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The commentary from Axis Bank management has been more cautious than that of rivals such as HDFC Bank and ICICI Bank (Mint)
The commentary from Axis Bank management has been more cautious than that of rivals such as HDFC Bank and ICICI Bank (Mint)

Axis Bank sticks to its caution script and so do its investors

  • In an update on its retail book, the private sector lender’s executives said delinquencies may spike in the third and fourth quarter of the current financial year
  • Axis Bank hasn't been able to bridge the valuation gap even with the sector index in a sign that investors share the bank’s caution

Things may get worse before they get better. That, in a nutshell, seems to be the message from Axis Bank’s management.

In an update on its retail book through a media interaction, the private sector lender’s executives said delinquencies may spike in the third and fourth quarter of the current financial year. To be sure, the lender has reported a sharp improvement in collections, just like its peers. Collection efficiency surged to 95% after the moratorium ended in August and gross bad loans were down to 4.18% of total loan book for the September quarter.

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But the commentary from the management has been more cautious than that of rivals such as HDFC Bank and ICICI Bank. Even in Thursday’s media interaction, the management stuck to caution. The bank is right in its guarded approach. Economic indicators have been mixed, with some sectors still showing pain. Employment and wages have taken a huge hit and the recovery in both is patchy. The Reserve Bank of India’s (RBI's) consumer sentiment survey has shown that Indians remain pessimistic over future employment and income prospects. “Given the fact that a lot of people lost their jobs, some had to take salary cuts and some industries were badly affected, these will have some impact on delinquency and portfolio collections," said Sumit Bali, head of retail lending at Axis Bank at Thursday’s interaction.

Small businesses continue to remain under stress, and asset quality here is only propped up due to the government’s guarantee schemes and regulatory forbearance. Once they are removed, it would be challenging for lenders to maintain current asset quality metrics. Analysts have pointed out that bad loans in the micro, small and medium enterprises (MSMEs) loan book may increase in coming quarters.

That is not to say that Axis Bank sees pain even in FY22. In fact, the lender has stressed that asset quality metrics may see improvement in the next financial year. Most of its peers, too, have indicated the same and the recent rally in banking shares show that investors share this optimism.

Axis Bank’s shares, too, have rallied in tandem with others in the past three months. However, the stock has underperformed peers such as ICICI Bank and HDFC Bank since January. It has not been able to bridge the valuation gap even with the sector index. Perhaps this is a sign that investors share the bank’s caution.

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