September 2017 quarter. NIM is the difference between yield on advances and cost of funds.
Even as cost of funds bottomed out at 5.08 per cent in Q3, more accounts (43 per cent of the loan book) falling into the MCLR (marginal cost of fund-based lending rate) regime and an increase in better-rated corporate accounts (which tend to give less pricing bandwidth for the bank), led to compressed NIMs in Q3. However, this is within the 20 basis point (bps) year-on-year decline the bank had said it was expecting, earlier this financial year.
Jairam Sridharan, chief financial officer, says NIM could see a slight uptick as more (corporate clients) migrate from the bond market to banking channels for working capital needs. The quarter was also helped significantly by 21 per cent year-on-year growth in the loan book, the bulk from the retail (small borrower) segment.
The star highlight in Q3 was sharp relief on asset quality. After at least six quarters of increase in the pool of bad loans, gross non-performing assets (NPAs) fell to Rs 250 bn, as against Rs 274 bn in Q2. Consequently, the gross NPA ratio fell to 5.3 per cent from 5.9 per cent in the earlier quarter; the net NPA ratio was 2.6 per cent; down from 3.1 per cent in Q2.
The gross NPA number is a tad higher by six bps over the year-ago period but, as Sridharan says, “New stress is not getting formed.” Three factors suggest the bank is perhaps at the cusp of ending its bad loans' spell.
First, accretion of bad loans or slippage reduced by half sequentially to Rs 44.3 bn. “The worst in terms of fresh slippage is behind us. We are entering the last stage of recognition and the early stages of resolution,” Sridharan said.
Recoveries were at a record high of Rs 40.1 bn, reiterating Sridharan’s confidence. Substantial cash recovery from an account in the information technology sector and a loan upgrade in the steel sector helped Axis demonstrate strong recovery in Q3. Provisioning for bad loans dipped to Rs 281 bn, from Rs 379 bn a year before.
The provision coverage ratio, consequently, improved to 66 per cent. “Axis Bank’s watch list has substantially declined to 12 per cent and is now only 1.3 per cent of the loan book (as compared to 6.7 per cent in March 2016). This indicates the bank is approaching the end of recognition of stressed loans and gives comfort to credit cost outlook for the next four to six quarters,” says Asutosh Mishra of Reliance Securities.
The bank remains cautious on Rs 16.1 bn of loans with weak credit rating (BB or lower). Likewise, with 25 per cent of the watch list (or assets which could turn bad) from the power sector, Sridharan notes all the stress isn’t fully visible yet and he expects trouble, if any, from that sector. What is comforting is the capital adequacy ratio, which improved to 17.5 per cent in Q3, thanks to Rs 11.6 bn of fund raising (including Rs 8.7 bn of equity capital), boosting the balance sheet.