servicing capabilities of many private power companies. Large companies continue to benefit from fresh lines of credit or other refinancing methods, which is probably ensuring lower default ratios.
NIM to decline gradually; shift to retail could impact loan yields: We expect NIM (net interest margin) to remain under pressure especially after short-term rates increased sharply in recent months and the shift in assets to the low-yielding retail segment. Its ability to transfer high costs is high as less than 10% of loans are fixed rate in nature (auto, personal loans and credit cards).
Book quality vulnerable to stressed companies: Axis Bank continues to report a fairly strong loan portfolio with low loan impairment (gross NPLs or restructuring). The management has maintained that the broad additions to NPLs/restructured loans and credit costs would be similar to those seen over the past few quarters. Half of Axis Bank’s loans to large companies, out of which 17% is to stressed sectors (metals, infrastructure), including power (5%). Out of the bank’s total funded exposure, 3% is to power at R97 bn and non-funded exposure is another R160 bn. As the commissioning cycle gathers pace, almost 50% of private companies in the power sector (25% of the total power-sector exposure) will probably not have sufficient cash flows to meet their debt and interest obligations, which places the bank at increased risk of deterioration in asset quality. We believe some of these companies will be able to refinance debt through foreign currency loans or access fresh lines of credit to replace maturing ones over the next few quarters, at least, thereby delaying stress in the bank.
Besides, the bank has moderated growth in loans to large companies to less than 10% over the past few quarters, against over 20% before FY12. The bank has also reduced concentration of loans to the top 10 sectors to 40% from 60% in FY11.
Retail business drives fee income growth: Axis Bank has the highest share of fee income to assets among its peers at 1.5% of loans, which we think would be difficult to sustain given the slowdown in business, cautious outlook on