Axis Bank gets burnt yet again by divergence explosion
Not more than six months ago, banks were caught with red on their ledgers when the Reserve Bank of India (RBI) forced lenders to disclose the differences between the regulator’s and lenders’ assessments of bad loans. What followed was a phenomenal rise in slippages and a commensurate jump in provisioning for banks.
Now the nightmare seems to be back. Axis Bank Ltd, India’s third-largest private sector lender, has reported a 182% surge in slippages for the three months ended September compared to the previous quarter. This was after RBI pointed out an under-reporting of Rs5,632 crore worth of toxic assets after conducting its annual risk-based supervision exercise.
Nine accounts that were classified as standard as of the June quarter have now slipped into the NPA (non-performing asset) category. Axis Bank elaborated that eight of these nine are consortium accounts involving other banks and that most lenders had termed them as standard earlier.
For Axis Bank, the divergence took total slippages to Rs8,936 crore, the highest ever for the lender, and worsened its bad loan metrics. Gross bad loans as a percentage of total loan book rose to 5.9%. Had the lender not seen a rebound in its corporate loan growth to 10% and an overall loan growth of 16%, the metrics would have been optically worse.
Provisions surged 34% sequentially to Rs3,140 crore, which nipped the net profit to Rs432 crore. Considering the second quarter a year back was equally disastrous for the bank, net profit growth was an optically pleasing 36%, but Street expectations were way higher at Rs1,318 crore.
But has the rise in bad loans laid bare Axis Bank’s entire toxic asset pile? Much to the chagrin of investors, there is more trouble ahead simply because the private sector lender has close to Rs7,041 crore exposure to eight of the 12 accounts referred under the Insolvency and Bankruptcy Code. Given the fact that the bank has a provision coverage ratio of 55% on these accounts, it seems the lender is not very optimistic on low haircuts. Axis Bank has exposure to another 12 accounts singled out by RBI for quick resolution.
By its own internal assessment, the lender has Rs15,815 crore worth loans rated BB or below, and encompass its watchlisted accounts as well as restructured accounts. Much of the slippages have been from this set of loans.
While the Axis Bank stock fell 1.44% on Tuesday, investors are likely to punish the stock more since the results were detailed post-market hours. Given that other lenders are also involved in the accounts that slipped in Axis Bank’s books, the collateral damage to the sector stocks is a forgone conclusion.