Axis Bank’s asset quality deteriorated in the first quarter of the current financial year due to the sustained elevation in retail unsecured slippages and a change in the classification metric for non-performing assets (NPA). The first among private sector banks to declare its results for the April-June quarter, Axis Bank also saw a rise in provisions owing to the technical impact, weighing on the bottomline.
Net profit for the private sector lender fell 4% on year and 18% sequentially to ₹5,806 crore for the reporting quarter. Adjusted for the technical impact, the profit after tax would have been ₹614 crore higher.
Axis Bank said it undertakes an annual internal inspection in January-February every year, where it reviews internal benchmarks against industry best or most prudent practices. This year’s review revealed that one bank was following tighter underwriting norms for certain loan categories, which led to Axis Bank’s decision to change its practices on asset classification and upgrade criteria for certain loans, chief financial officer Puneet Sharma said in the post-earnings conference call.
“The purpose of the benchmarking is to make sure that our balance sheet is resilient and can withstand any credit cycle that comes our way,” Sharma said, adding that the bank had previously followed similar changes in policies for provisioning of its commercial banking portfolio and the decision to take 100% provisions against unsecured retail loans.
NPA norms
He explained that the classification of NPA generally takes place on the basis of the number of days the loan has been overdue, which is prescribed by the Reserve Bank of India (RBI). The second ‘qualitative’ criterion, which is up to each bank’s discretion, is what has been revised for the bank. The resultant ‘technical impact’ pertained largely to one-time settled accounts across product segments, and cash credit and overdraft products, typically offered to retail customers, especially retail agri customers.
“Conceptually, either it’s preponing recognition of NPLs because you’ve been more conservative, or we are delaying recognition of recovery over a period of time. Because the stock of our overall book is so large, you’re seeing the impact of that in this quarter to be quite large. We do believe that the economic impact over a period of time will be minimal, and from here on, it will start to come down,” managing director and chief executive officer Amitabh Chaudhry said.
Axis Bank’s advances grew 8% on year and 2% on quarter to ₹10.6 trillion as of 30 June. Retail loans were 6% on year and at ₹6.2 trillion, comprising 59% of net advances, and the share of secured retail loans was 72%. Personal loans grew 5% on year, credit cards by 2%, and rural loans by 5%.
Asset quality impact
Gross slippages for the quarter were ₹8,200 crore, of which ₹7,500 crore were from retail loans, ₹403 crore from commercial banking loans and ₹297 crore from wholesale loans.
Of the gross slippages, ₹2,709 crore were attributable to the technical impact, wherein the impact was highest in the retail segment at ₹2,165 crore, followed by ₹310 crore in the commercial banking business and ₹234 crore in the wholesale business.
As such, even excluding the technical impact, gross slippages for the quarter were at ₹5,491 crore, higher by 13 basis points on year and 20 bps on quarter. Around 25% of the slippages were from the agricultural portfolio, which usually sees cyclically higher delinquencies in the first and third quarters of a financial year. The rest of the slippages came entirely from unsecured loans, including some large accounts that may have been upgraded later in the quarter, Sharma said. He added that 29% of the gross slippages, excluding the technical impact, were from linked borrower accounts that were either standard when marked as bad loans or got upgraded again within the same quarter.
Further, 80% of the individual contracts that slipped because of the technical impact and continue to remain NPA as at the end of June, are fully secured. “Hence, given the security cover, we believe that economic loss due to technical impact will be minimal over the life of such contracts,” he said.
Provisions for the quarter were ₹3,948 crore, of which ₹821 crore were due to higher recognition of NPAs due to the change in norms.
The bank’s gross NPA ratio rose to 1.57% as of 30 June from 1.28% in the previous quarter and 1.54% in the previous year. The bank’s net NPA ratio, at 0.45%, also deteriorated from 0.33% in the previous quarter and 0.34% in the year-ago period. Adjusted for the technical impact, the gross and net NPA ratios were 1.41% and 0.36%, respectively.
“If we have to identify one marginal area of improvement for ourselves, recoveries and upgrades are what we can work on,” Sharma said. Loan recoveries and upgrades for the quarter were ₹2,147 crore, lower than ₹2,790 crore in the previous quarter. Recoveries from written-off accounts were at ₹904 crore, up 53% on year but flat on quarter.
Q1 results, Q1 financials, bank earnings, asset quality, provisions, NPAs, non performing loans, accounting change, loan growth, deposit growth, net profit
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