Axis Bank: Asset quality surprises on the upside in Q4

Strong retail franchise continues to drive growth; analysts expect stock to be included in MSCI in May

Axis Bank has proved to be an outlier among private banks this earnings season, as it has not sprung any surprises on the asset quality front. The bank has reported a healthy growth across the board. More importantly, it did not show an acceleration in stressed assets as some of its peers have. During the March quarter, the bank’s net profit grew 18 per cent to Rs 2,181 crore on the back of a 20 per cent rise in net interest income and 21 per cent increase in other income. The bank’s net interest margin remained stable at 3.81 per cent, but it is expected to sustain at four per cent levels by FY17.

 

The bank’s performance has not only come above the Street estimates, but it also does not have any nasty surprise on the asset quality front. Like most other private sector banks, Axis Bank also reported a 40 per cent sequential increase in provisions to Rs 710 crore, but this was not accompanied by any a sharp increase in stressed assets. During the quarter, loans to the tune of Rs 1,540 crore were recast, while slippages stood at Rs 610 crore. During the quarter, assets worth Rs 187 crore were recovered and upgraded, while Rs 150 crore of recast loans fell into the non-performing asset (NPA) basket. Net NPAs as a percentage of loans stood at 0.44 per cent at the end of the financial year. The bank has curtailed NPA accretion for the full year, too. Axis Bank had guided for stressed asset addition of Rs 6,500 crore during the financial year, but exited with stressed asset addition of Rs 5,577 crore. Analysts claim this shows the bank’s strong underwriting capability and ability to steer profitably grow even in tough times. Axis Bank doesn’t expect FY16 to be worse than FY15 in terms of stressed asset accretion even though the first two quarters could be challenging. As a result, the bank expects credit costs to be at 80 basis points in FY16.

The bank’s continued focus on its retail franchise seems to be yielding dividends. The bank has reported a strong growth in advances and deposits, with current account savings account, or CASA, constituting 40 per cent of deposits from 39 per cent last year. The bank’s retail advances grew 27 per cent year-on-year, while overall advances grew 22 per cent. Axis Bank expects retail segment to drive loan growth in FY16, too. Retail loan book is likely to grow by 27 per cent while overall loan growth is expected to be 18-20 per cent in FY16.

Analysts expect the Axis Bank to be included in the MSCI Index by the end of May as it has taken the approval to increase its foreign institutional holding to 74 per cent. This would lead to incremental buying in the stock.