The shares of Axis Bank fell nearly 5 per cent on Friday in reaction to weaker than expected Q3 FY25 results, released after market close on Thursday. What are the key takeaways?

Muted balance sheet growth

Axis Bank’s deposits grew 9 per cent year on year. This is less than the deposit growth rate at the system level, which came in at 9.8 per cent. Deposit growth at the system level has actually fallen from the 11.8 per cent year-on-year growth seen in Q2 FY25, impacted by liquidity tightness in the system. Axis Bank has also been focusing on improving the quality of deposits in terms of higher granularity to aid reduction in outflow rates.

Its growth in advances came in at 8.8 per cent, which is lower than system-level growth of 11.2 per cent. The bank has been experiencing credit-quality stress in its unsecured retail book – the personal loan (PL) and credit cards (CC) portfolio to be specific. These portfolios account for 7.5 per cent and 4.3 per cent of the overall loan book. It has stuck to its tightened underwriting, and this has caused lower growth in Q3 compared with Q2 of FY25. The year-on-year growth in PL and CC in Q3 was 16.7 per cent and 8.2 per cent respectively, while the same in Q2 was 23.3 per cent and 22 per cent respectively. New card issuances were scaled back from 1.06 million cards in Q2 to 0.68 million in Q3. Loan growth in the focused segments have been higher than the overall loan growth though. Small business banking, SME and mid-corporate portfolios (22.7 per cent of loan book) grew at 19.9, 14 and 15 per cent respectively.

The bank now operates at a credit-deposit ratio (CDR) of 92.6 per cent, up from 92 per cent as of Q2 FY25. Though the management finds such levels comfortable, if increase in CDR persists, in case deposit growth doesn’t pick up, it could have a bearing on advances growth, going forward.

Asset-quality woes

The strain in the unsecured pocket continued in the quarter due to over-leveraging. Though headline NPA ratios stayed flat, slippages remained elevated. Fresh slippages during the quarter rose 22 per cent sequentially on an absolute basis. About 91 per cent of the fresh slippages during the quarter were from the retail book, where PL and CC books are housed.

The bank has stuck to its conservative policy of providing for delinquent unsecured accounts at 100 per cent on a 90-DPD (days past due) basis. This meant provisions were up and so was credit cost. Provisions on sub-standard assets (absolute basis) were up 216 per cent and 52 per cent year on year and quarter on quarter.

The management noted that the incremental exposures in the unsecured pockets are behaving well. This needs to be taken with a pinch of salt as the vintage (repayment track record) on these accounts is fairly low. Collection resources have also been beefed up. Credit quality of the microfinance book (0.6 per cent of loan book) too remained under pressure. The management reckoned that the current state of stress in the unsecured and MFI portfolios is not close to a peak and might worsen. Though early, this could be suggestive of the performance of these segments in other banks too. However, there could be exceptions such as Kotak Mahindra Bank, which reported delinquencies plateauing in its CC book and tapering down in its PL book. Large private banks such as HDFC Bank and ICICI Bank remained unscathed from the stress in unsecured segment as of Q2 FY25 and could fare better in Q3 too. Investors are better off watching out for management commentaries, before taking exposures.

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