ADVERTISEMENT

Axis Bank Reports Lowest Quarterly Profit In More Than Nine Years

Axis Bank’s asset quality deteriorates significantly in the second quarter. 

An Axis Bank branch in Mumbai (Photographer: Dhiraj Singh/Bloomberg)
An Axis Bank branch in Mumbai (Photographer: Dhiraj Singh/Bloomberg)

Axis Bank Ltd. reported a sharp fall in its second quarter earnings as bad loans surged, forcing the bank to set aside more funds as provisions. The worst may not be over with nearly Rs 13,800 crore in loans still classified under the bank’s “watch list” for stressed assets.

Net profit plummeted 83.3 percent to Rs 319.1 crore in the quarter ended September, according to the company’s financial statement on stock exchanges. The consensus estimate of analysts tracked by Bloomberg was a net profit of Rs 1,626 crore. The quarterly profit is the lowest since the three-month period ended December 2007.

The primary reason for the sharp fall in net profit was an increase in bad loans, which skyrocketed to Rs 16,378 crore in the second quarter, a 71 percent increase compared with the first quarter of the current fiscal. At this time last year, only Rs 4,451 crore in loans were classified as gross NPAs, suggesting that the extent of under-reporting was significant.

As a result of the increase in the bad loans, provisions rose 71 percent sequentially to Rs 3,622.7 crore.

Axis Bank Reports Lowest Quarterly Profit In More Than Nine Years

The “Watch List”

In April, the Axis Bank management placed loans worth around Rs 22,600 crore on a watch list. The list, the management had then said, contained loans that were vulnerable but classified as standard. At the time, the bank had said that around 60 percent of these loans were likely to slip and become non-performing over the next few quarters.

In the first quarter of the year, loans worth around Rs 2,300 crore from the watch list became non-performing assets. In the quarter ended September, loans worth another Rs 7,287 crore slipped from the watch list into the bad loans category.

What’s more, Jairam Sridharan, chief financial officer of Axis Bank, said the total slippage from the watch list is likely to be “materially” above the 60 percent mark that was originally forecast.

So far, at the end of September, around 39 percent of the watch list has slipped into the bad loan category.

As a percentage of total loans, gross NPAs rose to 4.17 percent from 2.54 percent at the end of the first quarter. Net NPA also rose to 2.02 percent from 1.08 percent.

Axis Bank Reports Lowest Quarterly Profit In More Than Nine Years

Why The Sudden Rise In Bad Loans?

The sharp increase in bad loans during the quarter was because resolution mechanisms prescribed by the RBI did not work, the bank’s management said at a press conference on Tuesday.

Over the last six months we have been working on trying to see resolutions for some of these (loans) based on tools that the RBI had provided. Some of it has not materialised in this time frame; it has been slower than what we had expected. And the large slippage during this quarter has been driven by a few accounts, which have been large.
Srinivasan Varadarajan, deputy managing director, Axis Bank

Will The Pain Continue?

“Slippages for the second half should be lower,” said Varadarajan despite the guidance that the slippage from the watch list could be more than the previously estimated 60 percent.

According to the management, the large, and more vulnerable accounts from the watch list have slipped in the first and second quarter of the year. Now, the largest loan is not more than 10 percent of the current watch list size.

The bank is likely to make aggressive provisions in the remainder of the financial year, with the goal of bringing its provision coverage ratio to 70 percent. As on September 30, Axis Bank’s provision coverage ratio stood at around 60 percent, said Sridharan.

As a result of the higher provisions, Axis Bank will miss its earlier credit cost guidance of 125-150 basis points for the entire financial year. For the full financial year, Axis Bank is likely to bear a credit cost of around 300 basis points, said Sridharan.

Net interest income at the bank rose 11.1 percent year-on-year to Rs 4,513.87 crore in the second quarter. Net interest margin fell to 3.64 percent from 3.8 percent in the previous quarter, largely on account of the impact of writing back interest earned on loans classified as non performing assets.