Axis Bank’s Profit Declines, Asset Quality Worsens In Third Quarter

India’s third largest private lender Axis Bank Ltd., reported a 73.4 percent decline in net profit for the third quarter, missing street estimates, as asset quality worsened, though at a slower pace than in the previous quarter.

The lender’s net profit in the October-December quarter fell to Rs 576.6 crore from Rs 2,175.3 crore in the corresponding quarter of the previous financial year, it said in a stock exchange filing. Operating profit for the bank increased 16.4 percent year-on-year to Rs 4,640.2 crore. Net interest income also increased 4.1 percent to Rs 4,333.7 crore, versus the same period in the last financial year.

The consensus of analysts polled by Bloomberg had pegged profit at Rs 831.8 crore and net interest income at Rs 4,595.4 crore.

Asset quality for the bank worsened as the gross non performing assets (GNPA) figure rose from 4.17 percent in the second quarter to 5.22 percent. The absolute GNPA stood at Rs 20,466.8 crore, 25 percent higher than the Rs 16,378.7 crore figure seen in the last quarter.

“Slippages have come off the peak, but they are still elevated,” said V Srinivasan, deputy managing director at Axis Bank. During the quarter, Axis Bank saw fresh slippages worth Rs 4,560 crore, much lower than the Rs 8,772 crore that slipped in the previous quarter.

Of the fresh slippages in the third quarter, Rs 2,579 crore came from the bank’s watch list. As a result, the watch list reduced by 20 percent and now stands at Rs 11,091 crore.

In April, the bank had placed loans worth Rs 22,600 crore on a watch list, and had said that around 60 percent of these would likely become non-performing assets over the next few quarters. After the sharp increase in non-performing assets in the second quarter, mostly on account of slippages from the watch list, the management said more than 60 percent of the watch list could eventually go bad.

At the end of the third quarter, as much as 51 percent of the watch list has slipped.

However, what will be more worrying for the bank, is that slippages from outside the watch list have increased. In the third quarter, net slippages outside the watch list stood at Rs 1,631 crore, most of which were corporate loans.

“Slippages from outside the watch list were more than we had anticipated over the past two quarters. And these are fairly old vintages–originating before financial year 2011,” said Jairam Sridharan, chief financial officer at the bank.

The loans from outside the watch list that slipped, worth Rs 975 crore, originated primarily from the iron and steel, and infrastructure and construction sectors.

The increase in non-performing assets necessitated higher provisions, which rose 4.8 percent to Rs 3,795.8 crore, quarter-on-quarter. This was higher than the Bloomberg consensus estimate and four times higher than the year-on-year figure.

The bank’s provision coverage ratio has been raised by 4 percentage points to 64 percent on account of higher provisioning.

Based on its estimates on asset quality, the management has also retained its guidance on credit cost for the financial year at around 300 basis points. For the quarter ended September, Axis Bank had a credit cost of 3.61 percent.

Axis Bank’s net interest margin for the quarter stood at 3.43 percent, down from 3.64 percent in the previous quarter. According to Sridharan, there was a margin compression of 33 basis points on account of one-time effects during the quarter.

The management estimates that margins compressed by 10 basis points because of the increase in deposits, which could not be deployed effectively because of lack of credit demand.

During the quarter, the bank raised Rs 3,500 crore by way of additional tier-I capital, pushing its capital adequacy ratio higher to 16.6 percent.

Demonetisation Impact

Surprisingly, Axis Bank saw deposits grow at 9.6 percent, which is slower than the 16.2 percent seen during the second quarter. Banks are expected to register a higher deposit growth in the October - December quarter, due to demonetisation.

Advances growth also slowed down to 10 percent, compared to a growth of 21 in the same period last year. Retail advances grew at 19 percent, while corporate credit grew 4 percent on a yearly basis. Small and medium enterprises advances grew by 5 percent.

The management said it has not seen an impact on asset quality on account of demonetisation, though this could play out over the fourth quarter. It is not, however, a cause for concern, because asset quality generally improves in the fourth quarter, especially in the retail and agriculture segments, Sridharan said.

The government's demonetisation move and its push for a digital economy led Axis Bank's digital channel usage to 82 percent year-on-year in value terms. It witnessed a 103 percent increase in transactions through its digital channel.

An earlier version of this article quoted the slippages at Rs 4,212 crore, as stated by Axis Bank in its earnings statement. The bank later corrected the number to Rs 4,560 crore. The copy has been duly updated.