Many one-offs dent Axis Bank's Q2 show

The lender's results missed Street estimates by a significant margin

After showing hopes of a rebound and levelling of asset quality issues in the June quarter, the Street had reasonable expectations from Axis Bank. But these were shattered because of a surprise sprung from an unexpected front. The Reserve Bank of India (RBI), as part of its risk-based supervision exercise for FY17, highlighted divergence in provisioning for loan assets made by the bank. And, as required by the RBI, Axis Bank provided Rs 1,315 crore for this. With this divergence provided for in the September quarter (Q2), the bank’s results missed Street estimates by a significant margin. Even as net profit in Q2 rose by 36 per cent year-on-year (y-o-y) to Rs 432 crore, analysts aren’t pleased. Loan-loss provisioning after moderating to Rs 2,342 crore in the June quarter, rose by 34 per cent sequentially in Q2 to Rs 3,140 crore. Provisioning worth Rs 505 crore due to loans referred to the Insolvency and Bankruptcy Code (IBC) also elevated the provisioning. This suggests that provisioning might not swell further, but may remain elevated, since it reduced from Rs 3,622 crore a year ago to Rs 3,140 crore in Q2. 

Nonetheless, slippages (loans that have turned doubtful or bad) in Q2 remained high at Rs 8,936 crore. With the watch list (accounts identified as stressed) reducing from Rs 13,789 crore a year ago to Rs 6,052 crore in Q2, a large part of the slippage is flowing from outside the watch list. Noticeably, loans to the power sector are accelerating the trouble as 29 per cent of Q2’s slippages came from that sector. The power and iron and steel sectors account for 64 per cent and 11 per cent of the bank’s watch list, respectively, and hence the sectoral trend in slippages may continue for a few quarters. 

Loan accounts with poor credit rating (BB or lower) form 73 per cent of the total slippages and the proportion of these accounts to total slippages may remain high going ahead. This may once again prompt investors to stay cautious. 

Credit cost guidance for FY18 has also been revised upwards from 175-225 basis points (bps) to 220-260 bps in Q2, indicating that asset quality may remain weak in the near future. “Expect stress to normalise by second half of FY19,” said Jairam Sridharan, chief financial officer, Axis Bank. That’s at least four quarters of tepid performance to make do with. 

In the light of lacklustre operations in Q2 with net interest income and operating income growing by just a per cent each and core operating profit shrinking by five per cent y-o-y, analysts may revisit their expectations. The only saving grace is the improvement in lending activities (up 16 per cent y-o-y in Q2) and low-cost deposits increasing by 24 per cent y-o-y. “However, with the promise of the worst being over not fulfilled and credit costs revised upwards, investors should tread carefully,” Asutosh Mishra of Reliance Securities said. Axis Bank’s stock price is expected to be under pressure in the near term.