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Axis Bank: No concerns other than capital
Apr 25, 2011

Axis Bank declared the results for the fourth quarter of financial year 2010-2011 (4QFY11). The bank has reported 17% YoY growth in net interest income and 33% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 31% YoY during FY11 on the back of 36% YoY growth in advances.
  • Net interest margins (NIM) fall marginally to 3.7% in FY11 from 3.8% in FY10 on account of rise in cost of funds.
  • Net profits grow by 35% YoY in FY11 despite low growth in other income.
  • Net NPA to advances marginally lower at 0.3% at the end of FY11 as against 0.4% in FY10.
  • Capital adequacy ratio (CAR) at 12.6% at the end of March 2011, Tier 1 capital was at 9.41%.
  • Bank has declared dividend of Rs 14 per share (dividend yield 1%).

Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 29,885  43,666 46.1%  116,380 151,548 30.2%
Interest expense 15,283  26,656 74.4% 66,335 85,918 29.5%
Net Interest Income 14,602  17,010 16.5% 50,045 65,630 31.1%
Net interest margin (%)       3.8% 3.7%  
Other Income 9,335  14,504 55.4% 39,457 46,321 17.4%
Other Expense 10,098  13,306 31.8% 37,097 47,794 28.8%
Provisions and contingencies 2,018 2,544 26.1% 13,891 12,800 -7.9%
Profit before tax 13,839  18,208 31.6% 52,405 64,157 22.4%
Tax 4,170 5,463 31.0% 13,368 17,471 30.7%
Profit after tax/ (loss) 7,651  10,201 33.3% 25,146 33,886 34.8%
Net profit margin (%) 25.6% 23.4%   21.6% 22.4%  
No. of shares (m)         410.5  
Book value per share (Rs)         462.8  
P/BV (x)*          3.0  
*Book value as on 31st March 2011

What drove performance in FY11?
  • Despite some shortage of capital (capital adequacy ratio close to 12%), Axis Bank managed to put up a credible performance for the fourth quarter and full year ended March 2011. However, even if the bank goes in for equity dilution, the current rate of growth in loan book (nearly 1.5x sector growth) may not sustainable over the longer term. This growth has come on a lower base in FY10 when the retail loan growth had fallen drastically. If the bank chooses to increase borrowings to sustain growth rates, the same may come in at the cost of margins.

    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 bank's NIMs dropping by 0.1%. The bank is targeting NIMs in the range of 3.5% to 3.7% in the medium term. While the NIMs for FY11 are well within our estimates, we believe that Axis Bank's NIMs will continue to remain amongst the best in the industry.

    Outperforming peers..
    (Rs m) FY10 % of total FY11 % 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 1,390 branches and 6,270 ATMs across 921 cities. During FY11, the bank added 278 branches and 1,977 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 FY11.

  • While Axis Bank's fee income registered a growth of 30% YoY during FY11, the proportion of fee to total income improved from 32% in FY10 to 33% in FY11. 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 Bank's 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 FY11 and the provision coverage was 81% (above RBI's mandate). Having said that the management cited concerns over possible delinquencies in the restructured assets.

    Axis Bank currently has Rs 19.3 bn of restructured assets the total restructured assets comprised 1.2% of advances at the end of FY11. 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 FY11, 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 1,377, the stock is trading at a multiple of 2.2 times our estimated FY13 adjusted book value. Axis Bank's performance in FY11 has been well in line with our estimates in terms of asset growth and net interest margins for the full fiscal. 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 some capital constraints impacting asset growth in the medium term, we reiterate our positive outlook on the bank from a long term perspective (ResearchPro subscribers can view latest updates here).

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