Rating Rationale
October 03, 2018 | Mumbai
Axis Bank Limited
'CRISIL AAA/Stable' assigned to Tier II Bonds (Under Basel III)
 
Rating Action
Rs.4000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Assigned)
Tier I Bonds (Under Basel III) Aggregating Rs.7000 Crore CRISIL AA+/Stable (Reaffirmed)
Rs.5000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Reaffirmed)
Rs.2500 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Reaffirmed)
Rs.850 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Reaffirmed)
Rs.2000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Reaffirmed)
Rs.3205 Crore Infrastructure Bonds CRISIL AAA/Stable (Reaffirmed)
Rs.6000 Crore Infrastructure Bonds CRISIL AAA/Stable (Reaffirmed)
Rs.5000 Crore Infrastructure Bonds CRISIL AAA/Stable (Reaffirmed)
Rs.60000 Crore Certificate of Deposits CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Stable' rating to Rs. 4000 crore Tier II bonds (under Basel III) of Axis Bank Ltd (Axis Bank) and reaffirmed its rating on the Axis bank's other debt instruments at 'CRISIL AAA/CRISIL AA+/Stable/CRISIL A1+'.

The overall ratings reflect Axis Bank's strong capitalisation, healthy resource profile, and comfortable earnings. However, asset quality is average and remains sensitive to stress, mainly in the corporate sector loan portfolio.

Analytical Approach

To arrive at the ratings, CRISIL has considered the standalone business and financial risk profile of Axis bank.

Key Rating Drivers & Detailed Description
Strengths
* Strong capitalisation with demonstrated ability to raise capital
Capitalisation is strong, with sizeable networth of Rs 64,186 crore as on June 30, 2018 (Rs 63,445 crore as on March 31, 2018). The Tier-I capital adequacy ratio (CAR) and overall CAR under Basel III were comfortable at 13.22% and 16.71% respectively as on June 30, 2018 (13.04% and 16.57%, respectively, as on March 31, 2018). Capitalisation is also supported by the bank's demonstrated ability to raise equity capital; the bank raised Rs 8,680 crore in 3Q 2018 through preferential allotment. Further, the Bank has also allotted convertible warrants amounting to Rs. 2,563 Cr which are exercisable up to 18 months from the date of allotment (18 December 2017) which will add to capital cushion. The healthy networth also provides adequate cushion to support credit growth and maintain adequate cover against net non-performing assets (NPAs). The net worth to NPA ratio was around 4.3 times as on June 30, 2018, and it improved from 3.8 times as on March 31, 2018. Capitalisation is likely to remain strong over the medium term, supported by expected improvement in cash accrual, demonstrated ability to raise capital, and higher focus on lending better credits with lower risk weightages.
 
* Healthy resource profile
The resource profile has improved significantly over the five fiscals through 2018, with the share of stable low-cost current and savings account (CASA) deposits rising to 47% of total deposits as on June 30, 2018 (49% as on June 30, 2017), which is amongst the highest in the sector. This contributes to lower-than-industry-average cost of deposits and cushions the net interest margin. CASA deposits had a compound annual growth rate (CAGR) of around 17% over the five fiscals through 2018, driven by a strong focus on expanding the retail customer base and increasing the branch network.

Moreover, the proportion of retail deposits (savings plus retail term deposits) was comfortable at around 65% as on June 30, 2018. With a network of 3,779 branches (including extension counters) and a strong digital footprint, the bank is expected to sustain a healthy resource profile over the medium term.
 
* Strong market position
Axis Bank is amongst the top three private sector banks, and had a market share of 5.1% in advances and 4% in deposits as on March 2018. Advances had a CAGR of 17.4% over the five fiscals through 2018 mainly contributed by stronger growth in retail loans (26% CAGR). Also, the loan portfolio is well balanced with retail loans constituting 48% of loans, followed by corporate (39%) and small and medium enterprise (SME; 13%), as on June 30, 2018. Also, over 70% of the retail loans are sourced by existing customers; this should lead to healthy growth rates. The bank has also retained its strong position in the debt syndication business, which continues to support expansion in fee income. With healthy capitalisation, well spread out branch network, diverse product offerings, and a strong digital footprint, market share is expected to improve over the medium term.
 
