of Reliance Securities. “With incremental pain recognition getting smaller, the turnaround seems sustainable if supported by core operations going forward.”

In fact, despite the weak lending climate, Axis Bank’s focus on retail loans has helped the bank grow its assets by 12 per cent y-o-y to ~3,85,481 crore in Q1. While retail loans, which account for 46 per cent of the total loan book, grew by 22 per cent y-o-y in Q1, there was a three per cent growth in the wholesale book, though much of it was driven by working capital loans. Deposits also grew to ~3,93,741 crore (up 10 per cent y-o-y) in Q1, supported by a strong growth of lowcost Casa(current account savings account) deposits. Share of Casa deposits stood at 49 per cent in Q1.

After seeing some capital consumption in the March quarter, the lender’s capital adequacy was back to a comfortable 16.63 per cent level in Q1. Tier-I capital stood at 12.33 per cent helped by ~3,500 crore raised through issuance of AT-1 bonds. The bank also raised ~5,000 crore through Tier-II bonds in Q1.

Lastly, Sridharan rejected media reports of the bank’s CEO, Shikha Sharma, moving out of the bank. Reports had suggested her possible shift to the Tata group, but Sridharan rejected these claims.

Little support from interest income weighed on net profit, though it topped Street’s expectations; asset quality improves marginally