Axis Bank: Asset quality pain not over

Sub-investment grade assets may keep bad loans elevated

Even after higher recognition of non-performing assets (NPAs or bad loans) in the March 2018 quarter, it may be early to say that the asset quality pain for Axis Bank is over. The stock is down 4.8 per cent in 2018, when Nifty Bank and Sensex are up 4-5 per cent. Analysts say, the bank’s exposure to sub-investment grade assets is still high and could be a source of bad loans in the near-term.

No doubt, the balance sheet clean up in the March 2018 quarter — mainly due to the Reserve Bank of India’s (RBI) new NPA framework —- reduced the bank’s stressed pool. Its exposure to the power sector, for instance, dropped to 2.5 per cent of its advances as of March 2018 from 5.1 per cent a year ago. However, analysts are cautious about the bank’s outstanding exposure (~89.9 billion, 1.8 per cent of its advances) to sub-investment grade accounts (with a credit rating of BB or lower). This is because, in March quarter, 90 per cent of its corporate slippages (loans turning bad) were from BB and below rated loans. In an analysts call, the management also said that the rating downgrade cycle will continue for one-two more quarters. “Large pool of sub-investment grade assets will keep gross NPAs elevated for at least two more quarters,” analysts at HDFC Securities, said in their analysis of the bank’s annual report. Asutosh Kumar Misra, an analyst at Reliance Securities, also shares a similar view.

Positively, the bank is likely to see double-digit growth in domestic loan book. But, since investments in the private space are muted and there would be some write-offs (including on National Company Law Tribunal cases), the growth in loans may be restricted. The relatively lower increase in slippages (versus peak levels of FY18) due to reduced stressed would support the bank’s net interest margin as interest reversal (on bad loans) would be lower. However, migration to a marginal cost of funds based lending rate (MCLR) from base rate for existing loans, as instructed by the RBI, may put some pressure on margins, Misra adds.

In this backdrop, analysts expect pressure in the first two quarters of FY19, with improvement thereafter as many issues including NCLT cases (first list of 12 loan accounts) are expected to get resolved.