Axis Bank: Pop goes the math on bad loans

Axis Bank, the third largest private sector lender in India, seems to have miscalculated its asset quality every quarter since RBI’s review


Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Exactly a year ago, amid the rumblings set off by the Reserve Bank of India’s (RBI’s) asset quality review, Axis Bank Ltd had said that it had recognized and provided for all the stressed loans in the December quarter.

The private sector bank’s stock dropped about 9% in the ensuing two months that reflected investors’ scepticism over the claim. Perhaps it is time for investors to recall this and take refuge in scepticism again.

The third largest private sector lender seems to have miscalculated its asset quality every quarter since RBI’s review. While Axis Bank earned points from investors for disclosing a watchlist of loans with the results of the fourth quarter of 2015-16, the loans outside the list seem to be decaying faster.

For the December quarter of 2016-17, the bank’s slippages totalled Rs4,560 crore, of which 36% or Rs1,631 crore is outside the so-called watchlist.

ALSO READ | Axis Bank Q3 profit falls 73.4% to Rs579.57 crore

The fact that the non-watchlist slippages were legacy corporate accounts, which the bank should have ideally identified and provided for earlier, indicates a serious misstep.

The watchlist consists of only corporate accounts and leaves out SME (small and medium enterprises) loans and retail loans. Here too, the slippages are ticking up, with those in SME loans climbing sequentially to Rs382 crore.

In the wake of demonetization, this is a disturbing trend especially when the bank’s management said that the effect of the currency withdrawal on asset quality has not played out yet.

The watchlist itself now stands reduced to 2.8% of total loans with an outstanding amount of Rs11,061 crore. More than half of it has already gone bad and the probability of the rest slipping is high. The management’s guidance is that 70% of the list could go bad.

Besides asset quality, Axis Bank also disappointed on almost every other metric except the robustness in other income. The private sector lender’s net profit fell by a massive 70% to Rs580 crore, a mile away from the median estimate of 20 analysts by Bloomberg that put the profit at Rs831.80 crore. Net interest income growth too was a shabby 4% and loan growth dropped to 10%.

The bad loan ratios are likely to be uglier in the fourth quarter given that loan growth is weak. Given the absence of a clear outlook on slippages by the management, analysts may find Axis Bank’s valuation unjustified. The stock has gained nearly 10% in 2017 so far, and the price-to- book value multiple now stands at two times, based on the estimated book value for 2017-18.

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