Loan pains could rise for Axis Bank

Net interest margin, loan growth positive surprises, but Rs 22,600 crore of loans on watch list is a key worry

Much in anticipation of good results, the stock of Axis Bank was up 2.2 per cent on Tuesday. However, despite the March quarter (Q4FY16) results (which came after market hours) beating the Street's estimates, the elevated asset quality pressure and weak forecast by the management on this front may put Axis Bank's stock under pressure on Wednesday.

Net interest income (NII) in Q4FY16 at Rs 4,553 crore grew 20 per cent year-on-year and came ahead of Bloomberg estimates of Rs 4,319 crore. Net interest margin (NIM) stood at 3.97 per cent (16 basis points up year-on-year) once again beating estimates of 3.71 per cent. However, net profit at Rs 2,154 crore shrunk one per cent year-on-year, partly due to provisioning — from Rs 709 crore a year ago to Rs 1,168 crore in Q4FY16. Of the provisioning, Rs 100 crore is towards the Punjab food credit issue and Rs 300 towards contingency reserves. Nitin Kumar of Prabhudas Lilladher sums up that the numbers from Axis Bank are quite decent in spite of the tough times.

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"NIM and loan growth came as positive surprises and if I were to exclude the contingency provisioning, the overall provisioning for the quarter is in line with expectations," he says. Retail loans (excluding those to small and medium enterprises) grew at 24 per cent year-on-year, outpacing the 22 per cent year-on-year growth in corporate loans.

Axis Bank has put loans worth Rs 22,600 crore under watch in Q4FY16.

Of these, 60 per cent may become non-performing assets (NPAs) in the next eight quarters. Shweta Mane-Daptardar of KRC Research says, "As assets under the watch list represent four per cent of total loan book and 13 per cent of corporate loans, it points to weak asset quality. Though this sort of disclosure on asset quality is encouraging, Axis Bank's stock could come under pressure on Wednesday."

Further, as about 50 per cent of loans on the watch list relate to iron and steel and power businesses, gross NPAs as a percentage of total loans made were 1.67 per cent in Q4FY16 (versus 1.34 per cent in Q4FY15, and 1.68 per cent in the December 2015 quarter) could go up. Another pain point, says Mane-Daptardar, is the forecast for high credit cost in FY17 (125 basis points versus 111 basis points in FY16).

Under these circumstances, analysts are wary whether the NIM is sustainable.