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Axis Bank: Margins make up for provisioning - Views on News from Equitymaster
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Axis Bank: Margins make up for provisioning
Jan 15, 2010

Performance summary
  • Net interest income rises by 11% YoY during 9mFY10 on the back of 13% YoY growth in advances.
  • Net interest margins (NIM) move up to 4.0% in 1HFY10 from 3.1% in 9mFY09.
  • Net profits grow by 42% YoY backed by strong traction in other income (up 47% YoY), despite higher provisioning.
  • Net NPA to advances marginally higher at 0.5% at the end of 9mFY10 as against 0.4% in 9mFY09.
  • Capital adequacy ratio (CAR) higher at 16.8% at the end of 9mFY10 after capital raising in 2QFY10.

Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 29,847 28,836 -3.4% 77,963 86,495 10.9%
Interest expense 20,550 15,345 -25.3% 51,426 51,051 -0.7%
Net Interest Income 9,297 13,491 45.1% 26,537 35,444 33.6%
Net interest margin (%)       3.1% 4.0%  
Other Income 7,321 9,880 35.0% 20,514 30,122 46.8%
Other Expense 7,522 9,626 28.0% 21,186 26,999 27.4%
Provisions and contingencies 1,319 3,731 182.9% 6,845 11,873 73.5%
Profit before tax 9,096 13,745 51.1% 25,865 38,567 49.1%
Tax 2,768 3,455 24.8% 6,681 9,197 37.7%
Profit after tax/ (loss) 5,009 6,559 30.9% 12,339 17,497 41.8%
Net profit margin (%) 16.8% 22.7%   15.8% 20.2%  
No. of shares (m)       359.0 402.0  
Book value per share (Rs)         391.4  
P/BV (x)*         2.7  
*Book value as on 31st December 2009

What drove performance in 9mFY10?
  • Although Axis Bank continued to grow balance sheet in 3QFY10, the same was at a far moderated pace as compared to the earlier quarters. The growth of 13% in advance was only marginally higher than the sector average growth during this period. However the bank’s margins show that the bank has not sacrificed profitability. With a higher proportion of CASA, the differential in lending and borrowing rates aided the improvement in the bank’s NIMs by a healthy 0.9%. The management believes that the same may not be sustained going forward as the cost of funds rise and the bank’s leverage increases. It is targeting NIMs in the range of 3.5% over the longer term. Nonetheless, we believe that it will continue to remain amongst the best in the industry.

    Keeping moderated pace...
    (Rs m) 9mFY09 % of total 9mFY10 % of total Change
    Advances 753,280   847,700   12.5%
    Agriculture 55,990 7.4% 77,670 9.2% 38.7%
    Retail 156,160 20.7% 189,000 22.3% 21.0%
    SMEs 141,460 18.8% 165,030 19.5% 16.7%
    Large corporates 399,670 53.1% 416,000 49.1% 4.1%
    Deposits 1,057,160   1,138,530   7.7%
    CASA 401,460 38.0% 519,090 45.6% 29.3%
    Term deposits 655,700 62.0% 619,440 54.4% -5.5%
    Credit deposit ratio 71.3%   74.5%    

  • Axis Bank also continued to build an India-wide presence through its 949 branches and 4,055 ATMs across 564 cities. During 9mFY10, the bank added 114 branches and 460 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 33% YoY and those of current account deposits grew 31% YoY. Demand deposits constituted 46% of total daily average deposits during 3QFY10, higher than the level of 38% observed during 3QFY09. This aided the bank’s improvement in spreads.

  • Axis Bank’s fee income registered a strong growth of 20% YoY during 9mFY10. Retail and credit portfolio each contributed around 30% to the bank’s total fee income. The proportion of fee to total income however dropped from 38% in 9mFY09 to 33% in 9mFY10. The growth in fees from capital markets segment slowed down while that from retail and large and mid corporate banking were the lead driver for the bank’s overall fee income growth during the nine month period.

  • Axis Bank’s net NPAs as a percentage of advances increased to 0.46% with a marginal slippage in the past quarter. Gross NPAs were at 1.2% at the end of 9mFY10 and the provision coverage was 87.8%. This is higher than the RBI mandate of 70% coverage. While the bank currently has Rs 231 bn of restructured assets (Rs 870 m restructured in 3QFY10) the total restricted assets comprised 2.4% of advances at the end of 9mFY10. The management believes that the NPA and restructured assets have already peaked in FY10 and unlikely to show significant slippages going ahead.

What to expect?
At the current price of Rs 1,076, the stock is trading attractively at a multiple of 2.2 times our estimated FY12 adjusted book value. While Axis Bank has performed in line with our expectations in terms of net interest margins, the asset growth is marginally lower. The bank’s performance in terms of its asset quality is also well within our estimates and we do not envisage any material downsides to the same. While we see a lower rate of asset growth being sustainable, the bank’s consistency in fee income growth makes it a safe play in the current scenario. We reiterate our positive outlook on the bank from a long term perspective.

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