Weakness
* Average asset quality
Asset quality remains sensitive to stress in the corporate sector. Gross NPAs declined to 6.52% of total assets as on June 2018, 2018, from 6.77% as on March 31, 2018 but was higher than March 31, 2017 levels (5.04%). A significant proportion of slippages in fiscal 2018 and June 2018 quarter was contributed by stressed accounts in the corporate segment including accounts structured under Reserve Bank of India (RBI) schemes (Strategic debt restructuring, Scheme for sustainable structuring of stressed assets, 5:25 flexible structuring scheme and restructured accounts) mainly from the power, iron and steel, textiles, and mining segments.

With the recognition of a majority of the corporate stressed loans as NPAs in fiscal 2018, the pace of slippages is expected to reduce in the current fiscal. Furthermore, with recovery from delinquent accounts expected to improve, and a better-than-industry-average performance in the retail and medium and SME segments likely to be maintained, the overall asset quality should improve in the near term.

The increase in NPAs has resulted in higher provisioning requirement. The provisioning cost increased to 2.4% of total assets for fiscal 2018 from 2.15% the previous fiscal. However, the pre-provision profit (as a percentage of average assets) remained steady at 2.4% driven by net interest income and fee income. The return on assets (RoA) dipped to 0.04% for fiscal 2018 mainly due to the rise in NPA provisions. Nevertheless, with the expected decline in NPAs and maintenance of robust credit, both pre-provisioning profits and the RoA are expected to improve in fiscal 2019 despite higher provisions.

The ability to manage asset quality, in both the corporate and retail loan portfolios, and maintain profitability will remain key rating monitorables over the medium term.

Outlook: Stable

CRISIL believes Axis Bank will continue to maintain strong capitalisation, a healthy resource profile, and a comfortable earnings profile over the medium term. The outlook may be revised to 'Negative' in case of more-than-expected deterioration in asset quality and earnings.

About the Bank

Axis Bank commenced operations in 1994 as UTI Bank, which was renamed in July 2007, and is now the third-largest private sector bank in India. It was jointly promoted by the administrator of Specified Unit Trust of India Undertaking, Life Insurance Corporation of India Ltd, General Insurance Corporation Ltd, and four public sector undertakings (National Insurance Company Ltd, The New India Assurance Company Ltd, The Oriental Insurance Company Ltd, and United Insurance Company Ltd).

As on March 31, 2018, the bank had a network of 3,703 branches including extension counters, and 13,814 automated teller machines (ATMs) across the country.

Profit after tax was Rs 275 crore  on total income (net of interest expense) of Rs 29,585 crore in fiscal 2018, against Rs 3,679 crore and Rs 29,784 crore, respectively, in fiscal 2017.

For the fisrt quarter fiscal 2019, profit after tax was Rs 701 crore  on total income (net of interest expense) of Rs 8,092 crore, against Rs 1,306 crore and Rs 7,616 crore, respectively, in the same period fiscal 2017.

Key Financial Indicators
on / for the year ended March 31   2018 2017
Total assets Rs crore 6,91,330 6,01,468
Total income (net of interest expense) Rs crore 29,585 29,784
Profit after tax Rs crore 275 3,679
Gross NPA % 6.77 5.04
Overall capital adequacy ratio % 16.57 14.95
Return on assets (annualised) % 0.04 0.65

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Note on Tier-I Instruments (under Basel III)
The distinguishing features of non-equity Tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase risk attributes of non-equity Tier-I instruments over those of Tier-II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL notches down the rating on these instruments from the bank's corporate credit rating. The rating on Axis Bank's Tier-I bonds (under Basel III) has, therefore, been lowered by one notch from its corporate credit rating to 'CRISIL AA+/Stable', in line with CRISIL's criteria (refer to 'CRISIL's rating criteria for BASEL III compliant instruments of banks').
 
The factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III) resulting in non-payment of coupon are: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honour coupon payment if the bank reports losses or low profits; or iii) the bank breaching the minimum regulatory Common Equity Tier-1 (CET I; including Capital Conservation Buffer) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher and faster than that for Tier-II instruments.
 
Note on Tier-II Instruments (under Basel III)
The distinguishing feature of Tier-II capital instruments under Basel II is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investors and hence, to default on the instrument by the issuer.  According to the Basel III guidelines, the PONV trigger will be determined by RBI. CRISIL believes the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and the systemic importance of the banking sector. The inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.
 
