Axis Bank net profit improves in Q1, but asset quality still a concern

It is taking pro­active steps to address potential stress, though net NPA at 2.04% hasn't changed much sequentially

New management setting the stage for strong growth tends to increase expectations from a company, and all the more when a competitor delivers  best-in-many quarter results. Consequently, expectations were high from Axis Bank, but the June quarter (Q1) seemed to be a bit of a let-down, mainly on the asset quality front.

Net profit at Rs 1,370 crore which grew by 95 per cent in Q1 year-on-year didn’t match the Street’s expectations (Rs 1,860 crore), largely because of elevated provisioning. Net interest income (NII) increased by 13 per cent year-on-year in Q1, though major support was on account of non-interest income, which rose by 32 per cent.  Retail fee income grew 28 per cent year-on-year, helped by the retail book growing by 22 per cent. This also aided overall domestic loan growth at 19 per cent year-on-year. 

The disappointment, though, was in asset quality. One of the primary reasons why Axis Bank stock re-rated significantly over the last year is that non-performing assets (NPA), or the pool of toxic loans, were seen coming down at a quick pace. 

While in Q1 the gross NPA ratio didn’t deteriorate, it remained sticky at 5.25 per cent, not materially different from the year-ago level. Slippages or fresh accretion of pain increased to Rs 4,798 crore, the highest in five quarters, though reasonably below the peak distress level. 

Jairam Sridharan, CFO, Axis Bank, explains that elevated slippage is largely a seasonal factor, usually evident in the June and the December quarters of a financial year owing to agri and retail loans. 

Yet, when most large banks have displayed a visible improvement on this parameter sequentially, it needs to be seen how the Street will absorb this miss when the trade opens on the Axis Bank counter on Wednesday.  

Also, provisioning cost rose by 14 per cent year-on-year in Q1, though it contained contingent provisioning (of over Rs  900 crore) for accounts that slipped below investment grade which came in at Rs 2,242 crore in Q1.  With this, the total contingent provisioning is Rs 2,358 crore, which covers fund and non-fund based exposure.

The good part is that below investment grade book at Rs 7,504 crore has remained stable at 1.3 per cent of the total loan book.  

Also, while at 3.56 per cent, net interest margin remained healthy in Q1 with 59 per cent of the loan book on floating interest rates, how effectively the book can reprise in a declining interest rate and increasing capital cost cycle needs monitoring.  

Nonetheless, compared to the year-ago quarter, there are fewer concerns for investors of Axis Bank, which justifies valuations at 2.3x FY20 estimated book.