Axis Bank’s watch list of maladies

September quarter results have shattered Axis Bank guidance on bad loans and showed how horribly off it was in its timing and judgement of asset quality


As of 30 September, nearly 40% of its watch list has turned bad and the bank no longer expects slippages will be limited to 60%.  Photo: Bloomberg
As of 30 September, nearly 40% of its watch list has turned bad and the bank no longer expects slippages will be limited to 60%. Photo: Bloomberg

In March, when Axis Bank Ltd had revealed a “watch list” of corporate accounts amounting to Rs22,628 crore, the lender had won the trust of investors by giving a clear guidance that 60% of this watch list could go bad over eight quarters.

About 10% of the corporate loans listed went bad in the June quarter and investors believed that the worst was out in the open and the pain would be spread over eight quarters.

But the September quarter results have shattered this guidance and showed how horribly off the third largest private lender was in its timing and judgement of asset quality.

As of 30 September, nearly 40% of its watch list has turned bad and the bank no longer expects slippages will be limited to 60%. Fresh slippages were massive at Rs8,772 crore in the September quarter and 89% were from the watch list. This accretion had the gross bad loan ratio surging to 4.17% from 2.54% and the net ratio to 2.02% from 1.08% the previous quarter.

Provisions climbed five-fold and the provision coverage ratio dropped to 60% from 72% in the March quarter. The bank made a profit of Rs319 crore, an 83% fall from a year ago.

Given that only Rs61 crore worth of loans have exited the watch list, a key fear now is whether the entire watch list will go bad quickly. This is possible given that 97% of the watch list now has a rating below ‘BBB’.

The list is dominated by the power sector, which comprises 41%. The red-flagged infrastructure and construction sector forms 8% of the list, with iron and steel making up 12%.

Outside of the list, too, there are pain points. Around 11% of slippages came from outside the list, higher than 8% in the previous quarter.

While the stock has underperformed the sector index, it could face further pressure, given the grim numbers. The redeeming metrics are its still strong core income growth of 11% and retail loan growth of 25%.

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