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 per cent to close at Rs 1,146 on Tuesday against the Sensex’s 0.7 per cent fall, adding to its outperformance in the past month, a majority of analysts believes the bank will have to consistently deliver on asset quality as the pressure is not over yet. Unless it does, the stock’s outperformance might 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 per cent of total advances. We raise our slippages’ estimate to 1.4 per cent for FY13 and maintain it at 1.5 per cent 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 the corporate debt restructuring (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.
| MUTED EARNINGS OUTLOOK FOR AXIS | ||||
| In Rs crore | HDFC Bank | Axis Bank | ||
| FY12 | FY13E | FY12 | FY13E | |
| Net interest income | 12,297 | 15,064 | 8,018 | 9,349 |
| % change y-o-y | 16.6 | 22.5 | 22.2 | 16.6 |
| Non-interest income | 5,244 | 6,541 | 5,327 | 6,020 |
| % change y-o-y | 21.0 | 24.7 | 15.0 | 13.0 |
| Net interest margin (%) | 4.6 | 4.6 | 3.0 | 3.0 |
| Bps chg y-o-y | -25 | 4 | -10 | 0 |
| Net profit | 5,167 | 6,642 | 4,242 | 4,817 |
| % change y-o-y | 31.6 | 28.5 | 25.2 | 13.6 |
| Price/Book value (x) | 4.9 | 4.2 | 2.0 | 1.7 |
| Loan growth (%) | 22.2 | 23.7 | 19.2 | 19.4 |
| Gross NPA (%) | 1.0 | 0.9 | 1.0 | 1.0 |
| Net NPA (%) | 0.2 | 0.2 | 0.3 | 0.4 |
| E: Estimates Source: Analyst reports | ||||
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 the power sector and small and medium enterprises (SMEs) are key things to watch. This, along with its upcoming fund raising plan (likely in next two-three months), could act as the key overhangs on the stock.
In contrast, last Friday, its larger peer, HDFC Bank, delivered another quarter of consistent performance on loan growth, asset quality and margins, 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 key sources of the upside. These could provide up to 10 per cent EPS upside,” believes Anish Tawakley of Barclays Equity Research.
Q2: Mixed bag
Despite a steep rise in provisioning, Axis reported strong growth in fee income, other income and stable margins for the September quarter, which helped it report 21 per cent growth in net income and 22 per cent in net profit compared to the year-ago quarter.
Though both banks posted loan growth of 23 per cent on a year-on-year basis, sequentially, Axis reported muted loan growth of 0.6 per cent as against a robust nine per cent loan growth posted by HDFC Bank. This is consequent to a decline in Axis’ corporate and agriculture books. Positively, Axis continues to focus on growing its retail loan to 30 per cent of total loan book over the next two years from about 26 per cent now — a move that will enable it to stabilise the 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 per cent of total loan book.
Notably, after two-three quarters of sluggish fee income growth, Axis Bank witnessed a strong growth of over 20 per cent, 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 nine basis points sequential increase in net interest margins (NIMs) to 3.5 per cent for the September quarter. However, HDFC Bank’s NIMs slipped marginally by 10 basis points sequentially to 4.2 per cent.
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 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.
Axis Bank: Asset quality issues remain
Even as the Axis 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 quarter, its gross and net NPAs increased four and two basis points to 1.1 per cent and 0.33 per cent, respectively, compared to the June 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 per cent of loans falling under A and A+ rated categories as at end-September 2011, this figure stood at 62 per cent as at the end of the September quarter—including a two percentage point fall in the recently concluded quarter. Second, its slippages (addition to NPAs) increased 37 per cent sequentially to Rs 630 crore, reflecting continued pressure on asset quality. These need to be monitored.
