Axis Bank's profit rises 38% on lower provisions, but special foreign-currency deposits squeeze its margin

Axis Bank's quarterly profit rose 38%, helped mostly by lower provisions against a year-ago quarter that carried a one-time charge, while a surge of special foreign-currency deposits narrowed its lending margin and inflated its headline loan growth.

Lower provisions, partly a one-off comparison

Axis Bank said its standalone net profit for the July-September quarter, the second quarter of its fiscal year, rose 38% to Rs7,003 crore from Rs5,090 crore a year earlier. That is about $730 million at the exchange rate the bank used in its own presentation. The board approved the results at a meeting in Mumbai on Saturday, Oct. 17, and the bank filed them with India's stock exchanges the same day.

Most of the jump came from lower total provisions. Provisions and contingencies fell 52% to Rs1,694 crore from Rs3,547 crore a year earlier, and from Rs2,223 crore in the June quarter. The year-ago figure, however, included a one-time provision of Rs1,231 crore on standard loans, meaning loans that were still performing, and that charge did not recur. It accounts for about two-thirds of the Rs1,853 crore decline. Provisions set aside specifically for loan losses fell more modestly, to Rs1,564 crore from Rs2,133 crore.

The core business grew more slowly. Net interest income, the gap between what the bank earns on loans and pays on deposits, rose 12% to Rs15,371 crore. Fee income rose 6% to Rs6,381 crore. Trading income dropped to Rs85 crore from Rs498 crore a year earlier, so total other income slipped 1% to Rs6,531 crore. Operating expenses rose 9% from a year earlier and 11% from the June quarter to Rs10,819 crore. As a result, operating profit rose only 6% to Rs11,083 crore and was about 5% lower than in the previous three months.

Net profit also eased about 1.6% from Rs7,114 crore in the June quarter.

How the numbers compared with forecasts

In previews published a day before the results, Mirae Asset Sharekhan had forecast quarterly profit of Rs6,962.8 crore and Motilal Oswal had forecast Rs7,259 crore. The reported figure falls inside that range. Net interest income came in above both firms' forecasts of about Rs14,894 crore and Rs14,920 crore. Both brokerages had also expected the margin to narrow from the June quarter, partly because of the foreign-currency deposits described below.

The deposit window behind the margin dip

During the quarter Axis raised Rs1.02 trillion, or about $10.62 billion, of FCNR(B) deposits. These are foreign-currency term deposits from non-resident Indians, which the bank's presentation says it took in under a special Reserve Bank of India window. Of that amount, Rs438 billion was backed by loans from Axis's own international branches and Rs449 billion by standby letters of credit.

Those deposits pulled down the bank's lending margin. Net interest margin fell to 3.36% from 3.46% in the June quarter. Excluding the effect of the FCNR(B) deposits, Axis put the margin at 3.47%, roughly in line with the June quarter.

The same deposits also inflate the headline growth figures. Total advances rose 23% from a year earlier to about Rs13.74 trillion. Excluding loans linked to the FCNR(B) deposits, they rose 19.1%. Retail loans grew 16.4%, or 9.5% after taking out those loans. Period-end deposits rose 20.7% to about Rs14.52 trillion, and 17% excluding FCNR(B) deposits backed by the bank's own lending.

Bad loans kept falling

Gross non-performing assets fell to 1.16% of loans from 1.46% a year earlier, and net non-performing assets fell to 0.35% from 0.44%. New bad loans, which banks call gross slippages, were Rs4,762 crore in the quarter, down from Rs5,566 crore in the June quarter and Rs5,696 crore a year earlier. Annualized net credit cost fell to 0.45%.

The bank's common equity tier 1 ratio was 14.61%, and its total capital adequacy ratio was 16.27%. Annualized return on equity rose to 13.3% from 11.06% a year earlier.

What comes next

Subrat Mohanty, an executive director, told reporters on a media call that Axis will either use the foreign-currency money to replace "high cost deposits which come up for renewal" or use it to keep funding loan growth, Business Standard reported. He said the bank had already used some of it during the quarter to retire or replace such deposits.

Chief Executive Amitabh Chaudhry said in the release that the bank "built on our leadership in digital payments and secure banking" during the quarter. Axis is India's third-largest private-sector lender. Because it reported on a Saturday, investors get their first chance to trade on the results when Indian markets next open. The main question is how long the special foreign-currency deposits will keep weighing on the margin.