Axis Bank Earnings Disappoint As Bad Loans Continue To Rise
Axis Bank’s asset quality worsens.
Shares of Axis Bank Ltd. dropped as much as 9.3 percent, the most since August 2015, after reporting weak quarterly earnings on Tuesday as bad loans and provisions continued to rise, hurting the lender’s profits.
The bank, which has been in the midst of a balance-sheet clean-up for over two years now, also reported a divergence between the internal assessment of bad loans and the judgement made by the regulator in fiscal 2017.
Axis Bank reported a net profit of Rs 432 crore in the July-September quarter, well below analyst estimates which had pegged net profit at Rs 1,318 crore. The second quarter net profit was 35 percent higher than a year-ago, when the lender had seen a jump in bad loans.
Gross non-performing assets (NPAs) at the bank have been rising for the last nine quarters. Gross NPAs rose to Rs 27,402 crore at the end of the September quarter compared to Rs 22,031 crore at the end of the June quarter. Fresh slippages, or loans turning bad, stood at Rs 8936 crore during the quarter, significantly higher than the Rs 3519 crore in the first quarter of the current fiscal.
As a proportion of total loans, gross NPAs rose to 5.9 percent compared to 5.03 percent at the end of the last quarter. The net NPA ratio also rose to 3.12 percent from 2.30 percent last quarter. The bank set aside Rs 3,140 crore in provisions during the quarter, higher than the Rs 2,342 crore set aside last quarter.
Separately, the private lender disclosed that the Reserve Bank of India has pointed out a divergence in the assessment of bad loans between the bank and the regulator. At the end of fiscal 2017, the bank classified loans worth Rs 21,280 crore as bad loans. The RBI, however, pegged bad loans at Rs 26,913 crore. The resultant divergence stood at Rs 5,633 crore, the bank said.
“The Bank has duly recorded the impact of such reclassifications in the results for the quarter ended 30th September 2017,” it said. Detailing the reason behind the divergence, Axis Bank said that nine of these accounts were classified as standard assets across most consortium banks as on June 30, 2017. Axis Bank’s outstanding dues to these nine accounts stood at Rs 4867 crore. This entire amount has now been classified as bad loans.
More Pain Ahead?
In absolute terms, Axis Bank has seen bad loans jump by 515 percent over the last two year, from Rs 4451 crore in the second quarter of fiscal 2016 to Rs 27,402 crore now. The surge came after the RBI conducted an asset quality review across the banking sector, fearing significant under-reporting of bad loans.
Numbers released by Axis Bank show that the stress may not be over.
For instance, the bank continues to maintain a ‘watch list’ of loans worth Rs 6052 crore. These are accounts that are at risk of turning bad. At the start of fiscal 2017, the bank had identified over Rs 22,628 crore in loans and put them under this list. Of this, Rs 19,340 crore have turned bad, suggesting that the recovery rate within this list of stressed loans is low.
In addition, the bank has also restructured some accounts under schemes provided by the RBI such as Strategic Debt Restructuring. In its investor presentation, the bank disclosed that the quantum of loans which are either on the watch list or have been restructured stands at over Rs 10,000 crore, at the end of the September quarter.
“The contribution of the watchlist to the gross NPA number has been coming down constantly. Going ahead we should see that trend continue. In the second quarter, if you take away the impact of the RBI assessment, only a third of the slippages came from watchlist,” the bank’s Chief Financial Officer Jairam Sridharan said at the earnings press conference.
Fresh bad loans could emerge from sectors like power, iron and steel and telecom, which continue to be stressed for a variety of reasons.
The bank may also need to increase its provision cover in the coming quarters. At present, its provision coverage ratio stands at 60 percent, down from 65 percent last quarter. The lender, like other banks, will also need to step up provisions against accounts that are being resolved under the Insolvency & Bankruptcy Code. The RBI has asked that 50 percent provision be set aside against the secured loans given to these accounts and 100 percent provision be made against the unsecured exposure.
The bank disclosed that it has an exposure of Rs 7041 crore to the firms included in the list of companies that the RBI wants to refer to the IBC. It has made provisions of Rs 3886 crore against these accounts.
As a result of the continued pressure on bad loans and provisions, the bank is now estimating higher credit costs during the year.
In an otherwise dim quarter, the bank said that loan growth had started to pick up because of increased demand for working capital credit.
Net advances rose 16 percent over last year, with the corporate book growing 10 percent. Working capital credit rose 36 percent over last year.
The working capital demand came back to banks as the difference between bank lending rates and bond market rates contracted.Jairam Sridharan, Chief Financial Officer, Axis Bank
According to Sridharan, the private lender will continue to lend to higher rated companies, but will steer clear of problem sectors which have remained under stress for a while.
Retail and SME loans rose 23 percent and 15 percent respectively. Over time, the bank has reduced its exposure to corporate loans, which make up 42 percent of the total loan book.
Low cost current account and savings deposits (CASA) rose by 24 percent over last year and now account for 50 percent of the bank’s deposit base.
Overall, net interest income was flat at Rs 4540 crore. The net interest margin stood at 3.45 percent. Fee income grew 12 percent and stood at Rs 2170 crore.