By Karan Gupta

India Ratings and Research (Ind-Ra) has affirmed Axis Bank Limited’s (Axis) Long-Term Issuer Rating at ‘IND AAA’ with a Stable Outlook and Short-Term Issuer Rating at ‘IND A1+’. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Lower Tier-2 subordinated debt *

-

-

-

INR20

WD

Withdrawn (Paid in full)

Basel-III compliant Tier 2 bonds *

-

-

-

INR100

IND AAA/Stable

Affirmed

Basel III AT1 bonds *

-

-

-

INR70

IND AA+/Stable

Affirmed

* Details in annexure

The affirmation of Axis’s Long-Term Issuer Rating factors in its large pan-India franchise on both asset and liability sides. It is the third-largest private sector bank with about 5% market share in terms of advances. A diverse business mix as reflected in a well-spread out loan portfolio with more than half of it being granular retail is also supportive of the ratings. The bank’s focus on the liability side has resulted in a stable funding profile with current and savings account (CASA) ratio at 41.2% in 4QFY20, at median levels within its peer group. Furthermore, the existing capital buffers and the ability to raise capital are factored into the ratings. 

The Stable Outlook reflects Ind-Ra’s expectation that, even in the current economic situation which is impacted by the measures taken by the authorities to contain the spread of the COVID-19 pandemic, Axis’ reasonable capital buffers, strong provision coverage ratio (PCR) and additional provisions which are not included in PCR would provide cushion against any near term shocks. However, successive quarters of elevated fresh slippages -resulting in high credit costs and thereby losses resulting in material impact to Tier I capitalisation will be a key monitorable in the near term.

For AT1 instruments, the agency considers the 'discretionary component', 'coupon omission risk', and the 'write-down/conversion risk' as the key parameters to arrive at the rating. The agency recognises the unique going-concern loss absorption features that these bonds carry and differentiates them from the bank's senior debt factoring in a higher probability of an ultimate loss for investors in these bonds. 

KEY RATING DRIVERS

High PCR & Additional Provisions Aid amid Lockdown: The agency had highlighted in its FY21 Banking Outlook that slippages from the corporate segment could decline, and that the agriculture, MSME and retail segments might witness continuing asset quality pressures. However, with the prevailing COVID-19 situation, the agency believes that certain corporate sectors would be impacted severely, despite borrowers opting for a debt moratorium. The absence of economic activity for an extended period of time is likely to result in a significant loss of income for a large cross section of the society, which is likely to result in pressure on cash flows, leading to deterioration of the asset quality for the overall banking industry. The agency believes that unsecured lending to borrowers in the informal segment, which accounts for a significant share of cash collection, would see the maximum asset quality impact in the near term. 

Axis has been reporting large provisioning requirements resulting from significant deterioration in its corporate asset quality since FY17, resulting in thin pre-provision profitability buffers. However, Axis’s reported gross NPAs at 4.86% in 4QFY20 have been on a declining trend over the last eight quarters (FY19: 5.26% FY18: 6.77%; FY17: 5.04%; FY16: 1.67%). Fresh slippages have stabilised largely, with a significant reduction in the corporate segment and the ‘BB’ and below corporate book reducing to about 1.1% of the gross customer assets in 4QFY20 from 7.3% in 1QFY17. The focus on building a quality book continues with incremental additions in higher rated categories, resulting in a higher share of ‘A-’ and above rated entities in the overall mix of the corporate and SME advances. While uncertainty prevails around COVID-19 related challenges on asset quality, a strong PCR at 69.0% along with additional provisions of INR59.8 billion (not included in PCR and constituting 63.9% of net NPA) could provide buffers, if the credit costs remain elevated. 

Rising Proportion of Granular Loans in Portfolio:
Axis continues to grow its retail portfolio, with 24.2% yoy growth in 4QFY20 loan book as against the overall advances growth of 15.5% yoy. The retail book now constitutes 53% of the total advances (FY19: 50% FY18: 47%; FY13: 27%) with multi-product diversification. Over the years, Axis has seen a shift in its retail portfolio with a decline in the contribution of home loans and rural lending (4QFY20: 47%; FY13: 72%). Auto loans have marginally increased their share from 11% to 13% over the same time frame. Personal loans, loans against property, credit card, small business banking and others are the segments that have grown their contribution to 40% in 4QFY20 from 17% in FY13. With 47% of the retail asset being sourced through branches, the strategy to increase the number of branches further (4QFY20: 4,528) augurs well for the growth of the retail book.

Axis’ SME book has slowed down since 2QFY20 with a yoy decline as against growth of over 20% yoy in the past. The agency views this as a positive as it holds a cautious view on the asset quality of SMEs which is likely to further get impacted by the COVID-19 situation. Growth in the corporate advances segment has picked up (4QFY20: 11.3% yoy) with the bank focusing on improving the quality of the book and increasing share of shorter term loans, which could lead to better portfolio quality, but pressure segment margins.
 

