At a time when there is a broad-based economic slowdown, growth in lending is hard to come by.
In that scenario, Axis Bank Ltd’s swift turnaround to a robust core income growth, driven by 19% increase in domestic loans, should cheer investors.
The fact that this growth comes in tandem with a reduction in the private sector lender’s toxic loan pile is an added positive. Indeed, the management said the bank is not chasing extraordinary growth, but would rather lend to good borrowers, a message given by most other private sector lenders that have announced results so far.
This preference for safety is writ large over Axis Bank’s balance sheet. Loan growth is driven by retail; small businesses, especially the dealership network of the automobile sector, have been avoided. Another safety net is provisions, which rose 14% from a year ago, despite the toxic loan stockpile reducing in the June quarter.
The bank does not want to take any chances on asset quality and, hence, holds a provision of ₹2,358 crore in excess of providing against bad loans triggered by business as usual. The additional provision covers risks that may arise out of the non-fund-based exposure of bad borrowers and even the new stress that has emerged from non-bank lenders and select corporate groups.
Even so, the Axis Bank stock hasn’t seen good days, having underperformed the broad market index. The over 7% fall in the stock price in the last three months indicates that investors are still not sure about the extent of stress.
For the June quarter, slippages have increased, albeit marginally, and more than half of them are not from the known stressed corporate book.
Obviously, fresh stress has emerged from non-corporate loans, which the bank explained as originating primarily from agriculture. Corporate slippages were only 43% of the total slippages during the June quarter. The spike in write-offs also doesn’t bode well for the lender, especially as the recoveries have remained subdued. Considering the delays in resolution of key insolvency cases, the bank is unlikely to witness sharp recoveries going ahead.
Perhaps Axis Bank is aware of this, which explains it ramping up provisions and lending to only top-rated borrowers to ward off future stress. The lender’s efforts have paid off in the past year, given that the stress pool is contained at 4.2% of total loans, despite new additions.
The private sector bank has dealt with old stress quite well under its new boss Amitabh Chaudhry. But new stress cannot be wished away.
The jury is still out on Axis Bank’s asset quality and analysts are cautious on the outlook. After the over 2% fall on Tuesday, the stock trades at a modest multiple of two times its estimated book value for FY21, cheaper than most comparable peers.