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Axis Bank: Gross NPA near 2-year highs - Views on News from Equitymaster

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Axis Bank: Gross NPA near 2-year highs
Jan 17, 2014

Axis Bank declared the results for the third quarter and nine months ended December 2013 (9mFY14). The bank has reported 26% YoY growth in net interest income and 21% YoY growth in net profits for 9mFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 26% YoY during 9mFY14 on the back of 18% YoY growth in advances.
  • Net interest margins (NIM) move up from 3.6% in 9mFY13 to 3.7% in 9mFY14. The average NIM over the past 5 fiscals has been above 3.3%.
  • Net profits grow by 21% YoY in 9mFY14 backed by higher NIMs and growth in fee income (8% YoY).
  • Gross NPAs move up to 1.3% while net NPAs also came in higher at 0.4% of advances at the end of 9mFY14, provision coverage at 78%.
  • Capital adequacy ratio (CAR) on a firmer footing at 17.6% at the end of December 2013 (Tier 1 capital at 13.2%).

Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 69,649 77,891 11.8% 201,350 226,759 12.6%
Interest expense 44,701 48,051 7.5% 131,334 138,900 5.8%
Net Interest Income 24,948 29,840 19.6% 70,016 87,859 25.5%
Net interest margin (%)       3.5% 3.8%  
Other Income 16,154 16,444 1.8% 45,439 51,918 14.3%
Other Expense 17,486 20,134 15.1% 50,421 57,693 14.4%
Provisions and contingencies 3,868 2,024 -47.7% 11,550 16,022 38.7%
Profit before tax 23,616 26,150 10.7% 65,034 82,084 26.2%
Tax 6,274 8,084 28.8% 17,240 22,308 29.4%
Profit after tax/ (loss) 13,474 16,042 19.1% 36,244 43,754 20.7%
Net profit margin (%)       18.0% 19.3%  
No. of shares (m)**         468.8  
Book value per share (Rs)         772.0  
P/BV (x)*         1.5  
*Book value as on 31st December 2013

What has driven performance in 9mFY14?
  • Axis Bank showed a sharp uptick in the credit deposit ratio for 9mFY14 signaling disbursements at a faster clip. The bank's loan growth at 18% YoY is higher than the industry average. The retail loan portfolio, of which housing loans comprised 68% and auto loans comprised 13%, helped Axis Bank's advance growth meet the RBI's target. With 13.2 m savings bank accounts from 2,321 branches at the end of December 2013 the bank has undoubtedly leveraged its franchise well and capitalized on CASA deposits. The latter remained at 42.6% of overall deposits at the end of December 2013.

    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, the CASA support was instrumental in boosting the bank's net interest margins (NIMs) by 0.1% to 3.7% in 9mFY14. 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 low cost deposit accretion
    (Rs m) 9mFY13 % of total 9mFY14 % of total Change
    Advances 1,792,093   2,114,670   18.0%
    Agriculture 121,530 7.1% 126,420 6.3% 4.0%
    Retail 442,860 25.7% 608,690 22.0% 37.4%
    SMEs 236,280 13.7% 304,150 15.1% 28.7%
    Large corporates 920,650 53.5% 973,770 56.6% 5.8%
    Deposits 2,452,318   2,623,980   7.0%
    CASA 977,570 39.9% 1,116,990 42.6% 14.3%
    Term deposits 1,474,748 60.1% 1,506,990 57.4% 2.2%
    Credit deposit ratio 73.1%   80.6%    

  • During 9mFY14, the bank added 374 branches and 1,083 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 15% YoY and those of current account deposits grew 7% YoY.

  • While Axis Bank's overall fee income registered a growth of 8% YoY during 9mY13, the retail fees fell by 3% YoY in 3QFY14. However, the proportion of fee to total income dropped from 35% in 1HFY13 to 34% in 9mFY14. There was a drop in fees from business banking and capital markets.

  • Axis Bank's net NPAs as a percentage of advances moved up slightly to 0.4%, as against 0.33% in 9mFY13. Gross NPAs, also moved up from 1.1% at the end of 9mFY13 to 1.3% in 9mFY14 and the provision coverage was 78%. Having said that the management has not offered enough clarity over possible delinquencies in the restructured assets. The latter were around 2.1% of gross advances at the end of December 2013.

    The bank had an exposure of 8% each to infrastructure and power and 2.3% to real estate at the end of 9mFY14. This exposure remains most vulnerable to slippages. Most of the restructured loans too belonged to the power, 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.

What to expect?
At the current price of Rs 1,149, the stock is trading at a multiple of 1.2 times our estimated FY16 adjusted book value. Axis Bank's balance sheet growth is expected to remain muted in the near term. Also we do not see margins being sustainable at the current levels. We believe that while most of the margin risks are already factored in, the concerns over NPA overhang will continue to warrant a relatively lower valuation for Axis Bank as compared to its private sector peers. We reiterate our Hold view on the stock. Please also ensure that no stock comprises more than 5% of your portfolio.

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