Concerns of investors have not entirely abated after Axis Bank
’s December quarter numbers. The stock has been under pressure since it reported higher-than-expected slippages in the second quarter. Though the third quarter saw lower accretion of fresh slippages (new accounts turning into non-performing assets), the investor community wants to see some bold steps from the bank so that it can put the lingering problem of NPAs behind it and start a new credit cycle.
It is apparent that Axis Bank’s aggressive build-up of the corporate loan book is now showing up but the Street does not want the management to drag its feet on toxic accounts any more. The bank is well capitalised and can afford to take such decisions, believe many analysts. Of the total slippages in the quarter, Rs 830 crore, or nearly a fifth, came from the restructured book.
The Street is beginning to lose patience as the bank is perceived to act slowly on NPAs. Says one analyst, “The bank has been talking about this problem for a while but no bold steps have been taken yet on the subject. Also, while 70 percent of the slippages during the quarter came from the watch list, slippages from outside the watch list were very high. This means that the bank’s not able to estimate accretion of stressed assets.”
HDFC Securities says the 4x increase in ex-watchlist slippages was disappointing. The Street also believes that the bank could be more forthcoming on many accounts to give more granularity on accounts and how it is expected to be impacted.
Edelweiss Securities adds that because slippages from the non-watch list was higher, it cast a shadow on veracity of watch-list claims. Further, slower recovery/resolution pace remains challenging. At the start of FY17, Axis Bank had created a watch list of accounts worth Rs 22,000 crore, which could potentially turn into NPAs during the course of the fiscal. Of this watch list, accounts to the tune of Rs 11,000 crore have already been funded and provided for as the loans did slip.
Analysts believe that there’s been little recovery from this watch list and that is a cause of concern.
Ahead of the third-quarter results, there was a loud buzz on some large corporate accounts that were expected to slip. In conversation with Moneycontrol, the bank’s chief financial officer, Jairam Sridharan, said that most of the large accounts that the Street was concerned about have already been recognised as NPAs during the quarter gone by. “The non-NPA book does not have exposure to any of these entities,” he told Moneycontrol in an interview.
The bank is taking multiple measures to address legacy problems. It has changed its lending practices and fresh lending is only to A+ rated corporates. While this has put pressure on fee income, it is likely to hold the bank in good stead in times to come. The bank’s fee income declined 7 percent sequentially. While the drop was largely across segments, corporate fees fell 27 percent quarter on quarter while retail fees dipped a mere 2 percent.
In order to address the issue of NPAs, Axis Bank has increased its provision coverage ratio from 60 percent to 64 percent even as slippages came down 48 perecnt sequentially to Rs 4560 crore in Q3. But the Street wants a quicker resolution to NPAs now and feels that the bank should aggressively write off bad accounts. The Street expects 50 percent of restructured accounts — whether CDR, S4A or 5/25 — to go bad. If this is true, the bank will need to be sufficiently capitalized to take such a hit.