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Axis Bank: Capital constraints linger - Views on News from Equitymaster

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Axis Bank: Capital constraints linger

Jan 18, 2011

Axis Bank declared its 3QFY11 results. The bank has reported 33% YoY growth in interest income and 36% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 37% YoY during 9mFY11 on the back of 46% YoY growth in advances.
  • Net interest margins (NIM) fall marginally to 3.8% in 9mFY11 from 4.0% in 9mFY10 on account of rise in cost of funds.
  • Net profits grow by 35% YoY in 9mFY11 despite low growth in other income.
  • Net NPA to advances marginally lower at 0.3% at the end of 9mFY11 as against 0.4% in 9mFY10.
  • Capital adequacy ratio (CAR) at 12.5% at the end of December 2010, 13.8% after considering 3QFY11 profits.

Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest income 28,836 †38,383 33.1% 86,495 107,881 24.7%
Interest expense 15,345 †21,051 37.2% 51,051 59,261 16.1%
Net Interest Income 13,491 †17,332 28.5% 35,444 48,620 37.2%
Net interest margin (%)       4.0% 3.8%  
Other Income 9,880 †11,477 16.2% 30,122 31,817 5.6%
Other Expense 9,626 †12,223 27.0% 26,999 34,488 27.7%
Provisions and contingencies 3,731 3,138 -15.9% 11,873 10,256 -13.6%
Profit before tax 13,745 †16,586 20.7% 38,567 45,949 19.1%
Tax 3,455 4,532 31.2% 9,197 12,009 30.6%
Profit after tax/ (loss) 6,559 8,916 35.9% 17,497 23,684 35.4%
Net profit margin (%) 22.7% 23.2%   20.2% 22.0%  
No. of shares (m)         409.9  
Book value per share (Rs)         454.3  
P/BV (x)*         2.8  
*Book value as on 31st Dec 2010

What drove performance in 3QFY11?
  • Despite a period of tight liquidity, Axis Bank managed to put up a credible performance for the third quarter and the nine month period ended December 2010. We believe that the 46% YoY growth in loans that the bank has clocked in 9mFY11 (nearly 2x sector growth) is not sustainable over the longer term. This growth has come on a lower base in 9mFY10 when the retail loan growth had fallen drastically. Further, the current capital adequacy ratio of the bank may not be able to accommodate growth at such a fast clip.

    The growth in deposits for the bank was primarily through term deposits. The CASA base (low cost deposits) saw a blip due to hike in term deposit rates. Also, the narrowing of spreads in lending and borrowing rates led to the bankís NIMs dropping by 0.2%. The bank is targeting NIMs in the range of 3.5% to 3.7% in the medium term. While our estimates are slightly conservative, we nonetheless believe that it will continue to remain amongst the best in the industry.

    Outperforming peers...
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Advances 846,212   1,235,470   46.0%
    Agriculture †††86,880 10.3% 107,720 8.7% 24.0%
    Retail 189,504 22.4% 252,040 20.4% 33.0%
    SMEs 155,820 18.4% 170,530 13.8% 9.4%
    Large corporates 414,009 48.9% 705,180 57.1% 70.3%
    Deposits 1,138,530   1,558,110   36.9%
    CASA 519,090 45.6% 659,310 42.3% 27.0%
    Term deposits 619,440 54.4% 898,800 57.7% 45.1%
    Credit deposit ratio 74.3%   79.3%    

  • Axis Bank also continued to build an India-wide presence through its 1,120 branches and 5,303 ATMs across 734 cities. During 9mFY11, the bank added 137 branches and 91 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 32% YoY and those of current account deposits grew 20% YoY. Demand deposits constituted 42% of total daily average deposits during 9mFY11.

  • Although Axis Bankís fee income registered a growth of 19% YoY during 9mFY11, the proportion of fee to total income dropped from 33% in 9mFY10 to 32% in 9mFY10. There was a drop in fees from business banking and capital markets. The fees from large and mid corporate credit recorded the highest growth.

  • Axis Bankís net NPAs as a percentage of advances remained stable at 0.3% with a marginal improvement in the past quarter. Gross NPAs were at 1.0% at the end of 3QFY11 and the provision coverage was 91% (above RBIís mandate). Having said that the management cited concerns over possible delinquencies in the restructured assets.

    Axis Bank currently has Rs 21.1bn of restructured assets the total restructured assets comprised 1.6% of advances at the end of 9mFY11. Nearly half of the NPAs in the previous quarter have come in from the restructured assets. Thus the management does see the risk of some restructured assets moving into NPAs in the near term. Particularly from the SME, capital markets and agricultural loans that form 27% of restructured assets.

  • The bank had 60% of investments in the HTM basket in 3QFY11, thus exposing it to some risk of mark to market losses if interest rates move up sharply.

What to expect?
At the current price of Rs 1,264, the stock is trading at a multiple of 2.0 times our estimated FY13 adjusted book value. Axis Bankís performance in 9mFY11 has been slightly above our estimates in terms of asset growth and net interest margins for the full fiscal. The bankís performance in terms of sustaining its asset quality is also well within our estimates and we do not envisage any material downsides to the same. While we see some capital constraints impacting asset growth in the medium term, we reiterate our positive outlook on the bank from a long term perspective.

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