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Axis Bank’s Bad Loans Jump Four Times In A Year: A Management Failure?

Gross non-performing assets at Axis Bank have risen from Rs 4,451 crore last year to Rs 16,378 crore now.

Shikha Sharma, Chief Executive Officer, Axis Bank. (Photo: BloombergQuint)
Shikha Sharma, Chief Executive Officer, Axis Bank. (Photo: BloombergQuint)
  • Axis Bank registered the lowest quarterly profit since December 2007
  • Net profit dropped 83 percent year-on-year led by a surge in bad loans
  • Loans put under the “watchlist” reduced 32 percent as these slipped into the NPA category
  • 89 percent of the total corporate credit slippages came from the bank’s watchlist
  • Stock fell 7.9 percent to Rs 486.95 as of 11:30 a.m.

If there were any doubts that banks in India, private and state-owned, were hiding bad loans in the depths of their balancesheets, those doubts should now be vanquished. On Tuesday, Axis Bank reported quarterly earnings confirming how deep the problem was, atleast at that one bank.

According to the earnings report, loans worth Rs 16,379 crore have been classified as bad loans or gross non-performing assets (NPA) by the bank. On a quarter on quarter basis, bad loans jumped 71 percent. But that is not even the shocker. The real eye-opener is the way bad loans have moved in the last four quarters.

In the second quarter of the last fiscal, Axis Bank had classified Rs 4,451 crore as bad loans.

Over the past four quarters, bad loans at Axis Bank have jumped four times to over Rs 16,000 crore

“Materially More” Bad Loans?

It gets worse.

The bank is still not done cleaning its books and has put Rs 13,789 crore in loans on its stressed loans “watchlist”. At the start of the fiscal year, Rs 22,628 crores were on the watchlist. At the time, the bank’s management said that it expects about 60 percent of these loans to slip into the non performing category.

In the six months of the fiscal so far, 40 percent of the watchlist has already turned bad. In a post earnings conference call with the reporting media, Jairam Sridharan, chief financial officer at the bank said that he now expects “materially more” than 60 percent of the watchlist to turn bad. The bank calls this the “net dissolution rate.”

Assuming materially more refers to a conservative estimate of 70 percent of the watchlist- that suggests atleast another Rs 6,700 crore in loans will be added to the gross NPA number over the next two quarters. That would take the gross NPA number to over Rs 23,000 crore - more than five times what it was before the Reserve Bank of India (RBI) conducted an asset quality review (AQR) of bank books.

According to Hemindra Hazari, an independent equity research analyst, as soon as the bank declared a watchlist, investors would have assumed that 100 percent of it will turn bad. He added, “I won’t be surprised if a watchlist emerges in the retail lending segment as well given that retail loans are growing rapidly.”

During the second quarter, the bank saw its retail loan book grow 25 percent.

The sectors where Axis Bank’s watchlist is now concentrated include power, oil and gas and steel.

Axis Bank’s Watchlist

  • Power accounts for 41 percent
  • Oil and gas accounts for 13 percent
  • Iron and steel accounts for 12 percent
  • Infrastructure accounts for 8 percent

Lax Risk Mangement?

When asked, whether the extent of under-reporting suggests lax risk-management processes at the bank, the management pointed to the choice of industries that the bank had lent to and the operational environment across those sectors.

Your question around risk management is a question that can be framed as - why did the watch list come up in the first place? It turns out that there are some choices there which are portfolio choices in terms of which industries and sectors one wanted to be in, for example infrastructure, power or iron and steel. Some of these sectors, over the years, have turned out to have significant issues from a macro perspective either in terms of government policies or in terms of commodity prices. Certainly there is another set of issues in terms of internal underwriting policies and control and governance. Needless to say, all of them are important and useful lessons that one needs to internalize as one constructs future portfolios.
Jairam Sridharan, Chief Financial Officer, Axis Bank

To be sure, the bank has enough buffers.

In terms of percentage of total loans, gross NPAs are at 4.17 percent compared to 2.54 percent at the end of the first quarter. Net NPAs are at 2.02 percent compared to 1.08 percent in the first quarter. These numbers are far better than the ratios reported by public sector banks. This is partly because Axis Bank, unlike its public sector peers, continues to grow its loan book. Advances in the second quarter grew 18 percent, helping keep the bad loan ratio in check.

Axis Bank also has a strong capital adequacy ratio of over 15 percent.

Even so, analysts say the bank’s track record in reporting and managing bad loans should give investors something to think about.

If everything is linked to the economy, then why should management exist and why should they be so highly paid?
Hemindra Hazari, Independent Equity Rsearch Analyst

Axis Bank is now pinning its hopes on amendments to the bad loan resolution mechanisms introduced by the RBI. Schemes like Strategic Debt Restructuring (SDR) and the Scheme for Sustainable Structuring of Stressed Assets (S4A) have failed to take off so far and banks are lobbying for changes to these rules to make them more usable.

“What the numbers finally look like will depend on resolution mechanisms. We are watching to see whether these resolution mechanisms take off,” said Sridharan.