Axis Bank Q1: High caution visible, fall in moratorium book in line with industry

Axis Bank had 9.7 percent of its loans under moratorium at the end of the April-June quarter. It may be a coincidence that HDFC Bank, another large private sector bank, too, had similar loan moratorium figures.

These numbers point to a trend--larger private banks have clearly taken a more cautious approach in extending the second round of loan relief to customers.

The fall in moratorium book could be due to two reasons. One, banks are not extending the moratorium to all customers. Two, a lesser number of customers approached their banks for EMI deferrals in the second round.

In the fourth quarter of the last fiscal, Axis Bank had said about a quarter of its loan book was under moratorium (25-28 per cent). The value of moratorium loans substantially declined at the end of the first quarter of the financial year 2020-21.

Also, an extra cautious approach is visible against coronavirus uncertainties in the future. This is reflected in a substantial increase in additional provisions. Provisioning is the money set aside by banks under the Reserve Bank of India norms to cover likely losses in problematic loan accounts.

Additional provisions held by Axis Bank now stand at Rs 6,898 crore, which is well above RBI’s norms.

That it is well-prepared for the COVID-shock was emphasised by the bank in its interaction with media. It said that the additional provisions were over and above the NPA provisioning included in PCR (provision coverage ratio) calculations and the 0.4 percent standard asset provisioning requirement.

“The overall additional provisions held by the bank towards various contingencies together with the standard asset provisions, translate to a standard asset coverage of 1.56 per cent at June 30, 2020,” the bank said.

This is both good and bad news for investors. The good news is the bank refusing to lower guard against the coronavirus-shock and being cautious both on moratorium loans and provisioning. The bad news is that despite all the precautions if the coronavirus crisis prolongs, a sizeable chunk of moratorium loans can turn bad.

In a conference call after the results, the management said most of the moratorium loans in the second round were retail loans. These could be risky in a prolonged economic downturn when job losses tend to be rampant.

The impact will be similar to smaller companies. In the conference call, Axis Bank management repeated that in the small and medium enterprises (SME) space, fresh lending was extended to only top rated companies.

SMEs are most vulnerable in the present climate, as their business has been hit and these firms typically have a weak cash buffer for a crisis compared to the bigger players.

Axis Bank’s approach to COVID-19 provisioning is in line with the industry. HDFC Bank, which has a similar moratorium loan level (9 per cent), has set aside floating provisions of Rs 1,451 crore and contingent provisions of Rs 4,002 crore as on June 30.

Total provisions (comprising specific, floating, contingent and general provisions) were 149 percent of the gross non-performing loans as on June 30. Large non-banking finance companies (NBFCs), too, are being cautious. Bajaj Finance, for instance, has increased COVID-19 provisions to Rs 2,350 crore as on June 30. This is about 11 percent of the total moratorium book.

In the Q1 result presentation, Axis Banks said 82 per cent of its corporate book was rated A- and above, with 96 percent of incremental sanctions in Q1 to corporates rated A- and above. It also said, as mentioned above, only high-quality SME borrowers are getting preference.

To sum up, the bank has done all the right things to guard against the coronavirus shock but much will depend on how the economy shapes up.