Axis Bank has prepared a "watch list" of about Rs 22,000 crore worth of loans, or 4 percent of its total assets, out of which 60 percent might go bad in the next couple of quarters, said V Srinivasan, Deputy MD of Axis Bank to CNBC-TV18.
Srinivasan added that the bank has assessed the status of the corporates, their current payment track record, their fundamentals, and the probability of the slippages, before taking a call on making the watch list.
No more names will be added to the watch list. The bank will keep updating the investors on a quarterly basis, said Srinivasan.
Srinivasan expects the trend in slippages to be the same for FY17, where retail banking will remain benign in term of slippages and credit environment.
The small and medium enterprise business will also continue to be fairly steady for the bank.
If the RBI resolutions continue to happen and economy does better, Srinivasan expects the watch list to come down.
Srinivasan, however, maintained that the capital position of the bank is extremely strong, and it has and will continue to grow without diluting capital.
Below is the transcript of V Srinivasan’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Your watch list? Rs 22,000 odd crore of which you expect that 60 percent may go bad in the next eight quarters. Is there an upside or a downside risk to this forecast?
A: We are always, when you are looking into the future, it is always uncertain. We have taken this status of the corporates which are part of this watch list, assessed what their payment track record is right now, assessed what the fundamentals of the company are, looked at the environment and then taken a call in terms of what the probability is slippages of these companies are and come out with this watch list.
Clearly, as conditions change, whether for the better which hopefully is the case, or for the worse, the watch list will also to some extent behave. What we are saying is we are not going to add anymore companies to this watch list and we will be updating investors in terms of what is happening to this watch list on a quarter-on-quarter (Q-o-Q) basis. Of course, there could be slippages from outside of the watch list which we believe will not be too high and clearly, this is the one list to watch out for in terms of key stores of stress from the corporate lending book over the next eight quarters.
Sonia: It is good to hear that you will not be adding any more companies to this watch list. But I am a bit concerned about the accounts that have not already been added to the watch list, for example, accounts in the retail and the small and medium enterprise (SME) sector. Can you throw some more light on whether there is a probability of large slippages from those accounts, say in the medium term?
A: What we have said yesterday was also that we expect credit cost to be around 125 basis points for FY17 and that factors in slippages across all segments which include SME and retail. If you look at what has happened over the last year, and look at what would happen this year, the trends in terms of slippages will be broadly the same. The retail continues to be fairly benign in terms of slippages and credit environment and clearly we expect retail to hold up. SME has been a fairly steady business for us and we expect it to be the case in FY17 also.
Latha: Let me come back to the watch list. Would you say that 60 percent is the worst case scenario and therefore, in the context of an economy that does a little better, there could be an upside surprise?
A: If the economy does better, if resolution happens as we have seen over the last few months, we have seen pick up in terms of resolution, clearly there could be upside to this number. What we have also said is that we would try and keep the provision coverage ratio around 70 percent by the end of the year which also is fairly conservative considering that some of the resolutions which may happen will not entail such a huge provision.
Sonia: You told us about Axis Bank, but I am just trying to understand what the larger implications for the banking system as a whole could be, given that a bank like yours with a relatively lower stock of stressed assets has forecasted a fairly challenging period over the next two years at least. Do you think that the recovery cycle for the entire sector as a whole could be a prolonged one?
A: The way we need to look at it, as I said before, if you look at what banks are doing, what regulators in the government are pushing for, is for speedier resolution. And clearly as resolution picks up pace, like we have seen a couple of transactions over the last month or so, as resolution picks up pace, we should see this portfolio wind down. And come off from the levels we have indicated yesterday. And that is upside which we should hope for. And that is what is not factored in terms of what our projections are. So, the whole thing is as the environment improves, as the resolution starts picking up and solutions are found in terms of what the right capital structure and monetisation strategy for each of these corporates are, it is something which will be positive as far as this portfolio is concerned.
And as you said, we have disclosed a number yesterday in terms of what our watch list is and we are just part of the consortium. And there will be other banks who are part of the consortium in which these companies are operating.
Latha: There is one set of guys of course, like the CLSCs and the Macquaries and more importantly, the Nomuras who have actually upped the price target to Rs 575 on your stock. There are others who have told us that last year they did not tell us, last quarter they did not tell us there are so many problems, now they are telling us there are problems, will they come next quarter and tell us there are more problems? Any replies to these guys?
A: That is why we have said, in terms of the watch list, it is a closed list and we are not looking to add companies to the watch list. And we have said what we believe could be the possible slippage and what we are going to do as far as this watch list is concerned. So, the whole thing has been the market has been grappling with various metrics in terms of what could be the potential stress as far as the system is concerned and as far as the individual bank is concerned. Just to give our own insight, out own perspective in terms if what we see in our portfolio and what could be the possible stress level, that is what we have tried to do in terms of a transparent disclosure in trying to highlight to the market what that portfolio looks like.
So, as I said, it is not something which we ever try to keep away from the market, but there are various metrics going along in terms of what could be, what could be the stress levels of the system as well as individual banks, we try to indicate to the various stake holders, what we believe our view on that is.
Latha: What will this do to capital since you have to set aside more risk capital? Will you have to raise money?
A: Not at all. I think our capital position is extremely strong. Tier-I is 12.51 percent as of March 31,2016, overall capital adequacy is upwards of 15 percent. Even if we assume a credit cost of 125 basis points over the next year, and almost similar levels of next year and if you look at operating income growth which you have projected, I do not think you will requiring capital. One thing you need to keep in mind is that when we raised our last round of capital, our Tier-I capital adequacy ratio was lower than where we are today. So, even though for the last three odd years, we have grown our balance sheet. We have grown without diluting our capital and that has been our biggest achievement and that give us sufficient room in terms of absorbing some of these credit costs and also have sufficient room for growth.
Sonia: Apart from asset quality pressures, the other worry is the sluggishness that is expected in the corporate loan book growth. For axis bank, what are the expectations of loan book growth in the corporate segment over the next 6-12 months?
A: If you look at what happened in FY16, even though what you said is true for the system, for us corporate loan book grew at 22 percent. So, clearly, we have pockets available to us of highly rated corporates where we have been able to grow and in spite of the system being fairly flattish in terms of growth. So, we expect that to be the case in FY17 too. We believe that we can grow our corporate book and gain market share as far as highly rated corporate sectors are concerned by better structures and better pricing and which is what we will try and do.
Latha: A final brief question. As a person who has his pulse on the economy, can you say with some certainty that bankers will have a slightly better time in FY17 than FY16?
A: You need to separate it out across two dimensions. One is the operating environment and what happens to your operating income and profitability and second is in terms of what happens to your legacy book, what sort of provisions a credit cost can entail. So, we believe that the environment in terms of overall banking sector will possibly be more positive than what we have seen over FY16. But as far as credit costs are concerned, we will continue to stay elevated. So, it depends on where each of the banks are in terms of credit costs and that would determine in terms of what the bottomline is. But we are positive in terms of the sector and environment in terms of growth, in terms of both loan growth being slightly higher, rates being slightly lower and overall, the ability to do business better as far as FY17 is concerned.