Axis' dismal show could trigger downgrades

Rise in bad loans from outside its watch list and slowing lending activity are sore points

In sharp contrast to the strong show posted by smaller private lenders, Axis Bank failed to deliver on most fronts in December quarter (Q3). Weak loan growth, falling net interest margin, and continued pressure on asset quality led to a 73 per cent year-on-year fall in its net profit for the quarter. Notably, net profit has fallen for the fourth quarter. The sharp five-times jump in trading income to Rs 1,525 crore on falling yields came to the rescue, boosting revenue. Strip it off, and the operating (underlying) profit is muted for the quarter gone by.

Watch list comprises loans that may turn bad. A rise in bad loans outside its watch list was a negative surprise in the quarter and indicates the bank had not fully captured stress. Of total slippages in its corporate loans, 30 per cent were outside the list, up from 11 per cent in September quarter. Weakness in iron and steel and infrastructure construction led loan slippages in Q3. In fact, even retail (consumer) and small and medium enterprises’ segments witnessed higher stress, though they form a tiny part of total bad loans. Management said slippages have peaked out, but it doesn’t see sustained improvement in asset quality as yet.  

At 10 per cent, its loan growth moderated much sharper than anticipated, thanks to muted demand for loans in the corporate and small and medium enterprises segments. In fact, loan growth is at a multi-quarter low for the bank. Strong growth in loans against properties and automobiles and commercial vehicles segments fuelled the 19 per cent growth in retail loans and could have been higher but for the sharp fall of 26 per cent in agriculture loans after note ban. Though management believes some part of demand will come back from rural and agriculture sector, it has toned down overall expectations. Axis now expects FY17 loan growth to be lower than the high-teen growth expected earlier. Though its net interest margin (a profitability indicator) contracted both sequentially as well as over a year ago due to reversal of interest income, management expects it to bounce back to 3.6 per cent levels.

Most analysts could tone down their full-year estimates, which could pull down the stock price. The share was down one per cent ahead of the results, that came after market hours on Thursday. Investors will now be keenly watching ICICI Bank’s results later this month, given that both banks have similar loan exposures.