Axis Bank sees its darkest hour as the lights go out on asset quality

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How many bankers does it take to change a light bulb? Apparently none at Axis Bank, as the lender faced its darkest hour on asset quality in the March quarter. The stock in all probability will face its own on Friday.

The bank reported a massive Rs2,189 crore loss for the fourth quarter of 2017-18, a far cry from Street expectations of a small profit of Rs662.3 crore as shown by a Bloomberg survey. The private lender had to carve out a massive Rs7,179 crore towards bad loan provisioning during the quarter, three times more than in the previous year.

The lender did worse than Street expectations on its bad loan ratios. Its gross bad loans now form 6.77% of its loan book and as the bank stuck to prudence in provisioning, the net bad loan ratio was a less scary 3.4%.

But what will terrorize investors is the Rs16,536 crore of slippages in a single quarter, unheard for the bank. The management put up a brave face and said that the bank has reached the end of the bad loan recognition process. Indeed, at this level of slippages, the recognition had better be over.

With this slippage wave, the watch-list stands obliterated and on a cumulative basis, Axis Bank has recognized close to Rs28,000 crore worth of bad loans since the Reserve Bank of India mandated banks to do so in 2016.

What led the debacle on asset quality were loans to power generators and distributors who could no longer pay up.

More than 40% of the slippages during the quarter are from the power sector.

The bank has learnt its lesson and its growth in the corporate loan book during the quarter came entirely from working capital.

It has moved away from project finance loans that hurt it in every quarter on asset quality. The management vowed to bring down credit costs in FY19 and stressed that incremental bad loans will be far less than what the lender has reported so far.

The fact that the lender’s profile of corporate borrowers has improved, retail book has grown fast and some encouraging signs on loans referred under Insolvency and Bankruptcy Code support the management’s claim of a decent year ahead.

While investors may have run out of reasons to justify the stock’s valuation, perhaps the leadership change ahead would power up the stocklivemint