News Analysis

Asset quality woes weigh on Axis Bank

Radhika Merwin BL Research Bureau | Updated on January 15, 2018 Published on April 27, 2017

Incremental stress quarter-on-quarter from outside the watchlist worrisome; more pain seen in the coming quarters

Axis Bank that declared its results on Wednesday is down nearly 2 per cent in trade today, owing to persisting concerns on its asset quality. Bad loan woes for the bank that began about a year or so back, it appears, is yet to bottom out. While slippages into NPAs (non-performing assets) that peaked in the September quarter last year, have since moderated, the still sizeable additions to bad loans, stress from outside the watchlist, notable portion of loans restructured under 5:25 scheme and SDR (strategic debt restructuring), and more importantly, divergences observed in asset classification and provisioning from RBI norms—all indicate more pain for Axis Bank in the coming quarters. Earnings that had already slipped to 12 per cent growth in 2015-16 (from 18 per cent in the previous year) have shrunk by 55 per cent in the 2017 fiscal, owing to sharp increase in the bank’s bad loans during the past year.

Not so comforting

The RBI’s recent circular that requires banks to make suitable disclosures in case of material divergences in asset classification and provisioning from its norms (pertaining to the 2016 fiscal), could have impacted Axis Bank’s bad loan book significantly during the latest March quarter. This is because loans to the tune of Rs 9,478 crore, according to RBI, should have been declared as NPAs in the FY16 fiscal itself; the bank had reported gross NPAs of Rs 6,087 crore as on March 2016.

But Axis Bank, unlike its peer YES Bank, has not seen any major impact on account of this, as chunk of such loans has already been declared as bad loans during the first three quarters of 2016-17. A majority of these accounts formed part of the bank’s watchlist (key source of future stress in the corporate loan book) it created in the beginning of the 2017 fiscal. Outstanding accounts of around ₹22,600 crore that were put on the watchlist, are down to Rs 9,436 crore as of March 2017. Of the Rs 13,000-odd crore slippages into NPAs from the watchlist, over 70 per cent, it appears should have been categorised as NPAs at the end of 2015-16 itself.

The sudden observations by the RBI aside, Axis Bank’s still high slippages into NPAs is a concern. From Rs 4,560 crore in the December quarter, slippages have inched up to Rs 4,811 crore in the March quarter. While slippages are down from the Rs 8,700 crore levels seen in the September quarter last year, they are still much higher than the levels seen in the quarters, prior to creating the watchlist.

Axis Bank has also restructured loans under the 5:25, SDR and S4A which may need watching going ahead. As of March 2017, outstanding underlying standard loans for SDRs and 5/25 is around Rs 2,173 crore and Rs 2,329 crore respectively.

The incremental stress quarter on quarter from outside the watch list is also worrisome. In the June quarter, 92 per cent of the corporate slippages had come from the watchlist. In the December quarter, a much lower 70 per cent of slippages came from the watchlist. Over the full fiscal year 2017, 84 per cent of corporate slippages have been from the watchlist and 16 per cent from outside.

Modest core performance

Axis Bank’s core performance has also taken a knock over the past year. After growing its loan book by 21 per cent in 2015-16, the bank managed just a 10 per cent growth in loans in 2016-17. While retail loans remained on a strong footing, corporate loans were flat over the previous year.

The stock of Axis Bank has fallen by about 17 per cent over the past six months. While the bank’s sound capital position should provide cushion to earnings (on account of increase in bad loan provisioning), uncertainty around asset quality will likely weigh on the stock in the coming quarters.

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