Axis Bank eyes 18-19% loan growth, says slippages to continue

India's third largest private sector lender Axis Bank reported a 83.1 percent fall in profit in the second quarter to Rs 319 crore on back of bad loans clean-up. Provisions rose to Rs 3,623 crore, more than 5-fold increase in comparison to year-ago.Over the last six quarters, not much improvement was seen on the operating side, said Jairam Sridharan, CFO of Axis adding that there now is more uncertainty over eventual number of slippages. The bank had guided for 60 percent of its watch list turning into non-performing loans, which could be higher going ahead.Sridharan said that slippages in Q2 were likely at their peak. Addition of slippages will continue to be higher in coming quarters for Axis.FY17, he said, will be the peak of credit cycle for the bank.Sridharan is anticipating the loan growth to continue at 18-19 percent for the current fiscal. Organic growth is visible in the retail and small and medium enterprises (SMEs), but corporate demand continues to be extremely sluggish.“Private capex needs to improve for all engines to fire,” he said.Below is the transcript of Jairam Sridharan’s interview to Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Latha: What perhaps is most disturbing is your guidance on the watch list. Last time you told us 60 percent of the watch list of about Rs 22,000 crore is in doubt. Now you think it could be more than 60 percent? How much more?A: Yes, six months ago, when we created the watch list, it was clearly our intention to guide that a material part of this watch list is what we expect to slip over the next eight quarters. And at that time we had said 60 percent and that was based on certain assumptions about how the macro was panning out and how some of the resolution tools that were being discussed at that time were going to pan out. As it has happened over the next six quarters, we have seen not much material improvement on the operating side. There has not been much deterioration either, but there has not been much improvement. When companies that are in a weak position financially and are hanging on by a thin thread, when they continue to see the weakness persist and the lack of positive news, their situation gets worse over time even though nothing has changed in the environment that is basically what we have seen.Plus, the resolution tools that we have been talking about, whether it is strategic debt restructuring (SDR) or whether it is Scheme for Sustainable Structuring of Stressed Assets (S4A), etc. when they were launched, there was a lot of expectation around how they might be helpful in resolution. But, as it has panned out, they have not quite taken off in the kind of numbers that one might have expected. This has contributed to an environment of a little bit more uncertainty around what might be the eventual slippage from this watch list.What we think right now is that we are going to see a significant deterioration on the slippage from the watch list numbers. As you have seen, we have taken a little bit of a bitter pill already in Q2 by taking a pretty significant part of the watch list and having them as non-performing assets (NPA). Some more pain is left. Consider it once bitten twice shy. I am now a bit more reticent about how much of the remaining watch list might slip. We want to watch out what is happening in the resolution environment and the operating environment a little bit more before we come up with firmer numbers.Sonia: So, even if we assume in the first half of the year, the gross slippages have been around Rs 12,500 crore of which Rs 10,000 crore is from the watch list. Assuming more than 60 percent, as your rightly mentioned, if you take about 80 percent, should we work with an additional Rs 8,000 crore slipping from the watch list by the end of FY18?A: Yes, broadly what you are saying is -- without giving any specific number guidance here -- directionally the kind of math that one should do. Make your own estimates, because your estimates are as good as mine in terms of what might be the eventual percentage slippage from the watch list. So, you make an estimate number and then see how much has already slipped and then whatever is the incremental, that is the amount of slippage that needs to come.Now from a timing perspective, whether all of that will come in the remaining two quarters or whether it might happen in the next four quarters or thereabouts, that we will need to see, but yes, that math is directionally accurate.Latha: But you still cannot tell us 80 percent or 75 percent?A: No, I would rather not. At one point of time, when we thought we had some visibility and certainty around how this was going to pan out, we gave a number, but as it turns out, some of what we thought was real, was probably a mirage.So, I would rather wait and see how the operating environment improves. There are early green shoots, so one has got to watch for that and let us see whether some of that pans out. One hears conversations on some of these resolution tools being revived. So, let us see how that pans out and if some of those pieces of news come out then we might be on firmer grounding in terms of being able to give a final marker.Latha: To continue with what Sonia was asking you, would you feel, even if you cannot tell us the amount, at least the pain would ooze out of the system, out of at least your bank by the end of the this year? We just have to live through two more painful quarters?A: That is fairly accurate. One of the things that we did in this quarter, if you notice our earnings presentation that we put out for the investment community, we showed in that earnings presentation a very long term view of how credit costs for the bank have panned out, over the last 15 years. You can see two cycles in the 15-year period. One corporate led cycle and one retail led cycle and this one again is the third cycle, which is the corporate led cycle. If you see that curve, you essentially can get to the argument