Post Axis bank Q2 2016 results: Will private Indian banks disclose truer picture of their balance sheets ?

I had written a post in Feb-2016 titled as: How is it that Indian private sector banks don’t have NPAs and losses? The post was based out of a discussion where one was told that private banks are hiding much more than they are revealing. How is it that given the same set of companies and business environment, losses are only made by public sector banks and not private ones?

Those who are privy to the working of Indian loan market tell you that usually the largest and most worthy deals (hopefully) first go to public sector banks (read SBI most of the time). The public sector banks are able to offer the lowest rates given their much lower cost of deposits. It is only when public banks either reject or do not give the full amount, deals come to private banks. So private banks usually get the raw side of banking market in India. So, if bad loans indeed happen, there is a case for suffering being higher on private banks. But here we actually have a case of private banks suffering much lesser whereas it should be atleast equal to public banks if not higher.

It seems the chickens are coming home to the roost for private banks as well. Axis Bank reported a huge loss in Q2 2016 report:

If there were any doubts that banks in India, private and state-owned, were hiding bad loans in the depths of their balancesheets, those doubts should now be vanquished. On Tuesday, Axis Bank reported quarterly earnings confirming how deep the problem was, atleast at that one bank.

According to the earnings report, loans worth Rs 16,379 crore have been classified as bad loans or gross non-performing assets (NPA) by the bank. On a quarter on quarter basis, bad loans jumped 71 percent. But that is not even the shocker. The real eye-opener is the way bad loans have moved in the last four quarters.

In the second quarter of the last fiscal, Axis Bank had classified Rs 4,451 crore as bad loans.

The bank is still not done cleaning its books and has put Rs 13,789 crore in loans on its stressed loans “watchlist”. At the start of the fiscal year, Rs 22,628 crores were on the watchlist. At the time, the bank’s management said that it expects about 60 percent of these loans to slip into the non performing category.

In the six months of the fiscal so far, 40 percent of the watchlist has already turned bad. In a post earnings conference call with the reporting media, Jairam Sridharan, chief financial officer at the bank said that he now expects “materially more” than 60 percent of the watchlist to turn bad. The bank calls this the “net dissolution rate.”

Assuming materially more refers to a conservative estimate of 70 percent of the watchlist- that suggests atleast another Rs 6,700 crore in loans will be added to the gross NPA number over the next two quarters. That would take the gross NPA number to over Rs 23,000 crore – more than five times what it was before the Reserve Bank of India (RBI) conducted an asset quality review (AQR) of bank books.

Is it poor risk management?

When asked, whether the extent of under-reporting suggests lax risk-management processes at the bank, the management pointed to the choice of industries that the bank had lent to and the operational environment across those sectors.

“Your question around risk management is a question that can be framed as – why did the watch list come up in the first place? It turns out that there are some choices there which are portfolio choices in terms of which industries and sectors one wanted to be in, for example infrastructure, power or iron and steel. Some of these sectors, over the years, have turned out to have significant issues from a macro perspective either in terms of government policies or in terms of commodity prices. Certainly there is another set of issues in terms of internal underwriting policies and control and governance. Needless to say, all of them are important and useful lessons that one needs to internalize as one constructs future portfolios.” —Jairam Sridharan, Chief Financial Officer, Axis Bank

It will be interesting to see this private banking space now..


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