Axis Bank reported weak operating numbers in the December quarter. While accretion of bad debt has been slower than the second quarter in this fiscal year, the increase in slippages from the non-watch list has made the market nervous on asset quality. In conversation with Malini Bhupta of Moneycontrol, the bank’s Chief Financial Officer Jairam Sridharan believes that stressed assets could have peaked in FY17. Edited excerpts:
Q) If we look at the quarter, what surprised the market was the share of slippages that came from outside the watch list. What does that mean?
If you see the start of the financial year, we had disclosed our potential stressed asset list and said we expected slippages to come out of that pool. If you see the first three quarters, Q1 saw elevated levels of slippages formation and Q2 was very high. In Q3, we see slippage numbers that are down from their peak in Q2. In absolute terms, slippages are elevated. If we see the pipeline of stress and how recognition has moved, we feel that FY17 will be the peak and the trajectory will be downwards in FY18.
While slippages have come down in absolute terms, we are strengthening the provisioning. We have increased the provision coverage ratio (PCR) to 64 percent from 60 percent and each percentage point has a provisioning of Rs 250 crore. Provisions have not come off even though slippages have come off by 50 percent.
Q) Where has fresh stress come from?
So, during the quarter, 70 percent of corporate slippages came from the watch list and if you see on a nine-months basis, about 85 percent of all corporate slippages have come from that list. Our view was that the watch list will be the source of stress and it has played out just as we expected. In absolute terms, during the quarter gone by, slippages from outside the watch list have been higher than our comfort levels and we need to see where that trend leads us.
At the end of March, we had created a watch list of assets where we believed stress levels would be higher. We had created a long list of accounts that looked weak in some dimension and after putting some filters, we put the weakest ones in that list. These were disclosed accounts worth Rs 22,000 crore in the watch list. The area that needs to be looked into further is the non-watch list. At the end of nine months, about 50 percent of the accounts in the watch list has turned into NPAs. Our watch list is now just over Rs 11,100 crore.
In the non-watch list, the big sectors that contributed to NPAs were the usual sectors like power, steel and infrastructure.
Q) What about concentration of risk?
Concentration of risk has been coming down. The top 20 borrowers as a percentage of Tier I capital five years ago was upwards of 300 percent for Axis and now this is over 100 percent. We have had significant reduction in top borrower concentration and concentration towards specific sectors. The problematic assets are in three or four major sectors.
Q) There has been much talk about some large accounts turning into NPAs and that has been a concern. Please comment.
Without getting into specifics, the bank has recognised a lot of the fairly stressed borrower entities as NPAs. A lot of the names that have been floating around in the media or on investor minds -- those exposures do not exist or they have been classified as NPAs. The non-NPA book will not have exposure to those stressed entities.
Q) While calculating the bank's adjusted book value, the Street is only factoring in 50 percent value of the CDR (corporate debt restructuring), 5/20 and other restructured assets. What does this imply?
If you look at the history of restructuring. There were CDR mechanisms and then there were 5/20 and S4As. The fact is that if you are restructuring someone’s account there is some stress; but all accounts are not similar to one another. Different analysts have different mechanisms to calculate the percentage of slippages from different accounts. From the old CDR pool, we would see 25 percent of the pool slipping into NPAs. Over the last few quarters, the percentage has trended up to 35 percent of these loans sliping into NPAs. Slippage into NPAs needs to be distinguished from losses being taken into the balance sheet. The market is assuming a certain probability of default and that is appropriate.
Q) What is your expectation for FY18 as far as slippages go?
We expect FY17 to see a peak for stressed asset accretion. If you see credit costs you will see our long-term credit costs have been 80 bps and this year we are way above that at 300 bps. Conceptually, you will see a normalisation from this peak of FY17 in the coming year. We had said we expected the second half to have lower slippages but similar credit costs as we want to improve provision coverage. Credit costs will be similar to what we saw in the first half of the year in the second half.
Q) There has been much talk about some Indonesian mining assets that were expected to turn into NPAs. Is that correct?
We have very limited exposure to mining-type entities in non-Indian markets. And where we do have some exposure, these have been recognised and provided for.
Q) Your lending practices have been tightened and that has also impacted your fee income. How is your fee income expected to behave in coming quarters?
There is some correlation between credit quality and fee income. You’ve seen fee income in corporate credit shrink as new growth has not been high and also the migration is towards better-rated corporates where fee income is lower. We are in that transition phase as we are changing our credit mix but that is not permanent. We expect fee income to be granular, flow-oriented and, therefore, predictable.
Q) How has demonetisation impacted borrower behaviour?
What we have seen so far is the investor/corporate community seems to be in wait-and-watch mode. Promoters are not making big new investment plans and growth has been challenged materially because of events of the last few months. If things go as per plan and greater formalization of economy happens then it will have a positive impact.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
