Axis Bank: Overall numbers better forecast, rising stressed loans tricky

Overall numbers bettered expectations, rising pool of stressed loans may be the tricky aspect

After two back-to-back lacklustre quarters, Axis Bank’s September-quarter (Q2) results have brought a much-needed relief because the numbers bettered expectations on multiple counts.

Net interest income (NII) grew 20 per cent year-on-year to Rs 7,326 crore, while the lender reported a net profit of Rs 1,683 crore as against a net loss of Rs 112 crore in the year-ago quarter. The figure is 51 per cent higher sequentially. The bank’s ability to grow its deposit book by 8.8 per cent and yet reduce the cost of funds by 100 basis points (bps) year-on-year to 4.6 per cent, thus sustaining its net interest margin (NIM) at 3.6 per cent, are noteworthy. The most important aspect is that it lowered the net non-performing assets (NPA) ratio to just about 1 per cent. With this, Axis Bank may have achieved its objective of keeping asset quality in check after three years of toiling.

However, the need to keep an eye on the bank’s asset quality may not have abated. At 2.3 per cent, the pool of stressed exposure rose by 50 basis points (bps) year-on-year and 60 bps sequentially. Represented as loans with a BB or below rating, this book has always been problematic. The bank has provided Rs 2,671 crore against these loans, taking the provision coverage ratio (PCR) to 50 per cent in Q2; the overall PCR improved to 77 per cent from 75 per cent in Q1. BB and below fund-based exposure rose 45 per cent year-on-year to Rs 9,120 crore in Q2, including Rs 3,500 crore of downgrade from fund-based and Rs 1,500 crore of non-fund based exposures. Around 75 per cent addition to the stress pool was owing to likely restructuring and rest due to internal reviews.

The rise in stress has happened in just a month of restarting rating reviews after a hiatus since March. Whether the number further rises when the Supreme Court vacates its stay on NPA recognition needs to be seen.

The overall provisioning buffer of Rs 3,143 crore towards Covid-19 exigencies, including Rs 1,864 crore in Q2 set aside for probable restructuring, should suffice, say analysts. With the bank not receiving many restructuring requests yet and projecting a likely Rs 2,500 crore of commercial banking and retail loans expected to be restructured, analysts feel that it has done what is required. Those at Prabhudas Lilladher, who have upgraded the Axis Bank stock from “hold” to “accumulate” after Q2, say the provisioning should act as a cushion, thereby keeping the impact on financials under control.

The stock’s correction on Thursday can be partly attributed to the over 20 per cent rally in the last one month.

With valuations (1.5x FY21 estimated earnings) still favourable, the downside risk for Axis Bank seems priced in for now.