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Axis Bank: Strong traction in home loans - Views on News from Equitymaster
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Axis Bank: Strong traction in home loans
Jan 24, 2015

Axis Bank declared the results for the third quarter of financial year ended March 2015 (3QFY15). The bank has reported 20% YoY growth in net interest income and 18.4% YoY growth in net profits for 3QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 20.3% YoY during 3QFY15 and 18.7% in 9mFY15 on the back of 23% YoY growth in advances.
  • Net interest margins (NIM) move up from 3.7% in 9mFY14 to 3.9% in 9mFY15. The average NIM over the past 5 fiscals has been above 3.3%.
  • Net profits grow by 18.3% YoY in 9mFY15 backed by higher NIMs and growth in fee income.
  • Gross NPAs move up to 1.3% while net NPAs also came in higher at 0.4% of advances at the end of 9mFY15, provision coverage at 87%.
  • Capital adequacy ratio (CAR) on a firm footing at 15.6% at the end of December 2014 as per Basel III norms (Tier 1 capital at 12.4%).

Rs (m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Interest income 77,891 88,897 14.1% 226,759 257,815 13.7%
Interest expense 48,051 53,001 10.3% 138,900 153,566 10.6%
Net Interest Income 29,840 35,896 20.3% 87,859 104,249 18.7%
Net interest margin (%)       3.7% 3.9%  
Other Income 16,444 20,390 24.0% 51,918 56,777 9.4%
Other Expense 20,134 23,140 14.9% 57,693 67,300 16.7%
Provisions and contingencies 2,024 5,071 150.5% 16,022 16,187 1.0%
Profit before tax 26,150 33,146 26.8% 82,084 93,726 14.2%
Tax 8,084 9,076 12.3% 22,308 25,765 15.5%
Profit after tax/ (loss) 16,042 18,999 18.4% 43,754 51,774 18.3%
Net profit margin (%) 20.6% 21.4%   19.3% 20.1%  
No. of shares (m)         2,363.3  
Book value per share (Rs)**         185.4  
P/BV (x)*         3.0  
*Book value as on 31st December 2014

What has driven performance in 9mFY15?
  • Focus on collateralized retail assets like home loans bore fruits for Axis Bank as it did a reasonably good job of growing the loan book as well as protecting margins in 9mFY15. The bank's loan growth at 23% YoY is in line with our estimates for the fiscal. Its earlier focus on corporate loans, however, has taken a backseat. The retail loan portfolio, of which housing loans comprised 50% and auto loans comprised 10%, helped Axis Bank's advance growth meet the RBI's target. With 13.6 m savings bank accounts from 2,558 branches (156 added in 9mFY15) at the end of December 2014 the bank has undoubtedly leveraged its franchise well and capitalized on CASA deposits. The latter was at 43.1% of overall deposits at the end of December 2014

    Retail loans pick up pace
    (Rs m) 9mFY14 % of total 9mFY15 % of total Change
    Advances 2,118,431   2,605,670   23.0%
    Retail 756,280 35.7% 990,155 38.0% 30.9%
    SMEs 290,225 13.7% 393,456 15.1% 35.6%
    Large corporates 1,071,926 50.6% 1,214,242 46.6% 13.3%
    Deposits 2,623,414   2,911,990   11.0%
    CASA 1,116,990 42.6% 1,255,860 43.1% 12.4%
    Term deposits 1,506,424 57.4% 1,656,130 56.9% 9.9%
    Credit deposit ratio 80.8%   89.5%    

  • While Axis Bank's overall fee income registered a growth of 30% YoY during 9mFY14, the retail fees (37% of fee income source) grew by 10% YoY in 1HFY15 offering a big boost. However, the proportion of fee to total income dropped from 35% in 9mFY14 to 34% in 9mFY15. 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 9mFY14. Gross NPAs, also moved up from 1.1% at the end of 9mFY14 to 1.3% in 9mFY15 and the provision coverage was 87%, not accounting for the accumulated write-offs. The restructured assets were around 2.4% of gross advances at the end of December 2014. Most of the restructured loans too belonged to the power, textile, oil and shipping sectors. Axis Bank seems to have been very cautious about lending to large corporate projects in 9mFY15 given its experience in restructured loans from the segment.
What to expect?
At the current price of Rs 565 the stock is trading at a multiple of 2.3 times our estimated FY17 adjusted book value. While Axis Bank's balance sheet growth may pick up in coming quarters, 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 recommend investors to not buy the stock at current valuations as there is hardly any margin of safety.

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