Axis Bank's massive bad loan cleanup signals fresh start

The bank has diversified its loan mix to retail and SMEs to avoid poor asset quality.

Axis Bank has embarked on a widespread clean up of its gross non-performing loans which rose steeply from 1.5% to 7.5% in FY18, according to Maybank Kim Eng.

Asset quality was particularly poor in power, infrastructure, construction and metals amidst unfavourable business conditions like shortages, difficulties in securing environmental clearance and low selling prices, hitting corporate banks like AXSB the most.

In Q4, most of the bank’s corporate loans went under restructuring and were recognised as NPLs which partially contributed to a loss of $330m (INR22b).

Also read: Can Indian banks weather the last wave of bad loan resolution? 

However, the bank’s massive cleanup is setting itself for a fresh start as it moves away from corporate loans by diversifying into retail and SME segments which rose 20% YoY and the proportion of which increased from 54% in 2016 to 60% in 2018.

“AXSB maintained provision coverage at 52% for its NPLs. In our view, the cycle may be nearing an end as most stress loans have moved to NPLs,” Maybank Kim Eng noted.

Earnings are also set to rebound from the second half of 2019 as credit costs normalise and loan growth within 16-18% range is expected for the next two years.