(Photo: Mint)
(Photo: Mint)

Axis Bank’s Chaudhry inherits a cleaner book; investors stay cautious

  • Clearly, the lender needs to have an eye on its entire loan book and not just errant corporate borrowers
  • Axis Bank’s gross bad loan ratio was 5.75%, 100 basis points lower than the peak it had hit in the quarter ended March 2018

Axis Bank Ltd’s hat-trick of strong quarterly performance should bring investors enough cheer. After all, the private sector lender beat Street estimates not just on net profit, but also core income growth.

The bank’s net interest income rose 18% from a year earlier, the fastest growth in six quarters, and its net interest margin improved to 3.47%. The fixing of asset quality has now borne fruits in the form of improved bad loan ratios. The lender has moved away from project finance and focused on retail and better quality corporate borrowers.

Axis Bank’s gross bad loan ratio was 5.75%, 100 basis points lower than the peak it had hit in the quarter ended March 2018. Quarterly fresh slippages are down to manageable levels.

Its overall risky loans, which the bank says are rated BB and below, are down to 1.4% of its book, and its move to boost provision coverage ratio to 75% shows it wants to leave nothing to chance any more. Growth in loans is coming from the retail segment, which grew 20%. The 4% growth of the corporate book shows the bank is cautious and choosy.

This would mean that new chief Amitabh Chaudhry, who took charge earlier this month, will have it easy in terms of bad assets. He has not inherited a large toxic pool of assets, as much of the problem seems to have been fixed by the management.

That said, Chaudhry still needs to be vigilant on the lender’s loan book, besides chalking a growth path in the coming quarters. Investors also need to be aware that not all is well with Axis Bank, yet. Perhaps that is why five brokerage firms still have a sell rating on the stock.

Firstly, fresh slippages have grown sequentially. But what should worry is nearly half of these slippages are non-corporate. Axis Bank has done well to repair its corporate loan book by weaning off low-rated risky loans. It was also lucky by having just about 800 crore exposure to the beleaguered Infrastructure Leasing and Financial Services Ltd, which hit its peers hard.

However, slippages outside the corporate book have grown. Clearly, the bank needs to have an eye on its entire loan book and not just on errant corporate borrowers. The management explained that some of the stress has been from farm loans.

Chaudhry has laid out a plan for growth and profitability but hasn’t given numerical values to these, which would have been appreciated by investors. Nevertheless, part of the 16% rise in the Axis Bank stock in the last three months has been due to Chaudhry taking over from former head Shikha Sharma. Despite the rise, the stock trades at a modest multiple of two times its estimated book value for FY20. Investors don’t seem too convinced the clean-up is done.

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