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Axis Bank: Not enough clarity on provisioning - Views on News from Equitymaster
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Axis Bank: Not enough clarity on provisioning
Jan 15, 2013

Axis Bank declared the results for the third quarter and first nine months of financial year 2012-13 (9mFY13). The bank has reported 19% YoY growth in net interest income and 22% YoY growth in net profits for the nine month period. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 19% YoY during 9mFY13 on the back of 21% YoY growth in advances.
  • Net interest margins (NIM) slip to 3.6% in 9mFY13 from 3.8% in 9mFY12 due to fall in yields over the past two quarters. The average NIM over the past 5 fiscals has been above 3.3%.
  • Net profits grow by 22% YoY in 9mFY13 despite rise in provisions and slower growth in fees (15% YoY).
  • Net NPAs stable at 0.3% of advances at the end of 9mFY13, gross NPAs at 1.1% of advances.
  • Capital adequacy ratio (CAR) on firmer footing at 13.7% at the end of December 2012, excluding net profit for 9mFY13 (Tier 1 capital at 9.0%).

Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 57,769 69,649 20.6% 159,343 201,350 26.4%
Interest expense 36,366 44,701 22.9% 100,626 131,334 30.5%
Net Interest Income 21,403 24,948 16.6% 58,717 70,016 19.2%
Net interest margin (%)       3.8% 3.6%  
Other Income 14,298 16,154 13.0% 38,326 45,439 18.6%
Other Expense 15,109 17,486 15.7% 43,109 50,421 17.0%
Provisions and contingencies 4,223 3,868 -8.4% 10,037 11,550 15.1%
Profit before tax 20,592 23,616 14.7% 53,934 65,034 20.6%
Tax 5,346 6,275 17.4% 14,246 17,240 21.0%
Profit after tax/ (loss) 11,023 13,473 22.2% 29,651 36,244 22.2%
Net profit margin (%) 19.1% 19.3%   18.6% 18.0%  
No. of shares (m)**         427.1  
Book value per share (Rs)         632.7  
P/BV (x)*         2.2  
* On a trailing 12 months basis

What has driven performance in 9mFY13?
  • Without showing any signs of volatility in its track record of above average growth and margins, Axis Bank reported a reasonably good set of numbers for 9mFY13. With 12.4 lac savings bank accounts from 1,787 branches at the end of December 2012 the bank has undoubtedly leveraged its franchise well and capitalized on CASA deposits. The latter remained at 40% of overall deposits at the end of December 2012.

    The retail loan portfolio, of which housing loans comprised 68% and auto loans comprised 13%, was the flag bearer of Axis Bank's above average loan growth in 9mFY13. The bank manged to grow its loan portfolio by 21% YoY, with the retail portfolio growing by 45% YoY. The accretion to low cost deposit base (CASA), albeit at a slower pace, also helped the bank tide over the pressure on cost of funding. Nevertheless, lower loan yields led to fall in net interest margins by almost 0.2%. Axis Bank is targeting NIMs in the range of 3.3% to 3.7% in the medium term. The bank plans to raise the limit for authorized share capital. As per the management, even if the bank goes in for equity dilution, the growth in loan book may be muted over the next 1 to 2 years.

    Going strong on deposit accretion
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 1,487,391   1,795,040   20.7%
    Agriculture 107,000 7.2% 115,610 6.4% 8.0%
    Retail 332,640 22.4% 480,680 22.0% 44.5%
    SMEs 206,920 13.9% 252,950 14.1% 22.2%
    Large corporates 840,831 56.5% 945,800 57.5% 12.5%
    Deposits 2,086,930   2,445,020   17.2%
    CASA 867,560 41.6% 977,570 40.0% 12.7%
    Term deposits 1,219,370 58.4% 1,467,450 60.0% 20.3%
    Credit deposit ratio 71.3%   73.4%    

  • During 9mFY13, the bank added 165 branches and 439 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 20% YoY and those of current account deposits grew 30% YoY.

  • While Axis Bank's overall fee income registered a growth of 14.8% YoY during 9mFY13, the retail fees grew by 32% YoY. However, the proportion of fee to total income dropped from 35% in 9mFY12 to 34% in 9mFY13. There was a drop in fees from business banking and capital markets.

  • Axis Bank's net NPAs as a percentage of advances remained stable at 0.3%, as was the case in FY12. Gross NPAs were at 1.1% at the end of 9mFY13 and the provision coverage was 81%. Having said that the management has not offered enough clarity over possible delinquencies in the restructured assets. The latter were around 2.06% of gross advances at the end of December 2012. Most of the restructured loans belonged to the textile, oil and shipping sectors. More importantly, the bank's exposure to GMR Infrastructure is a concern. It had lent about Rs 19 bn to GMR Infrastructure for building Male airport. Later, the project hit a roadblock with the government of Maldives and it led to cancellation of the project contract. Therefore, Axis Bank's exposure to GMR, Deccan Chronicle and Suzlon are major concerns in terms of provisioning risks.

What to expect?
At the current price of Rs 1,422, the stock is trading at a multiple of 1.8 times our estimated FY15 adjusted book value. Axis Bank's performance in 9mFY13 has been slightly above our estimates in terms of asset growth and net interest margins for the full year. Despite capital headroom, the loan growth may remain moderated in near term. We believe that most of the downside risks in NPA is already factored into the bank's valuations. Hence, we reiterate our Buy view on the stock.

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