Axis Bank clients take Rs 674-cr derivatives hit

Mumbai, Apr 21: Leading private sector lender Axis Bank, which recorded a 70.56% jump in net profit to Rs 361.40 crore in Q4 2007-08, said it made contingent provisions of Rs 71.97 crore as on March 31, 2008 on account of mark-to-market (MTM) losses arising from derivative trades incurred by two customers. These customers have repudiated certain transactions and have sued the bank.

According to Axis Bank, at end-March ’08 it had structured 188 outstanding derivatives transactions in which the companies had aggregate MTM losses of Rs 673.55 crore. In addition, there were 70 transactions in which companies had aggregate MTM profits of Rs 8.67 crore.

Of these, 113 outstanding transactions pertain to forex derivatives, in which the companies had aggregate MTM losses of Rs 547.72 crore. In addition, there were 36 transactions in which companies had aggregate MTM profits of Rs 6.48 crore.

Explaining the details of the provisioning, the bank said, of the 188 transactions with MTM losses, 6 have been repudiated by two customers, involving an MTM loss to the companies of Rs 71.97 crore. The two companies have gone to court over these cases. Full provision has been made for these losses.

Speaking to FE, PJ Nayak, chairman & CEO, Axis Bank, said, “We have fully provided in the last fiscal year for the mark-to-market losses in our balance sheet. Also, we are legally contesting the cases filed against us by the companies that have entered into the derivative transactions.”

Under RBI guidelines, any such outstanding contract would be classified as an NPA, 90 days after a default in payment to the bank. None of these transactions have turned NPAs as yet. Axis Bank has also been active in structuring derivatives transactions, including various cross-currency options and swaps.

Overseas, in the asset portfolios at Singapore, Hong Kong and DIFC, Dubai, the bank has no collateralised debt obligations and no credit default swaps. It has a portfolio of $153 million in credit-linked notes (CLNs) constituting credits stripped from convertible bonds issued overseas by Indian companies. At end-March 2008, the CLNs had a depreciation of $5.09 million, which has been fully provisioned for.

The bank’s NPAs and gross NPAs as proportions of net and gross customer assets were at 0.36% and 0.72%, respectively, at end March 2008, compared with 0.42% and 0.80% at end December 2007, and 0.61% and 0.95% at end March 2007.