 "Axis Bank")
Around this time last year, Axis Bank started the trend of quantifying loans which could turn bad in course of time. Terming this a ‘watch list’, it was estimated at Rs 22,628 crore at the end of the December quarter.
As it set a trend of sorts, the Street rewarded the bank for being forthright in estimating the pain ahead. However, confidence faded in the June 2016 quarter, after it declared slippage from outside the watch list. Since then, with each passing quarter, the pessimism has risen. And, in the recently concluded December quarter, with the non-watch list pain growing over four-fold sequentially, doubts emerge on whether the bank was prudent in estimating the watch list.
Two points make a strong case for investors to question the bank on these. First, slippages outside of its watch list have been constantly increasing, quarter after quarter. Second, and more important, the additional pressures mainly come from loans lent prior to FY11, to the power, iron and steel, infrastructure and construction, and oil and gas sectors. Since these segments have forever been pain points, the possibility of expectations going wrong seem high.
Jairam Sridharan, chief financial officer at Axis Bank, partly agrees. “The watch list remains the key source of stress. So, that’s not gone wrong. But, our earlier estimate that only 60 per cent of the watch list will go bad was clearly an underestimation,” he states.
What probably went wrong is weakness in loan recovery. “There were some assumptions we took on resolution and asset monetisation while estimating our list. These haven’t played out in the expected manner. For a recovery cycle to start, it is important for the resolution mechanisms to take off first,” he says.
These factors together have erased the stock’s better performance over the S&P BSE Sensex between 2013 and early 2015 -– moving from Rs 167 to an all-time high of Rs 613 in February 2015. Returning to the latter high will not be easy in the near term. Investors would want to be convinced that the improvement is not temporary but strong enough to rise above the pressures of slower net profit growth and weakening asset quality. These pressures, in fact, started surfacing in FY12. Return ratios have taken a hit since then. Profit growth, too, has been slowing in the past few years, forcing investors to temper their expectations.
As it set a trend of sorts, the Street rewarded the bank for being forthright in estimating the pain ahead. However, confidence faded in the June 2016 quarter, after it declared slippage from outside the watch list. Since then, with each passing quarter, the pessimism has risen. And, in the recently concluded December quarter, with the non-watch list pain growing over four-fold sequentially, doubts emerge on whether the bank was prudent in estimating the watch list.
Two points make a strong case for investors to question the bank on these. First, slippages outside of its watch list have been constantly increasing, quarter after quarter. Second, and more important, the additional pressures mainly come from loans lent prior to FY11, to the power, iron and steel, infrastructure and construction, and oil and gas sectors. Since these segments have forever been pain points, the possibility of expectations going wrong seem high.
Jairam Sridharan, chief financial officer at Axis Bank, partly agrees. “The watch list remains the key source of stress. So, that’s not gone wrong. But, our earlier estimate that only 60 per cent of the watch list will go bad was clearly an underestimation,” he states.
What probably went wrong is weakness in loan recovery. “There were some assumptions we took on resolution and asset monetisation while estimating our list. These haven’t played out in the expected manner. For a recovery cycle to start, it is important for the resolution mechanisms to take off first,” he says.
These factors together have erased the stock’s better performance over the S&P BSE Sensex between 2013 and early 2015 -– moving from Rs 167 to an all-time high of Rs 613 in February 2015. Returning to the latter high will not be easy in the near term. Investors would want to be convinced that the improvement is not temporary but strong enough to rise above the pressures of slower net profit growth and weakening asset quality. These pressures, in fact, started surfacing in FY12. Return ratios have taken a hit since then. Profit growth, too, has been slowing in the past few years, forcing investors to temper their expectations.
