Axis Bank's earnings slump 43% to US$190m in Q1

No thanks to higher NPL provisioning.

According to Maybank Kim Eng, higher NPL provisioning dragged 4Q net earnings down by 43% to INR12.2b (US$190m). Slippages at INR48b (US$748m) or 5.3% of loans were high, against historical average of 2%. ROE of 7% was an all-time low. Its FY18 outlook could be compromised by elevated credit costs, NIM compression and weak loan growth.

Here's more from Maybank Kim Eng:

4Q gross NPLs at 5.5% were slightly lower than 3Q’s 5.7%. AXSB recognised INR17b (US$265m) of cement-sector loans as NPLs. It made a 25% provision for these, with the sector now included in the bank’s watch list. The amount in this watch list now totals INR95b (US$1.5m) or 2.5% of loans. We think a substantial portion can morph into NPLs in FY18. Management raised its credit-cost guidance to 1.75-2.25% for FY18; our forecast is at the upper end of this guidance.

More positively, AXSB’s retail loan growth was 21% YoY. These loans now form 45% of its lending mix. CASA deposits also grew 26% YoY, lifting its CASA ratio by 4ppts YoY to 51%. Under pressure from competition, NIM shed 14bps YoY to 3.8%. We expect a 15-20bp fall in FY18E.

We think FY18 is going to be another tough year for AXSB. Elevated credit costs and NIM compression could keep its return ratios low. We see continued selling pressure until its corporate NPL cycle stabilises.