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Axis Bank: Encashing ‘cost’ benefit - Views on News from Equitymaster
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Axis Bank: Encashing ‘cost’ benefit
Apr 20, 2010

Performance summary
  • Net interest income rises by 7% YoY during FY10 on the back of 28% YoY growth in advances.
  • Net interest margins (NIM) move up to 3.8% in FY10 from 3.3% in FY09.
  • Net profits grow by 39% YoY backed by strong traction in other income (up 36% YoY), as well as a cut back on provisioning.
  • Net NPA to advances marginally higher at 0.36% at the end of FY10 as against 0.35% in FY09.
  • Capital adequacy ratio (CAR) comfortable at 15.8% at the end of FY10.


Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Interest income 30,392 29,884 -1.7% 108,354 116,380 7.4%
Interest expense 20,066 15,284 -23.8% 71,493 66,335 -7.2%
Net Interest Income 10,326 14,600 41.4% 36,861 50,045 35.8%
Net interest margin (%)       3.3% 3.8%  
Other Income 8,455 9,335 10.4% 28,968 39,457 36.2%
Other Expense 7,396 10,098 36.5% 28,582 37,097 29.8%
Provisions and contingencies 2,551 2,018 -20.9% 9,396 13,892 47.9%
Profit before tax 11,385 13,837 21.5% 37,247 52,405 40.7%
Tax 3,019 4,170 38.1% 9,698 13,368 37.8%
Profit after tax/ (loss) 5,815 7,649 31.5% 18,153 25,145 38.5%
Net profit margin (%) 19.1% 25.6%   16.8% 21.6%  
No. of shares (m)     359.0 405.2  
Book value per share (Rs)         396.0  
P/BV (x)*         3.0  
*Book value as on 31st March 2010

What drove performance in FY10?
  • Axis Bank can attribute the growth in its loan book as well as margins to the average annual rate of 43% that the bank has clocked in its savings account growth over the past 5 fiscals. Outperforming our profit growth estimates by nearly 20%, Axis Bank rounded off FY10 appreciably despite a muted start. The bank managed to sustain its balance sheet growth well above the sector average and at the same time 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 0.5%. 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 3.2% to 3.5% in the medium term. Nonetheless, we believe that it will continue to remain amongst the best in the industry.

    Getting back on growth track..
    (Rs m) FY09 % of total FY10 % of total Change
    Advances 815,570   1,043,430   27.9%
    Agriculture 82,170 9.2% 115,340 9.0% 40.4%
    Retail 160,520 22.8% 208,230 22.0% 29.7%
    SMEs 160,770 19.3% 194,830 20.0% 21.2%
    Large corporates 412,110 48.7% 525,030 49.0% 27.4%
    Deposits 1,173,740   1,413,000   20.4%
    CASA 506,440 43.1% 660,300 46.7% 30.4%
    Term deposits 667,300 56.9% 752,700 53.3% 12.8%
    Credit deposit ratio 69.5%   73.8%    

  • Axis Bank also continued to build an India-wide presence through its 1,035 branches and 4,293 ATMs across 643 cities. During FY10, the bank added 200 branches and 698 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 33% YoY and those of current account deposits grew 21% YoY. Demand deposits constituted 39% of total daily average deposits during FY10, higher than the level of 37% observed during FY09. This aided the bank’s improvement in spreads.

  • Axis Bank’s fee income registered a strong growth of 17% YoY during FY10. The proportion of fee to total income however dropped from 35% in 4QFY09 to 33% in 4QFY10. 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 FY10.

  • Axis Bank’s net NPAs as a percentage of advances remained stable at 0.37% with a marginal improvement in the past quarter. Gross NPAs were at 1.2% at the end of FY10 and the provision coverage was 72.4% (above RBI’s mandate). Here, we are a little surprised by Axis Bank move to write back the additional provisioning to improve profitability this fiscal. The same may not bear well if the bank’s asset quality is to show surprises in the future.

    While the bank currently has Rs 22.8 bn of restructured assets the total restructured assets coupled with gross NPAs comprised 3.2% of advances at the end of FY10. The management does see the risk of some restructured assets moving into NPAs in the near term.

What to expect?
At the current price of Rs 1,010, the stock is trading at a multiple of 2.5 times our estimated FY12 adjusted book value. Axis Bank has been above our estimates in terms of asset growth and net interest margins. The bank’s 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 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.

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