Detailed Rational

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating on Rs 2000 crore Tier I Bonds (Under Basel III) of Axis Bank Limited (Axis Bank). Ratings on other debt instruments have been reaffirmed at ‘CRISIL AAA/CRISIL AA+/Stable/CRISIL A1+'.

 

The overall ratings continue to reflect the bank's strong capitalization and strong market position and its comfortable resource profile. These strengths are partly tempered by the average asset quality.

 

Supported by regular equity capital raised by via qualified institutional placements (QIP) and improved accruals, the capital ratios of Axis Bank have remained healthy, as reflected in tier 1 and overall capital to risk-weighted adequacy ratio (CRAR) of 14.5% and 16.6%, respectively, as on September 30, 2024 (14.2% and 16.6%, respectively, as on March 31, 2024). Rating on the Tier I bonds (Under Basel III) is as per the criteria for these instruments(please refer to ‘CRISIL's rating criteria for BASEL III-compliant instruments of banks’).

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Axis Bank and its subsidiaries. This is because of majority shareholding, business and financial linkages and shared brand.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strong capital position with demonstrated ability to raise capital

Capitalisation is strong, with sizeable networth of Rs 1,65,629 crore as on September 30, 2024 (Rs 1,51,061 crore as on March 31, 2024). Tier-I capital adequacy ratio (CAR) and overall CAR were comfortable at 14.5% and 16.6%, respectively, as on same date (14.2% and 16.6%, respectively, as on March 31, 2024). Capitalisation is also supported by the bank's demonstrated ability to raise equity. Healthy networth also cushions credit growth and helps maintain adequate cover against net non-performing assets (NPAs). Net worth to net NPA ratio stood at 45.8 times as on September 30, 2024 and has improved considerably from 20.9 times as on March 31, 2022. Given the bank's healthy cash accrual and demonstrated ability to raise capital, it is likely to maintain healthy capitalisation to support overall credit risk profile of the bank and also adequately cover for asset-side risks, while pursuing credit growth over the medium term.

 

Healthy resource profile

The resource profile remains healthy, with share of stable low-cost current and savings account (CASA) deposits at 41% of total deposits as on September 30, 2024 (43% as on March 31, 2024 and 47% as on March 31, 2023). Although there has been a drop in the share of CASA deposits from March 31, 2018 levels, it remains in line with peers. The overall retail deposits share (CASA + retail term deposits) was comfortable at 75% as on September 30, 2024. This contributes to competitive cost of deposits and cushions the net interest margin. The bank has a strong focus on increasing the CASA share and has been ramping up its branch network to effectively target the retail customer base.

 

With a network of 5,577 branches (domestic, including extension counters) as on September 30, 2024 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, with a market share of around 5.6% and 4.9% in advances and deposits, respectively, as on September 30, 2024. Advances recorded a compound annual growth rate (CAGR) of ~14% over the five fiscals through 2024, mainly contributed by stronger growth in retail loans. Also, the loan portfolio is well balanced with retail loans constituting 60% of loans as on September 30, 2024, followed by corporate (29%) and small and medium enterprise (SME; 11%) loans. In line with increased focus of the bank, share of the retail portfolio has increased from 53% as on March 31, 2020.

 

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, the market share is expected to improve over the medium term.

 

Weakness:

Average asset quality

The bank’s overall asset quality remains average, although its been on improving trend; Gross and net NPA stood at 1.44% and 0.34%, respectively, as on September 30, 2024 (1.43% and 0.31% as on March 31, 2024). The improving trend has been driven by controlled slippages coupled with steady upgradations and recoveries (upgradations and recoveries of Rs 3,572 crore for half year ended fiscal 2025 as against Rs 4,290 crore for previous fiscal). Provision coverage ratio (excluding technical write-offs) stood strong at 77% as on September 30, 2024 (79% as on March 31, 2024).

 

However, with recent uptick in delinquencies in unsecured retail segments and with Axis Bank’s healthy growth in retail over last few years, the asset quality will remain monitorable over the near-to-medium term.

Liquidity: Superior

The bank’s liquidity position is comfortable, supported by a strong retail deposit base that forms significant part of the total deposits. Bank’s liquidity coverage ratio was around 115% (on a consolidated basis) as on September 30, 2024.The Bank's liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the RBI, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

 

ESG Profile

CRISIL Ratings believes that Axis Bank’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile in banking sector typically factors in governance as a key differentiator between individual banks. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment.

 

Axis Bank has an ongoing focus on strengthening various aspects of its ESG profile.

 

Axis Bank’s key ESG highlights:

• The bank has in place the ESG policy for Lending that integrates environmental and social risk assessment into corporate credit appraisal mechanism. The Policy applies to all new funding projects, subject to the specified threshold criteria. Further, the Bank channelizes its investments towards low carbon sectors such as renewable energy, mass transport, electric mobility and green infrastructure. In fiscal 2022, the bank had committed to do incremental financing of Rs 30,000 crore under wholesale banking to sectors with positive social and environmental outcomes, by fiscal 2026. However the target has been achieved early the bank financing around Rs 30,400 crore by March 31, 2024. 
• It has set a target of target of 3.5% reduction in intensity emissions per employee by fiscal 2027 from the base year of fiscal 2023. Bank further committed to make 5% of its retail two-wheeler loan portfolio as electric by fiscal 2024, of which 3.62% of target was achieved.
• Bank has taken various initiatives to support gender diversity, such as a specific leadership focused programme for women restarting from a career break and diversity-focused hiring programmes. As on March 31, 2024, 25% of the bank’s employee were women and the bank targets to take this to 30% by fiscal 2027.
• Majority of the board members are independent directors, and there is a segregation in chairperson and executive positions. The bank has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive. The bank also has a standalone ESG Committee at the Board level.

 

There is growing importance of ESG among investors and lenders. Axis Bank’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high share of foreign investors as well as access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes Axis Bank will continue to maintain its strong capital position, healthy resource profile, and comfortable earnings profile over the medium term.

Rating Sensitivity Factors

Downward Factors

• Higher than expected deterioration in asset quality thereby impacting earnings profile
• Decline in capital adequacy ratios (including CCB) with CET I remaining below 11% on sustained basis

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 and four Government-owned general insurance companies. As on September 30, 2024, the bank had a 5,577 network domestic branches including extension counters across the country.

 

On March 01, 2023 Axis Bank acquired erstwhile Citibank’s India Consumer Business. Axis Bank paid total purchase consideration of Rs 11,932.4 crore which was entirely self funded. The deals aimed to consolidate and further improves market position in wealth and private banking business by providing Axis Bank with access to large retail customer base of 1.8 million credit card holder and aggregate deposit base of ~ Rs 39,900 crore. The integration of Citibank business was completed in July 2024.

 

On standalone basis, the bank reported profit after tax (PAT) was Rs 24,861 crore on total income (net of interest expense) of Rs 72,336 crore in fiscal 2024, against Rs 9,580 crore and Rs 59,089 crore, respectively, in fiscal 2023. The Bank incurred an exceptional expense of Rs 12,490 crore, pertaining to the acquisition of Citibank’s India Consumer Business in fiscal 2023, excluding which the PAT was Rs 21,933 crore.

 

On consolidated basis, the Bank reported PAT was Rs 26,386 crore on total income (net of interest expense) of Rs 76,599 crore in fiscal 2024, against Rs 10,818 crore and Rs 62,766 crore, respectively, in fiscal 2023.

Any other information:

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’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 the Reserve Bank of India (RBI). CRISIL believes that 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.