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Axis Bank has adequate capital to absorb quarterly loss, says S&P report

Bank's ability to pay dividends is protected, net credit costs have declined: Ratings agency

Axis Bank

Axis Bank

Abhijit Lele Mumbai

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Axis Bank’s capitalisation will remain adequate despite a one-off loss associated with the acquisition of Citigroup Inc's consumer business in India, said Standard and Poor’s (S&P) on Friday. Outlook on the bank remains stable.

On a standalone basis, the private lender reported a loss of Rs 5,728 crore in the fourth quarter ended March 2023 (Q4FY23) against a net profit of Rs 4,117 crore in the year-ago period.

Axis Bank’s loss stems from writing off of goodwill and intangibles generated on the acquisition, said S&P in a statement. The bank’s risk-adjusted capital ratio will likely decline to 7.0-7.5 per cent from the 8.4 per cent level on March 31, 2022. This follows the loss the bank reported in the fourth quarter of fiscal 2023. Despite the decline, the bank's capitalisation remains adequate for the rating (BBB-/Stable/A-3).

The bank's loss in the fourth quarter caused return on assets to fall to 0.9 per cent for fiscal 2023 compared with 1.3 per cent a year ago. This was in line with our forecasts, said the rating agency.

The bank has fully amortized goodwill and intangibles generated on the Citigroup India acquisition. This protects its ability to pay dividends because as per Indian banking regulations, banks carrying intangible assets on their balance sheet are restricted from declaring dividends.

The bank also sustained non-recurring special expenses on stamp duty related to the acquisition and harmonization of provisioning and expense policies. Its reported return on assets for fiscal 2023 excluding these exceptional items was 1.8 per cent.

The bank's reported net credit costs have declined to 0.4 per cent (from 0.7 per cent in fiscal 2022) due to recoveries and lower new non-performing loans. Credit costs could stay below one per cent given asset quality risks are manageable and provisioning coverage is adequate.

S&P said, “we forecast Axis Bank's operating expenses to stay elevated over the next 18 months because of integration costs. Return on assets are likely to be 1.5-1.6 per cent.”

The bank's profitability will derive support from contained credit costs, margin upside from higher interest rates, and increasing share of unsecured retail loans, it added.

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First Published: Apr 28 2023 | 2:31 PM IST

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