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Axis Bank Ltd’s June quarter performance mirrored that of its peers with a rise in stress from the retail book due to the second wave.

The third-largest private sector lender missed the Street’s net profit estimates by a small margin owing to the modest performance on core interest income and interest margins. The second wave of the pandemic has left a mark on the bank’s balance sheet, visible in increased bad loans and a hit to income. On a sequential basis, net interest income grew 2.8% on the back of flat loan growth. Along with the 23% fall in non-interest income, this led to a 6.4% drop in operating profit. To be sure, year-on-year growth on most metrics was healthy owing to a low base.

Axis Bank reported an increase in fresh slippages to 6518 crore, 80% of which were from the retail book. The management indicated that while stress is primarily from the retail loan portfolio, the bank is comfortable with its lending strategy towards this category. Indeed, the bank didn’t lend much during the quarter to avoid an increase in stress. Also, secured home loans form 37% of the portfolio and 80% of the overall loan disbursements were secured. That said, analysts believe that the retail book needs close monitoring given the threat of a potential third wave. What brings comfort is the bank’s provisioning levels. Axis Bank’s provision coverage ratio remained above 70% and the lender has 5012 crore specifically towards pandemic risks. “While slippages could remain elevated in the near term, a healthy PCR of 70%, coupled with an additional provision buffer of 2% (including standard provisions) is likely to protect the Balance Sheet against any potential stress," analysts at Motilal Oswal Financial Services Ltd wrote in a note.

Given that on asset quality the bank’s performance was in line with its peers, analysts believe that a boost to valuations would come from growing its loan book. Here, the moderation in net interest margin came as a disappointment. Margins were down due to interest reversal from bad loans and a hike in the share of low-yielding corporate loans. Analysts at Jefferies India Pvt Ltd have trimmed their FY22 estimates for the bank by 3%. “Axis has lagged ICICI Bank on growth (loans, NII, NIMs) and narrowing this gap will be key to narrowing Axis' valuation gap vs ICICI Bank," they wrote in a note.

Axis Bank shares were down 1% in early trade today. They have gained 20% so far this year against a 29% surge in peer ICICI Bank shares.

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