Even as Axis Bank has made higher provisions for stressed loans including those given to companies like Deccan Chronicle and kept overall slippages within their guidance which are positive, the task isn’t over yet. Though the stock reacted positively rising 2.5% to close at Rs 1,146 on Tuesday against Sensex’s 0.7% fall, adding to its outperformance in the last one month, majority of analysts believe that the bank will have to consistently deliver on the asset quality front as the pressure is not over yet. Unless it does, the stock’s outperformance may not be sustainable.
"Overall, asset quality remained in line with the management guidance of Rs 1,000 crore per quarter for FY13 as incremental restructuring stood at Rs 320 crore, taking the total restructured loans to 2.4% of total advances. We raise our slippages estimate to 1.4% for FY13 and maintain it at 1.5% for FY14. However, slippages could see a rising trend in case the macro slowdown persists for long", believes Shashin Upadhyay of ICICI Securities.
Religare Institutional Research analysts too believe that restructuring will increase in the coming quarters as the number of cases referred to CDR cell, where Axis Bank has significant exposure, is increasing. As a result, they expect impaired assets per quarter to increase from the current rate of Rs 1,000 crore per quarter.
On the flip side, stock valuations (1.5 times FY14 estimated book value) are reasonable, and likely uptick in margins (due to reducing wholesale interest rates) could provide some cushion. Going ahead, analysts say Axis' high exposure to power sector and small and medium enterprises (SMEs) are key things to watch out for. This along with its upcoming fund raising plan (likely in next 2-3 months) could act as key overhang on the stock.
In contrast, last Friday, its larger peer HDFC Bank delivered another quarter of consistent performance on loan growth, asset quality and margin front - making it a preferred pick of most brokerages. "In our view, HDFC Bank will remain the relatively low risk investment option in a tough environment. A benign asset quality cycle in HDFC Bank's retail book and faster balance sheet growth (as other banks pull back) could be the key sources of upside. These could provide up to 10% EPS upside", believes Anish Tawakley of Barclays Equity Research.
Q2: Mixed bag
Despite a steep rise in provisioning, Axis Bank reported strong growth in fee income, other income and stable margins for the September quarter which helped it report a 21% growth in net income and 22% in net profit compared to the year ago quarter.
Though both banks posted loan growth of 23% on a year-on-year basis, sequentially Axis reported muted loan growth of 0.6% as against a robust 9% loan growth posted by HDFC Bank. This is consequent to a decline in Axis' corporate and agriculture book. Positively, Axis continues to focus on growing its retail loan to 30% of total loan book over the next two years from about 26% prevailing -- a move that will enable it to stabilise asset quality going forward. The move will also bring it closer to its larger peer, HDFC Bank, whose retail assets account for a little over 50% of total loan book.
Notably, after 2-3 quarters of sluggish fee income growth Axis Bank witnessed a strong growth of over 20% driven by strong traction in retail fees. Falling cost of funds, strong retail growth and an increase in the share of low-cost CASA deposits helped Axis Bank post a 9 basis points sequential increase in net interest margins (NIMs) to 3.5% for the September 2012 quarter. However, HDFC Bank’s NIMs slipped marginally by 10 basis points sequentially to 4.2%.
A higher other income (driven by one-off trading gains) enabled Axis Bank to meet Street expectations for the quarter gone by. The trends on provisioning remained divergent for both the banks as Axis Bank provided aggressively and doubled its provisions on a sequential basis, thereby restricting profit growth. On the other hand, HDFC Bank, which is far ahead on the asset quality front, saw a reduction in bad loans. Hence, it saw lower provisioning for the quarter, which aided its bottom-line growth.
Asset quality issues remain
Even as Axis Bank management pointed out that it has made excess provisions of Rs 115 crore (total Rs 509 crore) taking cognizance of the uncertain macro, the bank’s asset quality hasn’t improved. For the September 2012 quarter, its gross and net NPAs increased 2-4 basis points to 1.1% and 0.33%, respectively compared to the June 2012 quarter. This is the highest in the last three quarters and in contrast to the trend seen in HDFC Bank.
Additionally, some key metrics on this front indicate further stress on Axis’ asset quality. One, the ratings profile of Axis Bank's large corporate clients continued to worsen. Against 73% of loans falling under A and A+ rated categories as at end September 2011, this figure stood at 62% as at end of September 2012 quarter—including 2 percentage point fall in the recently concluded quarter. Second, its slippages (addition to non-performing assets or NPAs) increased 37% sequentially to Rs 630 crore reflecting continued pressure on asset quality. These need to be monitored.