Axis Bank turns a corner with a decent Q1 show
Essentially, there are unlikely to be nasty surprises ahead, unlike what Axis Bank investors saw in the past four quarters
Axis Bank Ltd’s first quarter (Q1) results offer much-needed succour to investors on asset quality. The lender is finally healing. Recall that the bank had a disastrous two years that ended with a nasty quarterly loss in March. The lender had reported its worst ever slippage ratio and labelled its entire restructured portfolio as bad.
For the June quarter, slippages have normalized as much as they can with about ₹4,300 crore turning non-performing. This led to the bank’s bad loan ratios improving sequentially, although they appear ugly when compared with the year-ago numbers.
What is more reassuring is that loans that the lender considers most likely to turn non-performing in the coming quarters are now just 2.5% of its loan book, sharply down from about 9% a year back.
Essentially, there are unlikely to be nasty surprises ahead, unlike what the bank’s investors saw in the past four quarters.
Of course, Axis Bank has an exposure of ₹4,600 crore to accounts undergoing bankruptcy proceedings. But the lender seems to have learnt the lesson on risk management. It has smartly provided 83% towards these accounts, having covered itself for possible steep losses.
Axis Bank has focused on retail and small businesses for lending, which are the safer assets to accumulate. The management has already indicated that it’s shutters down for project financing but it would continue to give working capital loans. Its exposure to stressed sectors has fallen.
Lastly, with much of the toxic loan pain behind it, the overhang on the lender’s core income and margins too would recede. The management indicates that the compression of net interest margin over the past two years is now over.
The Axis Bank stock is now poised for a breakthrough as it trades at a modest 1.8 times its estimated book value for FY20.
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