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs. Cr)
Rating Outstanding
with Outlook
INE238A08443 Bonds (Additional Tier I under BASEL III) 28-Jun-17 8.75 Perpetual 3500 CRISIL AA+/Stable
INE238A08435 Tier II Bonds Issue (Under Basel III)^ 15-Jun-17 7.66% 15-Jun-27 5000 CRISIL AAA/Stable
INE238A08427 Bonds (Additional Tier I under BASEL III) 14-Dec-16 8.75% Perpetual 3500 CRISIL AA+/Stable
INE238A08369 Tier II Bonds Issue (Under Basel III) 12-Feb-15 8.45% 12-Feb-25 850 CRISIL AAA/Stable
INE238A08377 Tier II Bonds Issue (Under Basel III) 30-Sep-15 8.50% 30-Sep-25 1500 CRISIL AAA/Stable
INE238A08393 Tier II Bonds Issue (Under Basel III) 27-May-16 8.50% 27-May-26 2430 CRISIL AAA/Stable
NA Tier II Bonds Issue (Under Basel III)^ NA NA NA 4000 CRISIL AAA/Stable
NA Tier II Bonds Issue (Under Basel III)^ NA NA NA 570 CRISIL AAA/Stable
INE238A08351 Infrastructure Bonds 5-Dec-14 8.85% 5-Dec-24 5705 CRISIL AAA/Stable
INE238A08385 Infrastructure Bonds Issue 30-Oct-15 8.25% 30-Oct-25 3000 CRISIL AAA/Stable
INE238A08401 Infrastructure Bonds Issue 20-Oct-16 7.60% 20-Oct-23 5000 CRISIL AAA/Stable
NA Infrastructure Bonds Issue^ NA NA NA 500 CRISIL AAA/Stable
NA Certificate of Deposits NA NA NA 60000 CRISIL A1+
^yet to be issued
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  60000.00  CRISIL A1+  11-05-18  CRISIL A1+  21-06-17  CRISIL A1+  28-12-16  CRISIL A1+  23-10-15  CRISIL A1+  CRISIL A1+ 
        27-02-18  CRISIL A1+  13-06-17  CRISIL A1+  02-12-16  CRISIL A1+  16-09-15  CRISIL A1+   
            08-05-17  CRISIL A1+  12-10-16  CRISIL A1+  03-02-15  CRISIL A1+   
                18-05-16  CRISIL A1+       
Infrastructure Bonds  LT  13705.00
03-10-18 
CRISIL AAA/Stable  11-05-18  CRISIL AAA/Stable  21-06-17  CRISIL AAA/Stable  28-12-16  CRISIL AAA/Stable  23-10-15  CRISIL AAA/Stable  CRISIL AAA/Stable 
        27-02-18  CRISIL AAA/Stable  13-06-17  CRISIL AAA/Stable  02-12-16  CRISIL AAA/Stable  16-09-15  CRISIL AAA/Stable   
            08-05-17  CRISIL AAA/Stable  12-10-16  CRISIL AAA/Stable  03-02-15  CRISIL AAA/Stable   
                18-05-16  CRISIL AAA/Stable       
Tier I Bonds (Under Basel III)  LT  7000.00
03-10-18 
CRISIL AA+/Stable  11-05-18  CRISIL AA+/Stable  21-06-17  CRISIL AA+/Stable  28-12-16  CRISIL AA/Stable    --  -- 
        27-02-18  CRISIL AA+/Stable  13-06-17  CRISIL AA+/Stable  02-12-16  CRISIL AA/Stable       
            08-05-17  CRISIL AA+/Stable           
Tier II Bonds (Under Basel III)  LT  8280.00
03-10-18 
CRISIL AAA/Stable  11-05-18  CRISIL AAA/Stable  21-06-17  CRISIL AAA/Stable  28-12-16  CRISIL AAA/Stable  23-10-15  CRISIL AAA/Stable  -- 
        27-02-18  CRISIL AAA/Stable  13-06-17  CRISIL AAA/Stable  02-12-16  CRISIL AAA/Stable  16-09-15  CRISIL AAA/Stable   
            08-05-17  CRISIL AAA/Stable  12-10-16  CRISIL AAA/Stable  03-02-15  CRISIL AAA/Stable   
                18-05-16  CRISIL AAA/Stable       
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt
Rating criteria for Basel III - compliant non-equity capital instruments

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