Axis Bank’s asset quality slips slightly

In a depressed economy, the key variables in any bank’s earnings would be the quality of its loan book and how it grew its advances. On both these fronts, Axis Bank Ltd’s June quarter numbers faced minor hiccups. Although net profit grew 22% from a year ago to Rs 1,154 crore, it was the slowest in at least eight quarters.

Secondly, while the bank reported an impressive 30% year-on-year growth in advances, it was on a lower base. Axis Bank had reported a sequential decline in its loan book a year ago due to repayments of short-term loans in June 2011. That 30% number also hides the fact that it added only Rs 1,386 crore, or 0.8%, to its loan book in the three months ended June.

Net profit growth would have been higher but for the significant increase in provisioning. The lender set aside Rs 259 crore for provisions in the June quarter. That is 47% more than what it had provided for a year ago and 86% more than in the March quarter.

That is a pointer to deteriorating asset quality, albeit slightly. Gross non-performing assets as a proportion of advances were 1.06% at the end of June, the same level as a year ago. Yet, that is a climb-up from the 0.94% at the end of March.

Fresh slippages in the June quarter at Rs 456 crore were lower than the Rs 514 crore added in March. However, there has been a rise in restructured assets. Axis Bank recast loans worth Rs 628 crore in the June quarter compared with Rs 588 crore in the previous quarter.

Total restructured assets stand at 1.95% of its loan book. The bank says adjusted for loans with a “satisfactory repayment track record”, this metric is only 1.32%. The average credit rating of its corporate customers has deteriorated. Now, only 64% of its corporate loans have a rating of at least A, compared with 67% at the end of March and 70% in fiscal 2011.

Another disquieting feature in the results is the slower growth in low-cost current and savings account (Casa) deposits. Casa deposits as a percentage of the total stood at 39% at the end of June, down 3 percentage points in March. It perhaps explains the slip in net interest margins to 3.37% in the June quarter compared with 3.55% in the March quarter, although the proportion of retail loans grew 2 percentage points sequentially to 24%.

While the management said there won’t be any problems with asset quality, it remains the main fear and explains the underperformance of the Axis Bank stock compared with the Bankex gauge of BSE since the beginning of this year.

Also See | Quarterly performance (PDF)