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Axis Bank Q1 result: The fat lady is yet to sing on bad loans

LiveMint logoLiveMint 26-07-2017 Aparna Iyer

Axis Bank Ltd’s June quarter results were unflattering, to say the least, although analysts had anticipated a dismal performance. The 16% year-on-year fall in its net profit, a rather sober 2% growth in core income and concerns about asset quality had more or less been predicted by analysts.

But the big worry is that there is no end in sight to the lender’s woes with bad loans.

While fresh slippages for the first quarter of fiscal year 2018 (FY18) were significantly lower at Rs3,159 crore, and bad loan ratios also didn’t seem far worse when compared with the previous quarter, the bank wrote off Rs2,462 crore worth of loans in the quarter, more than double that of the previous quarter. If this isn’t distressing enough, the vagaries of non-watchlist slippages continue.

For the first time since such a list was formed in March 2016, slippages outside the watchlist were far higher than those from the list. As of 30 June, 60% of the lender’s watchlist had turned bad and the list is down to Rs7,941 crore from the original size of Rs22,628 crore in March 2016.

The management argued that given the shrinking watchlist, it is obvious that non-watchlist slippages will grow. While this is a fair argument, it also shows the bank’s asset quality is far from stable.

Since its loan book quality is volatile, has Axis Bank insured itself through provisions? While its provision coverage ratio is healthy at 65%, the fact that its net non-performing asset (NPA) ratio rose more than the gross NPA ratio shows provisions are not adequate.

To be fair, Axis Bank has made additional provisions towards non-performing loans in four sectors, in line with the regulator’s ruling.

Finally, the bank had come under fire on a large divergence in bad loans reported as of March 2016. The Reserve Bank of India had calculated its bad loan stock at Rs15,566 crore, Rs9,478 crore more than what the lender had reported. Ironically, the divergence came despite Axis Bank being the first to put out a so-called watchlist of accounts.

For FY18, the lender categorically said that it would not indicate any fresh watchlist. Its FY17 performance reflected the March 2016 divergence as provisions surged, carving off a large chunk of profits.

Not surprisingly, the Axis Bank stock trades at a multiple of 2.21 times its estimated price-to-book value for FY18, and has underperformed the broad market.

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