Home / Market / Mark-to-market /  Bumpy road ahead for Axis Bank

Shares of Axis Bank Ltd have slumped 40.2% after they touched an all-time high in March last year, underperforming the banking index, which has fallen 26% during the same period. The slump in the stock is a reflection of the underlying stress in asset quality.

Gross bad loans increased by almost half to 5,724 crore compared with a year ago. Gross non-performing loans as a percentage of the loan book were at over a five-year high of 1.68%. Bad loans went up sharply because Axis Bank has fully recognized the necessary impairment and the resultant provisioning impact of asset re-classification, as per the Reserve Bank of India’s (RBI’s) assessment, in this quarter.

Further pain cannot be ruled out. Axis Bank expects slippages to be in the range of 1,300 crore in the March quarter after recording fresh slippages of around 2,803 crore in the quarter ended December. Almost half the slippages in the third quarter were because of RBI’s asset quality review.

The management in the conference call said the external environment is challenging and while at the macro level there are green shoots, at the operating level it is not seeing a pickup in demand.

Moreover, there is a lack of enthusiasm for new investments. “It might be too early to say that the fourth quarter might be the end of turbulent times," said Jairam Sridharan, chief financial officer at Axis Bank.

The lender has overshot its guidance on slippages, as it expects loans worth 7,000 crore to turn sour in FY16, against the 5,200 crore guidance it gave earlier. Provisions rose by around two-fifths to 713 crore against a year ago. As a result, net profit growth slowed to 14.5% year-on-year, at 2,175 crore.

The pipeline of assets under the 5/25 scheme was also strong. Axis Bank will recognize 10 cases worth 2,500 crore over the next few quarters. It has recognized four cases worth 1,600 crore in the quarter ended December. Under the 5/25 refinancing scheme, banks can extend loan repayment periods to 25 years, with an option of refinancing the loan every five years.

There could be few cases under strategic debt restructuring (SDR) in the coming quarters, although the quantum of cases recognized under SDR is small, at around 500 crore. SDR is designed to give bankers greater control over defaulting firms as banks are allowed to convert debt into equity and find a buyer for the asset within 18 months.

Net interest margins slipped to 3.79%, the lowest in over two years, because the base rate has fallen at a faster clip than cost of funds. The management expects the margin compression to continue because it is increasing its exposure to high-rated corporations looking to fund their refinancing needs. “We may have to compromise on pricing to get high-quality customers," said Sridharan.

The bank has slowed its advances growth to 21%, while its retail book continues to grow strongly. It is cautious in growing its corporate book, especially the small and medium enterprise segment. Deposit growth was around 16% year-on-year in the December quarter.

Axis Bank’s shares are trading at 1.8 times book value estimated for FY16 after the correction in the past 10 months. Asset quality needs to improve for the shares to recover.

The writer does not own shares in the above-mentioned companies.

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