Liability Engine Continues to Perform, but Pace Needs to Return: Axis’
CASA ratio stood at 41.2% in 4QFY20, with CASA and retail term deposits growing at 8.3% yoy and 27.4% yoy respectively, in comparison to the overall deposit growth of 16.7% yoy. The share of non-retail term deposits increased to 19.2% in 4QFY20 from 15.9% in 4QFY18, but was largely stable in comparison to 4QFY19 at 19.4%. Cost of funds has improved by 49bp since 4QFY19, with Axis reducing savings bank account and term deposit rates. However, concentration in deposits remains high in comparison to ‘AAA’ rated peers, with the top depositors constituting 11.8% of the overall deposits in FY19. Furthermore, the growth of wholesale funds considered for liquidity coverage ratio calculations has been higher than that of comparable peers over 4QFY19-4QFY20.  

Healthy Capital Buffers:
Capitalisation for Axis is at healthy levels with a common equity tier I capital of 13.34% and a total capital adequacy ratio of 17.53%. Furthermore, it has the ability to raise equity capital from the markets – raised INR113 billion through a preferential allotment (INR87 billion raised in FY18 and INR26 billion in May 2019) and INR125 billion through a qualified institutional placement n FY20. The agency estimates that Axis is in a comfortable position to absorb elevated levels of asset quality stress. The proportion of risk weighted assets to total assets stood at 67% in FY20 (FY19: 69%; FY18: 75%; FY17: 79%) and the agency believes that a further release of capital by bringing down this ratio significantly is unlikely.  

Liquidity Indicator – Adequate:
Axis maintained a cumulative funding gap of 10.7% in the up to one-year bucket as a percentage of the total assets at end-4QFY20. Axis also maintains 22.2% of its total assets in balances with the Reserve Bank of India and in government securities, to meet its short-term funding requirements. In addition, the bank had a comfortable liquidity coverage ratio of 112% in 4QFY20, sufficiently above the regulatory requirement of 100%.

Likely Extension of FY22 Target of Return to 18% ROE:
The senior leadership at Axis continues to witness multiple changes with the appointment of a new retail banking head, chief risk officer, chief financial officer and Head of Banking Operations and Transformation, which the agency views positively. While the management has temporarily stopped giving guidance due to the COVID-19 situation, the agency believes that the target of achieving a return on equity (ROE) of 18% by FY22 (FY20: 2.1%; FY19: 7.2%; FY18: 0.5%; FY17: 7.2%) could take longer than expected.  However, if the target is achieved, it will ensure the return of Axis to its longer-term growth and profitability trajectory. Ind-Ra believes that variations in credit costs are a key monitorable, as the achievement of the 18% ROE target is largely hinged on a reversion of credit costs to below long-term average of 110bp. 


RATING SENSITIVITIES

The Outlook could be revised to Negative, if the asset quality starts deteriorating sharply and credit costs are high on a sustained basis. The ratings could be downgraded if there is a material impact to Tier I capitalisation levels with CET I capital falling below 11% on a sustained basis, net NPA to CET I capital rising sharply higher than comparable peer group, significant erosion of franchise – reduction of deposits or advances market share on a sustained basis, or a weakening of the relative competitiveness in the banking space. Weakened liquidity or funding profile may also result in a negative rating action. 


COMPANY PROFILE

Axis was established by government-owned institutions in 1994 and was known as UTI Bank till August 2007. It is the third-largest private sector bank in terms of advances as well as deposits. At end-FY20, net advances for the bank stood at INR5,714 billion. The bank had a pan-India presence with a network of 4,528 domestic branches at end-FY20.

FINANCIAL SUMMARY

Particulars

FY20

FY19

Total assets (INR billion)

9,152

8,010

Total equity (INR billion)

849

667

Net income (INR billion)

16.3

46.8

Return on assets (%)

0.20

0.63

Common equity tier 1 (%)

13.34

11.27

Capital adequacy ratio (%)

17.53

15.84

Source: Company, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

8 April 2019

20 February 2018

14 November 2016

Issuer rating

Long-term/Short-term

-

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

Lower Tier-2 subordinated debt

Long-term

INR20

WD

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Basel-III compliant Tier 2 bonds

Long-term

INR100

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Basel III AT1 bonds

Long-term

INR70

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

ANNEXURE

Issue Type

ISIN

Date of Issuance

Coupon rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Lower Tier-2 subordinated debt

INE238A08310

16 June 2009

9.15

16 June 2019

INR20

WD (Paid in full)

 

 

Basel-III compliant Tier 2 bonds

INE238A08393

27 May 2016

8.5

27 May 2026

INR24.3

IND AAA/Stable

Basel-III compliant Tier 2 bonds

INE238A08419

23 November 2016

7.84

23 Nov 2026

INR18

IND AAA/Stable

Basel-III compliant Tier 2 bonds

INE238A08435

15 June 2017

7.66

15 June 2027

INR50

IND AAA/Stable

Total utilised

INR92.3

Total unutilised

INR7.7

Basel III AT1 bonds

INE238A08427

14 December 2016

8.75

Perpetual

INR35

IND AA+/Stable

Basel III AT1 bonds

INE238A08443

28 June 17

8.75

Perpetual

INR35

IND AA+/Stable

Total utilised

INR70


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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Analyst Names

  • Primary Analyst

    Karan Gupta

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001744

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121