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Axis Bank: No looking back - Views on News from Equitymaster
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Axis Bank: No looking back
Apr 21, 2008

Performance summary
  • Interest income grows by 57% YoY in FY08 on the back of 62% YoY growth in advances.
  • Net interest margin improves to 3.5% in FY08 (2.7% in FY07) due to lower cost of funds and higher proportion of CASA.

  • Cost to income ratio remains stable at 49%.

  • Bottomline grows by 63% YoY aided by strong traction in fee income, despite higher provisioning.

  • Derivative MTM losses partially provided for.

  • Capital adequacy ratio (CAR) comfortable at 13.7%.

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 13,415 20,154 50.2% 44,616 70,053 57.0%
Interest expense 9,025 11,870 31.5% 29,933 44,199 47.7%
Net Interest Income 4,390 8,284 88.7% 14,683 25,854 76.1%
Net interest margin (%)       2.7% 3.5%  
Other Income 3,011 5,565 84.8% 10,101 17,954 77.7%
Other Expense 3,430 6,620 93.0% 12,145 21,549 77.4%
Provisions and contingencies 813 1,642 102.1% 2,676 5,796 116.6%
Profit before tax 3,971 7,229 82.0% 12,639 22,259 76.1%
Tax 1,039 1,972 89.8% 3,372 5,752 70.6%
Profit after tax/ (loss) 2,120 3,615 70.6% 6,591 10,711 62.5%
Net profit margin (%) 15.8% 17.9%   14.8% 15.3%  
No. of shares (m)       281.6 357.7  
Book value per share (Rs)         236.2  
P/BV (x)*         3.8  
*Book value as on 31st March 2008

What has driven performance in FY08?
  • Amidst worries of retail delinquencies and derivative losses, Axis Bank crossed the 50% mark in its advance growth for the eleventh consecutive quarter in 4QFY08. As in the past, the bank has chosen to not concentrate its exposure to any single segment and has been altering its asset mix depending upon the industry scenario and its risk appetite. In FY08, the bank has been particularly stressing on its SME portfolio, in order to safeguard its margins as well as asset quality. The advance growth numbers as well as the FY08 net interest margins (3.5%) are marginally higher than our estimates. The same holds true in the proportion of CASA (current and savings accounts) that has risen from 40% in FY07 to 46% (one of the best in the sector) and suggests a cost conscious strategy with respect to deposit accretion.

    Keeping pace..
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 368,760   596,610   61.8%
    Agriculture 40,740 11.0% 55,070 9.2% 35.2%
    Retail 89,280 24.2% 135,920 22.8% 52.2%
    SMEs 66,300 18.0% 115,360 19.3% 74.0%
    Large corporates 172,440 46.8% 290,260 48.7% 68.3%
    Deposits 587,860   876,260   49.1%
    CASA 234,300 39.9% 400,270 45.7% 70.8%
    Term deposits 353,560 60.1% 475,990 54.3% 34.6%
    Credit deposit ratio 62.7%   68.1%    

  • Axis Bank’s fee income registered a strong growth of 67% YoY during 4QFY08 and 70% YoY during FY08. The proportion of fee income to total income remained stable at 30%. The growth in fees from retail (up 98%) and corporate banking (up 74%) businesses was largely responsible for this. The strong growth in the bank’s cash management, tax collection, project advisory and debt syndication business are expected to continue to aid the fee income growth going forward. Trading profits grew by 130% YoY and the share of trading profits to operating revenue increased marginally to 10% in FY08 from 7% in FY07.

  • While the bank’s net NPAs as a percentage of advances have shrunk to 0.4% in 4QFY08 against 0.7% in 4QFY07, the bank has also succeeded in arresting the incremental delinquencies (in absolute terms) this quarter. The provisions held together with accumulated write-offs as a proportion of gross NPAs amounted to 82.8% in FY08. If the accumulated write-offs are excluded, then the provisions held as a proportion of gross NPAs amounted to 49.8%.

  • Axis Bank had a portfolio of US$ 153 m of Credit-Linked Notes (CLNs) (based on the convertible bonds issued overseas by Indian companies) at end of March 2008. The CLNs had a depreciation of US$ 5.1 m, which has been fully provided for in terms of RBI guidelines. Further, Axis Bank was active in structuring derivatives transactions for companies, including various types of cross-currency options and swaps. At the end of FY08, there were 188 outstanding derivatives transactions structured by the bank in which the companies had an aggregate mark-to-market (MTM) loss of Rs 6.7 bn. Of these, 113 outstanding transactions pertain to forex derivatives in which the companies had an aggregate MTM loss of Rs 5.5 bn. Of these, 6 transactions have been repudiated by two customers, involving an MTM loss to the companies of Rs 720 m and the two companies concerned have filed cases in courts. The bank is legally contesting these cases and has already provided for the same, considering them to be NPAs.

What to expect?
At the current price of Rs 889, the stock is trading at 2.7 times our estimated FY10 adjusted book value. While Axis Bank continues to outperform our expectations in terms of asset growth and fees, we also derive comfort from its cost-centric approach. The bank’s consistency in fee income growth makes it a safe play in the rising interest rate scenario. However, its exposure to the outstanding derivative contracts calls for additional prudence in providing for the same. We shall revisit our estimates for the bank by factoring in the same. Our outlook on the bank continues to remain positive from a long-term perspective.

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