Axis Bank Q3 Preview: Net profit seen 70% up on low provisions, strong NII

Axis Bank is expected to continue with its asset quality improvement and report a reduction in bad loan ratios.

Axis Bank Ltd is expected to report a 70 percent jump in net profit for the October-December quarter, largely aided by a fall in provisions and a strong core interest income growth.

The average of the estimates of seven brokerages polled by Moneycontrol forecasts the net profit for the December quarter at Rs 5,321.5 crore, up 70 percent from Rs 3,130 crore a year ago. Net interest income (NII), the core income a bank earns through lending, is expected to grow 25 percent to Rs 10,846 crore, the poll showed. In the December quarter last year, the private sector lender had reported an NII of Rs 8,650 crore.

Analysts expect the NII growth to come on the back of a robust loan book expansion, putting loan growth at 15-16 percent. Axis Bank’s loan growth has averaged 14-18 percent for the past four quarters, a trend that is likely to continue. “Market share gain in SME, Bharat banking, leadership growth in cards, strengthening of transaction banking and growth in identified focused retail segments, will be the key growth drivers,” wrote analysts at ICICI Securities Ltd in their note. The bank’s focus on rural and semi-urban centres also augurs well for balance sheet growth, according to analysts.

On deposits, the bank is expected to report a modest growth of 10-11 percent, in line with larger peer banks such as HDFC Bank and ICICI Bank that have reported earnings so far. The movement within term and low-cost current and savings account deposits would be keenly watched. Notwithstanding rate hikes, analysts see the lender reporting an expansion in its net interest margin (NIM). “We see NIM to expand further, given frontloaded benefits of rate transmission; we expect front-ended NIM expansion for the bank,” wrote those at Elara Capital in a note.

All these should help boost net interest income along with an expected reduction in credit costs owing to improved asset quality.

Asset quality signs

Axis Bank is expected to continue with its asset quality improvement and report a reduction in bad loan ratios. In the September quarter, the bank had reported a gross bad loan ratio of 2.50 percent. Therefore, provisions may reduce leading to a boost to the bottomline. That said, small loans and lending to agriculture may show some signs of pain, according to analysts. Kotak Institutional Equities estimates that fresh slippages may come in at Rs 3,500 crore for the quarter. In the September quarter, the bank had reported slippages worth Rs 3,383 crore.

Overall provisioning needs would be low given low fresh stress and high provisioning coverage ratio of 80 precent.

Investors would keenly watch for the progress of Citibank’s credit card business acquisition by Axis Bank. Further, commentary from the management on margins in the coming quarters amid rising deposit rates would also be watched for. “A protracted high interest-rate cycle is a greater risk to Axis Bank than to large private peers, in terms of potential market share loss in prime credit,” point out analysts at BNP Paribas in a note.