Two banks reported markedly divergent performances for the September quarter (Q2).

Axis Bank Ltd surprised investors by reporting a cracker of a performance for the second quarter. The private sector lender’s net profit jumped a stupendous 83% because of lower provisioning. Punjab National Bank (PNB), on the other hand, reported a massive loss as its provisions surged by 300%.

Axis Bank’s slippages fell to 2,777 crore, the lowest in six quarters. Asset quality metrics improved, with the gross bad loan ratio falling for the third straight quarter to 5.96% of the loan book.

Recall that this column had pointed to the healing of the balance sheet in the June quarter. That seems to be now reflecting in the improvement in operating metrics.

Indeed, Axis Bank has succeeded in mending its balance sheet to a great extent. Most of this mending has come from avoiding project finance altogether and shrinking its corporate loan book.

The lender’s disastrous mistakes on credit risk assessment and the impact of these are now behind it.

That said, Axis Bank has an exposure of 825 crore to Infrastructure Leasing and Financial Services Ltd (IL&FS). But a hit from this is unlikely to cause much damage to the lender.

Further, Axis Bank’s exposure to non-banking financial companies (NBFCs) including housing finance companies, is about 2% of its total loan book. NBFCs have been under pressure since IL&FS defaulted on its repayments, sparking concerns across the sector.

The private sector lender also has 73% provision coverage ratio, which gives it adequate insurance against bad loan risk. Combine this with a healthy 15% growth in the loan book and investors have no reason to avoid the stock.

In a nutshell, Axis Bank’s future asset quality looks better, which should please investors. The change in leadership has also infused new life into the stock. The lender will have a new chief in Amitabh Chaudhry, with Shikha Sharma’s term ending in December.

In sharp contrast, public sector lender PNB is still reeling under the massive scam that surfaced a few quarters before. Far from healing, its loan book has worsened further. Gross bad loans are now more than 17% of its total loan book.

Axis Bank investors seem to have found the light at the end of the tunnel, while the same cannot be said about PNB.

Close