Provision cuts boost Axis Bank profit

After trailing the Bankex gauge on BSE for most of last fiscal on concerns about its asset quality, Axis Bank Ltd finally seems to have assuaged them. So far this calendar year, it has outperformed the Bankex, a trend likely to continue given its March-quarter numbers.

Net profit grew by one-quarter over a year ago to Rs 1,277 crore. Given that the operating profit grew a tepid 12%, the slowest in three quarters, a 152% rise in trading profit helped. That’s despite the growth in fee income coming at a tardy 8%. Indeed, without the trading profit, Axis Bank’s core operating profit grew only 7%. Thus, a 45% reduction in provisions added heft to the bottom line.

Axis Bank was able to cut provisions by containing its bad loans. While gross non-performing assets as a portion of its loan book declined 16 basis points (bps) to 0.94%, fresh slippages remained stable. One basis point is one-hundredth of a percentage point. The bank also had significantly higher recoveries at Rs 590 crore, compared with an average of Rs 130 crore in the previous couple of quarters. Thus, despite setting aside a smaller amount against bad loans, its provision coverage ratio improved to 80.2% in the March quarter, compared with 75.3% three months ago.

Yet, there are a couple of things to note. First, the bank restructured assets worth Rs 588 crore, an increase of 23.7% from the Rs 2,472 crore outstanding that it had at the end of December. Thus, restructured assets stood at 1.58% of its loan book at the end of March. Second, while Axis Bank grew its loan book 19% from a year ago, beating the industry run rate, the average credit rating of its customers has deteriorated, albeit slightly. Now, 67% of its corporate loans have a rating of at least A, compared with 70% a year ago. About 19% of its total exposures are to shaky sectors such as power and construction, which are in the doldrums and could take time to pick up.

That said, Axis Bank grew its retail advances a strong 35% over a year ago. In this environment, most of its private sector peers such as HDFC Bank Ltd are focusing on this segment, which is expected to grow faster. Retail loans now constitute 22% of Axis Bank’s advances, compared with 19% a year ago, and probably helped in curbing the slippage in net interest margin by only 20 bps sequentially to 3.55% for March. The growth in retail loans was driven by mortgages, so asset quality issues shouldn’t be a concern as well.

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