Exactly six quarters ago, Axis Bank Ltd reported a massive quarterly loss owing to a bad loan-battered balance sheet.

This time’s loss for the September quarter is due to a one-time tax adjustment, as the lender moved to a lower tax bracket after the government’s corporate tax cut announcement. In fact, this one-time loss should be seen as prudent, as benefits from the lower tax rate will now be enjoyed by the bank for a long time. Ergo, investors were willing to forgive the lender for it.

But this does not mean Axis Bank should be let off the hook by investors. For one, its slippages have increased, which means fresh stress is piling up.

For the September quarter, slippages were at 4,983 crore, a 79% jump from a year ago. Its list of stressed loans, also called watchlist, declined by 16% from the previous quarter, which is a good sign. But the list still adds up to 6,291 crore, and most of it would slip into non-performing assets, according to the management. The management has warned that stress is increasing in small business loans.

Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint


Another reason to keep a watch on the bank is that its loan write-offs are still steep. Simply put, Axis Bank’s bad loans are not reducing because borrowers have begun paying. They have dropped because the lender no longer believes it can get repaid and so it has written off the loans. Of course, most of its peers are writing off loans to bring down the bad loan stock, so singling out Axis Bank would be unfair.

To be sure, the bank’s balance sheet is far superior to what it was six quarters ago when it reported that massive loss. Its gross bad loans have come down and slippages are a shadow of what they were. The lender has also beefed up provisioning since then, with the coverage ratio being at an impressive 79%.

But a tough question is whether Axis Bank’s valuations are justified. At over twice its estimated book value for FY21, the stock seems reasonably priced compared with other expensive peers. For valuations to improve, slippages have to meaningfully come down.

And here, the outlook is not clear yet, as much of the recoveries depend on how quick insolvency cases are resolved. “While we have lifted core PPOP marginally across the years, we have also taken credit costs a little higher as near-term asset quality visibility is challenging and dependent on IBC resolutions, where we have no view," wrote analysts at Jefferies India Pvt. Ltd. PPOP is pre-provision operating profit and IBC is Insolvency and Bankruptcy Code.

No wonder the Axis Bank stock didn’t see any gain on Wednesday. That said, investors seem to appreciate the progress of the lender on asset quality over the last one year, visible in the 26% gain during that period.

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