Axis Bank: Is the pain priced in?

Despite up-front provisions to comply with RBI norms, management cautious on asset quality

The Axis Bank scrip is likely to be under pressure on Thursday despite posting higher than expected earnings. It seems the asset quality pain is far from over for the bank given the gradual improvement in macro and its relatively high exposure to troubled sectors such as infra, commodity-linked sectors, amongst others. This is because despite making full provisions required to comply with Reserve Bank of India (RBI)’s directives on non-performing assets (NPA) recognition, the management remains cautious.

“Instead of spreading provisions as mandated by RBI over two quarters, we did it Q3 (third quarter) itself. We remain cautious on asset quality in the March 2016 quarter due to additional stress in accounts outside the RBI list,” said Jairam Sridharan, CFO, Axis Bank.

The management is, however, hopeful that power sector reforms might ease some asset quality pressures.

In the quarter, the bank’s fresh slippages stood at Rs 2,082 crore, half of which were towards accounts specified by RBI. Despite this spike, the loan loss provisions remained flattish on a sequential basis. This is because the bank utilised its contingent provisions (built earlier over a period of time) worth Rs 220 crore in the quarter. The balance contingent liabilities now stand at Rs 180 crore (used Rs 1,070 crore contingent provisions in the past two quarters). If the bank’s stressed loans continue to be elevated, it might soon start reflecting on its profitability, believe analysts. Not surprisingly, its gross as well as net NPA ratios inched up to 1.7 per cent and 0.8 per cent, respectively. The bank, which had so far maintained its credit costs guidance for FY16 at 0.9 per cent, has now raised it to 1.25 per cent.

Apart from asset quality, the bank’s net interest margins (NIM), too, came off to 3.8 per cent in the quarter on account of higher quantum of base rate cuts versus reduction in cost of funds. The management has maintained its medium-term NIM guidance to 3.5 per cent providing some comfort. Healthy loan growth (fuelled by retail segment) and core fee income boosted Axis Bank's top line as well as net profit in the quarter. Net profit grew 14.5 per cent year-on-year to Rs 2,175 crore and was ahead of Bloomberg consensus estimate of Rs 2,106 crore.

The bank’s stock has fallen 12 per cent in the past month and trades at 1.5 times FY17 estimated earnings versus the historical average of 2.1 times. However, the stock is unlikely to witness any meaningful up move till the asset quality shows signs of a sustainable uptick.