Banking is a tough business, especially when a bank sees its deposits growth outpacing its advances growth. Axis Bank—one of India’s leading private lenders—faced this problem in the quarter ended June 2019. While advances grew by an annual 12.7% to touch ₹4,97,276 crore in the June quarter compared to ₹4,41,074 crore a year ago, the bank’s deposits grew 20.9% from ₹4,47,079 crore to ₹5,40,678 crore.

But that is not the sole reason why analysts are not celebrating the quarterly performance of Axis Bank, led by Amitabh Chaudhry, who took charge from Shikha Sharma on January 1. In fact, if the numbers are read in isolation, 95% annual growth in net profit calls for a celebration in the challenging times that banks in India are facing. Axis Bank posted a profit of ₹1,370 crore in the June quarter, up from ₹701 crore a year ago. The June 2018 quarter profit figure came after Axis Bank’s only quarterly loss in the past five years at ₹2,189 crore in March 2018.

Analysts have a strong reason to not cheer. In the quarter ended December 2018, Axis Bank’s profit grew 112.8% and 131.3% on a quarterly and annual basis, respectively. And, there were expectations that the bank’s profits would be significantly higher than what it reported. Higher provisioning brought about a fall in expected net profit. From ₹3,338 crore in the June 2018 quarter, provisions grew over 14.2% to ₹3,815 crore in the June 2019 quarter. On a quarter-on-quarter basis, provisioning saw a 40.7% rise from ₹2,711 crore in the March 2019 quarter.

On the non-performing assets (NPAs) front, the lender registered an annual decline of 9.9% in its gross NPAs from ₹32,662 crore in the June 2018 quarter to ₹29,405 crore now. This reflected in the gross NPAs as a percentage of advances, which came down to 5.25% in the June quarter compared to 6.52% a year ago. Net NPAs registered a 25.9% annual decline from ₹14,902 crore in the June 2018 quarter to ₹11,307 crore, while net NPAs as a percentage of advances came down from 3.09% to 2.04% in the same period.

In a release, Axis Bank said that during the quarter it made a change in internal guidelines to continue increasing conservatism in its provisioning. “The bank has now introduced a process of making systematic provisions towards non-fund based facilities in NPA and in stressed accounts outside NPA,” the release said. “The bank has now made multiple interventions over the last few quarters to create additional provisions outside regular NPA provisions,” it added.

Kotak Institutional Equities has a ‘reduce’ rating on Axis Bank with a fair value (target price) of ₹700–revised from ₹730 earlier–and calls this an underwhelming quarter. “The performance on asset quality was not on expected lines this quarter as we were looking for a steady improvement,” analysts led by M.B. Mahesh wrote in a note. “We like all the changes and decisions taken by the senior management but wait for a better entry price on this bank.”

Mumbai-based Emkay Global Financial Services, which has a ‘buy’ rating with a one-year target price of ₹900 on Axis Bank, has cut its earnings estimates by 4% and 2% for FY20 and FY21, respectively, upon “factoring in lower loan growth and elongated credit cost normalisation cycle, given the rise in fresh stress”. “Key risks to our call include higher NPAs outside the stress pool, slower-than-expected ramp-up of retail asset/liability and slower RoE (return on equity) trajectory than guided,” Emkay Global analysts Anand Dama and Shreesh Chandra wrote in their research note.

On July 20, Axis Bank’s board had approved raising funds aggregating up to ₹18,000 crore subject to shareholders’ nod. “We believe capital raise, if successful around the current price, will be a positive trigger for the stock as it would significantly strengthen the balance sheet,” said Rajiv Mehta and Sachit Damani, analysts with Mumbai-based YES Securities. At the current price of ₹707, Mehta and Damani expect 17% upside in Axis Bank shares with their 12-month target price of ₹830.

While the banking sector continues to operate under stress, Axis Bank will have to show better operational metrics beyond net profit.

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