Axis Bank expects credit costs to go higher after Q1 asset quality declines

The net credit cost stood at 0.97 percent in Q1FY25, up 47 bps YoY

Following a decline in asset quality during the June-ended quarter, Axis Bank forecasts a continued increase in credit costs, primarily due to a slower pace of recoveries, which is expected to exert further pressure on the bank's financial outlook.

"We need to factor in that seasonality played a spoilsport for sequential rise in non-performing assets (NPAs) and expect credit costs to go higher amid lower pace of recoveries," Axis Bank stated during their earnings conference call.

The private lender reported a gross NPA ratio of 1.54 percent for the quarter ended June, an 11 basis point increase quarter-on-quarter (QoQ). Similarly, the net NPA ratio increased by 3 bps QoQ to 0.34 percent in Q1FY25 amid rising credit costs. The net credit cost stood at 0.97 percent in Q1FY25, up 47 bps year-on-year (YoY). Credit costs refer to expenses incurred by a lender due to default or potential default on loans.

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The management indicated that roughly 55 percent of the increase in credit costs was due to lower recoveries and upgrades in the corporate loan portfolio. Although they expect these recoveries to eventually take place, the timing could shift between one and two quarters.

"Yes, there is deterioration seen in our asset quality across parts of the book, but it is not concerning enough because it has not breached our risk thresholds," the management assured.

Axis Bank also reported a muted increase in net profit in Q1FY24 due to a substantial rise in loan loss provisions. The private sector lender’s net profit rose 4 percent YoY to Rs 6,035 crore in Q1FY25, while net interest income increased by 12 percent YoY to Rs 13,448 crore.

The net interest margin (NIM), a measure of profitability for banks, stood at 4.05 percent, down 1 bps sequentially, and 5 bps from the year-ago period.

Looking ahead, the management indicated that they aim to maintain margins at 3.8 percent on a two-cycle basis.

"We will make all efforts to ensure we retain as much of the margin as we possibly can. But we are watchful of the competitive intensity in the market space for deposits as we get into the rest of the fiscal year," they added.