More hits than misses for Axis Bank MD & CEO Amitabh Chaudhry in 2019

Better share of retail assets, improved underwriting standards were the positives of his first year as MD & CEO; asset quality not turning around briskly was a blip

The Street pinned a lot of hopes on Amitabh Chaudhry when he assumed the charge of managing director and CEO of Axis Bank, in January last year. A year later, not only is the stock up 18 per cent, but the bank is also being steered in the right direction. Among others, the three factors that stand out in favour of the bank is the improving mix of retail loans, better underwriting practices and, in turn, better quality of earnings. However, there are some parameters the bank’s progress hasn’t been up to the desired levels.

More retail assets

Focus on retail assets has helped the segment grow over 20 per cent, and its share rise to 52 per cent in the September quarter, the latest available data. What’s also encouraging is that much of the improvement has come with a rise in the share of secured loans, mainly home loans, which accounted for 37 per cent of retail loans. Also, even if unsecured loans are growing faster than secured loans (a trend visible across banks), retail slippages are well in check at less than 1.5 per cent of the loan book — lower than the industry standards of 2–2.5 per cent.

Also, with retail assets growing faster than corporate loans, the share of retail loans contributing to Axis Bank’s fee income stood at 64 per cent in Q2, which is the highest so far. At a time when the competition is intense and limiting the pricing power of banks, increased contribution from fee income is a welcome step.

Alongside retail loans, the share of retail deposits has increased to 50 per cent of total deposits, aided by term deposits, from about 46 per cent, as on December 2018. While these deposits carry a higher coupon compared to bulk deposits, they tend to be sticky and offer funding comfort to the bank. The flip side is that Axis Bank is losing out on low-cost current account-savings account deposits, the share of which fell to 41 per cent in Q2, from 47 per cent a year ago. Bringing stability on this would further help it keep costs in check.

Source: Brokerages

Underwriting practices

Keeping pace with the practice that started in FY17, the bank has increased its focus on lending to high-rated A and above customers. The share of these loans, which is perceived to have a relatively low risk of delinquencies, rising to 80 per cent in Q2 indicates that potential pain that could emerge from Axis Bank’s corporate loans may be lower than seen in the past.

However, that doesn’t mean that the asset quality pain is completely a thing of the past. In fact, while the net non-performing assets (NPA) ratio has fallen to 

1.99 per cent in Q2, from 2.54 per cent last year, the pace of improvement in asset quality has been quite slow compared to ICICI Bank (1.6 per cent in Q2 versus 3.65 per cent a year ago). The addition to stress from the below investment grade book also remains a pain point for Axis Bank — a factor that is somewhat putting a lid on its stock price. “We expect bank’s credit cost to remain on the higher side until overall stressed assets are recognised as NPAs,” say analysts at Angel Broking. 

Those at Antique Stock Broking expect normalisation of credit cost by FY21. 

In the context of fresh stress emerging in the banking space, fresh surprises may not be received well by investors.

Better earnings profile

With the focus on retail loans, where growth remains healthy and asset quality pangs gradually coming off, the quality of earnings has improved in the past year. From 7.3 per cent return on equity in FY19, this number is seen increasing to 7.8 per cent in FY20. While the net interest margin, a measure of profitability, is only showing a gradual improvement — up from 3.4 per cent in for the nine-month period ended December 2018 to 3.5 per cent in Q2FY20, it does indicate the bank’s ability to establish its pricing power despite competition.

In all, the first year in office has been fruitful for Chaudhry. Sustaining the momentum with growth lately turning rough in the retail and corporate segments is the key challenge for him in 2020. For investors, trading at 2x FY21 book, Axis Bank presents a good opportunity. But, one needs to be mindful of asset quality pressures. If they don’t show signs of easing, the stock could see a correction.