Axis Bank’s First Quarter Profit Plunges 21%; Asset Quality Worsens

Axis Bank Ltd.’s net profit declined over 21 percent to Rs 1,555.5 crore in the first quarter of the financial year 2016-17, on account of a sharp deterioration in asset quality.

The bank’s gross non-performing assets rose to 2.54 percent from 1.67 percent in the quarter ended March 31. As a result, the bank’s provisions rose 81.2 percent sequentially and 88.6 percent year-on-year to Rs 2,117.2 crore, eroding profits.

The rise in bad loans was on account of slippages from its ‘watch list’, a list of accounts identified as potentially stressed accounts, Axis Bank said in its filing to the stock exchanges. The watch list reduced 10 percent quarter-on-quarter to Rs 20,295 crore, as loans worth Rs 2,680 crore slipped into non-performing assets, the private lender added.

During the quarter, the bank’s net interest income grew 11.4 percent on year to Rs 4,516.9 rupees. Axis Bank’s net interest margin came in at 3.79 percent, in line with expectations, but 18 basis points lower than what was reported in the previous quarter.

The Watch List

The management has created a list of loans that are potential areas of stress. In the previous quarter the bank said 60 percent of the Rs 23,000-crore loans on the watch list would slip into NPA over the course of two financial years, starting this quarter.

“The watch list is going to continue to be the primary source of stressed asset creation,” said V Srinivasan, deputy managing director, Axis Bank in a conference call with reporters. “What you’ve seen in the first quarter is a reflection of that, with 92 percent of the slippages in the corporate book coming from the watch list.”

The rate of slippage may be higher in the first half of this financial year, which indicates that asset quality could be a drag on profitability in the second quarter as well, Srinivasan added.

In the first quarter, the bank invoked strategic debt restructuring on two accounts worth Rs 252 crore, and 5/25 refinancing on four loans worth Rs 790 crore.

Management Commentary

Axis Bank is likely to maintain its provision coverage ratio at around 70 percent, despite expectations of a further worsening in asset quality, the management said. In the first quarter, provision coverage ratio stood at 69 percent.

During the quarter, the bank also made accelerated provisions for accounts where strategic debt restructuring has been invoked, and on accounts that were identified as stressed in the Reserve Bank of India’s asset quality review.

On asset quality, the management is confident that outside of the watch list, slippages will reduce going forward. However, asset quality is likely to worsen significantly in the near term on account of slippages from the list.

This year, the bank estimates that it will disburse 18-20 percent more loans than it did last year.