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Last Updated : Jan 23, 2018 12:05 PM IST | Source:

Axis Bank — Building a solid business while staring at an end to bad asset woes

The stock valued at 2.1X FY19 has headroom for re-rating once provision normalizes to historic average levels, few quarters down the line.

Madhuchanda Dey

Axis Bank reported a decent performance in the three months to December after the dip witnessed in the September quarter marred by asset quality divergence. Loan growth was robust, margins were stable with a positive outlook, slippages moderated, non-performing loans picture improved and finally a large capital raise sets the stage for aggressive market share gains at a time when most rivals are struggling.  The stock valued at 2.1X FY19 has headroom for re-rating once provision normalizes to historic average levels, few quarters down the line.

Quarter at a glance

Axis Bank reported 25% growth in after-tax-profit. Net interest income (the difference between interest income and expense) rose 9% as loans grew 21% and interest margin moderated. 


Non-interest income declined by 24%, as steep 87% fall in treasury income wiped off the 24% growth in core fees. Lower provisions and a moderate increase in operating expenses helped Axis report a respectable profit growth.

Strong growth in business

Business growth benefitted from a low base because of demonetization the previous year. Nevertheless, credit growth at 21% has been strong. The bank had a 9% share in incremental credit growth. With the growth coming from retail, SME as well as corporate, the loan book is well diversified and getting more granular.


Interestingly, the corporate book has been driven by 49% growth in working capital where the bank seems to be capturing market share.


The bank has identified more profitable segments within retail like microfinance, personal loans, small business banking, loan against property etc. that should counter the margin pressure coming from working capital driven incremental corporate lending.

Also Read: Axis Bank posts one of strongest quarters as recoveries spike, slippages halve

The competitive advantage of a strong liability

While overall deposits grew by 10%, the low cost (current and savings account or CASA) grew by 14% and forms 49% of total deposits. Axis has 8% share of system’s incremental deposits.

The bank has built a stable retail-focused deposit base. The share of retail as well as low-cost current and savings account (CASA) is one of the best in the industry.


The strength of the liability has reduced cost of funds. Net interest margins moderated due to sharper fall in lending yields and interest reversals due to non-performing assets. However, we believe the competitive cost of funds has helped the bank in garnering market share in a market dominated by MCLR (Marginal Cost of funds based Lending rate). Incidentally, the proportion of MCLR linked lending has touched 43% from 4% in June 16.

Margin stability going forward

Despite the pressure on lending yield, the bank expects its interest margin to stabilise/improve as the liquidity tightening in the system gives some pricing power to lenders, improvement in asset quality reduces the quantum of interest reversal and the recent capital raise brings down overall funding cost.


Fee income getting granular

While the strong traction in core fee income had the advantage of low base in the year-ago demonetisation quarter, it is important to note that retail and transaction banking have driven the fee income growth and now form 77% of fee income, thereby lending stability to this head.

Asset quality – on the mend

Both gross and net NPA (non performing assets) have improved quarter-n-quarter. Slippages of Rs 4428 crore (corporate slippage Rs 2980 crore, retail Rs 934 crore and SME Rs 513 crore) were lower. Also 93% of the corporate slippage came from assets rated “BB and below”. In fact this pool (below BB) has seen a net sequential increase of Rs 300 crore to Rs 16,120 crore.

The optically higher recovery number is partially due to upgrade of one steel account (that had slipped to NPA) and sale of NPA in the market.


Since a large part of the slippage is coming from the lower rated (BB and below) pool of assets, we focus on this and the outstanding assets that are either restructured or under various dispensation (like SDR, S4A and 5:25). This suggests a maximum quantum of Rs 17,457 crore of troubled assets. Hence elevated provisioning might continue for few more quarters before normalization commences from second half of FY19.

The bank has achieved a healthy provision coverage of 66% in the quarter and intends to maintain provision cover at this level going forward. Accounts transferred to IBC (Insolvency and Bankruptcy Code) have a provision cover of 68%.

De-risking incremental lending

The lending book is getting de-risked. Close to 74% corporate exposure is rated at least ‘A’ and 85% of incremental sanctions is rated ‘A’ or above. Nearly 78% of SME exposure is towards working capital.

Capital infusion – arsenal for future growth

With the preferential allotment infusing Rs 8680 crore, the Capital Adequacy Ratio has improved to 18% (Tier I 14.13%) which should take care of growth in the medium term.

As the bank leverages this capital to grow and credit cost normalizes, the return ratios should start improving that should pave the way for further re-rating.

First Published on Jan 23, 2018 09:19 am
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