Axis Bank's Asset Quality Dip In Q1 Is Neither Seasonal Nor Normal

This is the first time in three years that the bank has seen a spike in its non-performing asset ratio in the first quarter of a financial year.

As of June 30, the gross NPA ratio for the lender rose 11 basis points sequentially, while the net NPA ratio weakened by 3 basis points. Provisions for the quarter nearly doubled year-on-year to Rs 2,039 crore. Axis Bank's credit cost for the first quarter stood at 1.19%, compared with 0.68% in March and 0.74% in June 2023.

While addressing the press on Wednesday, the bank's Chief Financial Officer, Puneet Sharma, said that this was largely because of seasonality in the retail agricultural lending business.

"Sequentially, obviously, there is seasonality so one has to build that through...Net credit cost annualised for Q1 FY25 is not indicative of our expectation for full-year credit cost, as Q1 annualised credit cost has been impacted by seasonality and a couple of timing differences," Sharma told reporters.

The "couple of timing differences" he refers to are the delays in upgradation and recovery of corporate accounts, which have resulted in elevated slippages during the quarter. In the June quarter, gross slippages stood at Rs 4,793 crore, according to disclosures made by the bank. These slippages were higher by 38% quarter-on-quarter and 20% from a year ago.

Later, on a call with analysts, Sharma said that apart from the retail agriculture loans, 55% of the year-on-year increase in credit cost is attributable to lower upgrades and recoveries from NPA accounts.

In the total slippages for the quarter, retail loans accounted for Rs 4,229 crore, commercial banking slippages were at Rs 178 crore and those from wholesale banking were at Rs 386 crore.

The lender has witnessed a rise in unsecured loan risks in some parts of its retail business, Sharma said. However, this rise was not material and well within the bank's expectations.

In a note on Wednesday, Bernstein said that it has increased its credit cost estimates for Axis Bank by 10-15 bps for the next two years to 65 bps.

On Thursday, the stock closed 5% lower at Rs 1,175.35 per share on the bourses.

Since FY17, there have been four instances where NPA ratios for Axis Bank have spiked on a sequential basis in the first quarter. These instances were bookended by severe macroeconomic and regulatory risks, which plagued the entire banking system.

In June 2016, in the aftermath of the Reserve Bank of India's asset quality review, Axis Bank saw a sharp rise in bad loans. In the preceding quarter of March 2016, Axis Bank highlighted Rs 22,000 crore worth of corporate loans as part of a watchlist. These were accounts that had shown operational and financial weakness and were at high risk of becoming NPAs.

Between March 31, 2016 and June 30, 2016, the bank's gross NPA ratio jumped 87 basis points to 2.54%. Net NPA too rose 38 basis points to 1.08%.

The next such instance was in June 2017, when the net NPA ratio rose 19 basis points sequentially. In April 2017, the RBI reviewed its asset recognition and classification norms, where provisioning requirements for select sectors were increased. Under those new norms, standard asset provisioning would be raised to 1% by Axis Bank for sectors including power, infrastructure, telecommunication and iron and steel.

The other instance of bad loan ratios rising in the first quarter of the fiscal year was in June 2021, when restrictions were reintroduced after the second wave of COVID-19. Gross and net NPA ratios went up 15 basis points sequentially.