No nasty surprises, but stress to remain elevated at Axis Bank

Here’s the summary of Axis Bank Ltd’s March quarter earnings: no nasty surprises on the asset quality front, but stress remains elevated and the watchword for this fiscal year is caution.

Incremental additions to bad loans during January-March were fewer than in the previous quarter. Fresh slippages were Rs.1,474 crore compared with Rs.2,082 crore in the December quarter. Strategic debt restructuring was Rs.205 crore versus Rs.500 crore and refinancing under the 5:25 scheme was Rs.170 crore vs Rs.1,600 crore.

But troubles lie ahead. The bank has created a “watch list” of some loan accounts which are worth Rs.22,268 crore and are likely to be the source of future stress. Of this, it expects 60%, or Rs.13,361 crore, to go bad over the next two years. That number is about one-fifth higher than the combined slippages of the past two fiscal years.

Look at it in another way, assuming that these “watch list” slippages are equally spread over the next two years, the slippage ratio—slippages in a year as a percentage of opening normal loans—would be roughly 2% in FY17, about the same as for FY16.

That stress remains elevated can also be seen from the credit cost guidance of 125-150 basis points for FY17. That is higher than 111 basis points for FY16 and 75 basis points for the previous year. This likely includes extras such as 2.5% incremental provisioning every quarter for some restructured accounts and money that has to be set aside in the first quarter against loans to the Punjab government.

One basis points is one-hundredth of a percentage point .

In the March quarter, provisions rose 64% to Rs.1,168 crore, although it included contingency provision of Rs.300 crore. As a result, net profit fell 1.2% despite operating profit growing at 9%. While net interest margin for the March quarter was a pleasant surprise at 3.97%, the new marginal cost of funds-based lending will dent it in the coming quarters.

Overall, a retail focus, loan growth of 20% and these kinds of margin numbers are positives for Axis bank. However, with a good chunk of loans towards companies—both large and small, there is a fear of further stress addition eating into profits in the coming quarters. That caps valuations. Axis Bank shares have lost nearly 9% in the last 12 months compared with the 6.2% fall for the Bankex.