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Axis Bank: Asset quality improves in Q2 but sales to ARCs high

Given that sales to asset reconstructors are never fully in cash, a protracted slowdown could mean that some bit of losses from these loans could come back to bite Axis Bank in the coming quarters. Photo: Priyanka Parashar/Mint

Given that sales to asset reconstructors are never fully in cash, a protracted slowdown could mean that some bit of losses from these loans could come back to bite Axis Bank in the coming quarters. Photo: Priyanka Parashar/Mint

Axis Bank Ltd seems to have acquired the metronomic rhythm of HDFC Bank Ltd when it comes to net profit growth. In the last seven quarters, including the three months ended September, its net profit has grown 18-19%. It doesn’t command the valuations of its larger peer simply because its return ratios are lower and bad loan ratios higher.

The September quarter numbers offer some hope. The bank’s slippages were Rs.583 crore, about half of that seen in the June quarter. Its management also reiterated its guidance for curbing slippages at less than Rs.5,200 crore this year. Recoveries and upgrades were higher at Rs.180 crore compared with Rs.119 crore a quarter ago. Write-offs were lower at Rs.203 crore compared with Rs.925 crore in the June quarter.

But note also that the bank also sold Rs.1,850 crore loans to asset reconstruction companies (ARCs). That number is a bit on the higher side and indicates the underlying stress for banks in general. Given that sales to asset reconstructors are never fully in cash, a protracted slowdown could mean that some bit of losses from these loans could come back to bite Axis Bank in the coming quarters.

With restructured loans at another 2.8% of advances, total stressed assets are close to 4.2% of the loan book. That is not high as those of state-owned lenders, but is the key reason for investor wariness about the stock. Moreover, about one-fifth of its assets are exposed towards risky sectors such as infrastructure, power generation and distribution and metal, which are not in the best of health owing to the economic slowdown and commodity price meltdown.

That said, the bank continued to grow its loans at a fast pace of 23%. Retail advances grew 27% from a year ago. Corporate loans also grew at 25%, boosting fee income which rose 14%. But a fall in net interest margins to 3.85%, down 12 basis points from a year ago, meant that net interest income grew at a slower pace than the loan book. One basis point is 0.01%. Non-interest income growth was only 4.8%, because trading profit during the quarter fell to Rs.168 crore compared to Rs.271 crore a year ago.

After adjusting for one-offs and treasury income, core operating profit grew 21%. That’s the reason why Axis Bank stock still commands decent valuations, with the stock trading at 2.4 times its book value for the current fiscal year.

The writer does not own shares in the above-mentioned companies

[“source -livemint”]

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