Axis Bank net jumps 38% on lower base; asset quality worsens

Private sector Axis Bank today posted a a 38 per cent rise in September quarter net profit at Rs 432 crore on low base effect despite a spike in the dud loan portfolio due to newer surprises, including an under- reporting found by the Reserve Bank.
The third largest private sector lender also warned of more pressure on the asset quality side in the remaining quarter of the fiscal saying the second half will continue to be challenging.
The bank had a net profit of Rs 319 crore in the year-ago period and Rs 1,305 crore in the June 2017 quarter.

The bank, which already has highest bad loans among the top three private sector lenders, saw fresh slippages -- assets turning sour -- to the tune of Rs 8,936 crore, including Rs 4,867 crore in "divergence" found by the Reserve Bank on its FY17 provisions treatment.
This divergence is over and above the nearly Rs 10,000 crore found and recommended to be treated as NPAs for FY16.
Chief financial officer Jairam Sridharan explained that the RBI and the government have been proactive in their approach to dealing with NPAs, wherein efforts are being made for early recognition of dud loans.

A bulk of NPAs is from exposure to BB and below rated companies, which run into a full Rs 15,000 crore, he said, stressing that it is down from Rs 27,000 crore in March 2016.

Also, the bank said its watch list of assets which can turn bad has now gone down to Rs 6,000 crore from Rs 22,000 crore in March 2016.
Courtesy this shock, the bank also pushed up its credit cost guidance for the full year by 35 bps to 2.20-2.60 per cent range and warned that he sees it improving only in the second half of next fiscal year.

Sridharan said the next two quarters will continue to be under pressure and an improvement in the credit costs is possible only in the second half of next fiscal.
As the proportion of interest paying assets went down, the core net interest income rose by only 1 per cent to Rs 4,540 crore during the quarter, while the non-interest income grew only 2 per cent as the bond markets remained depressed to Rs 2,586 crore.
The loan book grew 16 per cent, driven largely by retail but there was growth in other segments like corporate loans as well, he said.

Retail now constitutes 45 per cent of the net advances, while on the liabilities front, the low-cost current and savings account deposits touched 50 per cent.
Net interest margin slipped to 3.45 per cent but Sridharan said this is in line with the guidance of a 0.20 per cent compression given earlier, which was maintained.
On the asset quality front, Sridharan elaborated that RBI has found a divergence in nine accounts amounting to over Rs 4,800 crore, and asked the bank to classify them as non- performing accounts. These accounts were standard till June 2017, he added.
The divergence led to a spike in provisioning, which moved up to Rs 3,140 crore from Rs 2,341 crore in the June quarter, but was lower than Rs 3,622 crore a year ago, Sridharan said, attributing this for the growth in profits on a year-on-year basis. The provisions done for the nine divergence accounts is Rs 1,619 crore and there will not be further shocks.

The bank has exposure to eight companies in the initial list of 12 dud assets to be resolved under the provision of the bankruptcy code, and 12 in the subsequent list of 40, Sridharan said.
As against a total outstanding of Rs 7,000 crore, it has provided for Rs 3,800 crore or 55 per cent, he said, adding the IBC-related provisions will go up during the year.
The bulk of the fresh slippages were in the power, and iron and steel sector, he said, adding the power sector will continue contributing to NPAs in the near future.
Of the overall slippages, Rs 8,100 crore came in from the corporate sector, while the rest is split evenly between the retail and small business segments, he said, expressing satisfaction with the way retail book is performing.

Sridharan, however, said the overall quantum of the stressed assets is reducing for the bank.
He said the bank is not against lending to the corporate segment, but said there will have to be a surge in economic prospects for revival in credit demand in the segment.
The bank was successful in compressing its expenses ratio growth to 12 per cent during the quarter, but will continue with its plan to open 100 branches per quarter.
Even though the numbers were announced post market hours, the bank scrip shed 1.44 per cent to close at Rs 513.20 on the BSE, as against a 0.08 per cent dip in the benchmark in a dull trade.