that yes, peaks do not last for very long, peaks go away very quickly and then you get to normalisation levels. It is our expectation that financial year 2017 is the peak of this credit cycle and within financial year 2017, if you look at slippages, the slippages that we saw in Q2 from a quarterly basis were more likely the peak of quarterly slippages.Sonia: I know it is hard to put a number to it, but can you say with any fair degree of certainty that the gross NPAs of 4 percent plus that Axis Bank has clocked in this quarter is the worst that the bank has seen and things could recover from here?A: The way to think about this is gross NPA is about how much slippages get added to the NPA book and is that any faster than the rate at which your underlying advances book is growing. For the next few quarters, the addition of slippages into the book is going to continue to be fairly high and much higher than the 18 percent annualised rate at which book growth is happening. So, the headline numbers, if you are watching headline numbers like gross NPA percentages, etc those numbers are likely to go up further out before they start falling. But if you are watching earlier metrics like slippages, how much new is getting added to the book, that probably, you have seen the peak.Latha: You said right that it is a percentage of the book and the book is also growing, so, now let us talk growth. Your business grew 18 percent, that was the growth of advances?A: That is right.Latha: 18.5 percent. What would be the run-rate? You will be able to maintain 18.5 percent? Could it get even better?A: In the foreseeable future, it looks like something in this range, 18-19 percent, seems like realistic number in terms of what growth might look like. We are continuing to see organic demand growth on the retail side. We are seeing a little bit of pickup in demand on the SME side. Though the corporate lending side continues to be extremely sluggish, the organic demand is very low and whatever limited growth one is seeing, one is seeing through refinancing transactions and hence shift in market shares. So, something needs to happen in organic, private sector capital expenditure development etc for all engines to be firing. Right now, one or two engines are firing, but they are firing fast enough that there is enough momentum for 18-19 percent kind of growth in the foreseeable future.Latha: What about the kind of provision cover you will be happy with? Is 60 percent okay for you or do you think that as the NPAs age and you provide more, by the end of the year, you will be back at closer to 70 percent?A: I mentioned this yesterday with some of your colleagues. I am not super happy with the 60 percent level. We would want to have a higher level of provision coverage than where we are at right now.Historically, we have had around 70 percent in terms of provision coverage. Directionally, one wants to get there. However, as you can imagine, the gross NPA book is now much larger given what has happened in this quarter. So, getting from 60 percent to 70 percent is a fairly uphill task. So, it is going to take us a little while to get there. But our intention, very much is going to be to directionally keep moving in that direction every quarter.Latha: Therefore, will there be a capital constraint? That is why I am working towards provision. If you have to provide more and you would like to provide more then will the current capital suffice to support a 19 percent growth?A: We are at 12.03 percent in terms of Tier-I and all of it is common equity Tier-I. So if you look at what the Basel-III requirement is at the end of March 2017, we have a fairly good degree of comfort over and above the Basel requirement.So right now, we probably have more than 300-325 basis points or so above what the Basel-III requirement is going to be in March. So at this point of time, the margin of safety is extremely high and I feel fairly good with that margin of safety.As the quarters go on and as we recognise some more of the provisions and we increase provision coverage, etc. will some of this margin of safety compress? The answer is probably yes.However, my feeling is that we have always articulated that our core margin of safety that we want to have is about 225-250 basis points over the regulatory requirement. I feel fairly comfortable about being above that core level of margin of safety for a little while. So, I am not particularly perturbed about equity or capital at this point of time.Sonia: The problem for the company in the last couple of quarters has been more to do with expectation management. The company has been saying that you guys are close to the end as far as NPA provisioning is concerned, but quarter after quarter, the NPA provisioning increases. I understand it is a very stressful environment as well, but what would you like to say to your shareholders, you investors to perhaps assuage these concerns?A: First of all, the environment is complex, but of course complexity is always going to be there in the business environment that we operate in. So that is no excuse.In general, our intent has been not to attempt to do expectation management, to be perfectly honest. What we are attempting to do is to share with the investment community at every point in time whatever our best guess is in terms of what we think is going to happen in the environment.Now as it happens, sometimes our best guess turns out to be wrong, in which case, we are happy to correct our mistake, the very next time we get a chance rather than keep hanging on to our old words and bend ourselves out of shape trying to meet that expectation.So, our philosophy has been keep sharing openly whatever we think is the scenario that we are working with internally and what is our best guess as executive management. More often than not hopefully, you will find that pan out. Sometimes, you will not find it pan out, but we are not going to be shy about coming out and saying yes, we got it wrong and here is what we think now.