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Axis Bank: Return on equity at 4 year low

Apr 28, 2014

Axis Bank declared the results for the fourth quarter and financial year ended March 2014 (FY14). The bank has reported 24% YoY growth in net interest income and 20% YoY growth in net profits for FY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 24% YoY during FY14 on the back of 17% YoY growth in advances.
  • Net interest margins (NIM) move up from 3.7% in FY13 to 3.9% in FY14. The average NIM over the past 5 fiscals has been above 3.3%.
  • Net profits grow by 20% YoY in FY14 backed by higher NIMs and growth in fee income (8% YoY).
  • Gross NPAs move up to 1.22% while net NPAs also came in higher at 0.4% of advances at the end of FY14, provision coverage at 78%.
  • Capital adequacy ratio (CAR) on a firm footing at 16.1% at the end of March 2014 as per Basel III norms (Tier 1 capital at 12.6%).

Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 70,475 79,652 13.0% 271,825 306,411 12.7%
Interest expense 43,828 47,994 9.5% 175,163 186,895 6.7%
Net Interest Income 26,647  31,658 18.8% 96,662 119,516 23.6%
Net interest margin (%)       3.7% 3.9%  
Other Income 20,071 22,134 10.3% 65,511 74,052 13.0%
Other Expense 18,721 21,134 12.9% 69,142 79,007 14.3%
Provisions and contingencies 5,953 5,052 -15.1% 17,504 21,074 20.4%
Profit before tax 27,997 32,658 16.6% 93,031 114,561 23.1%
Tax 6,492 9,001 38.6% 23,732 31,309 31.9%
Profit after tax/ (loss) 15,552 18,605 19.6% 51,795 62,178 20.0%
Net profit margin (%)       19.1% 20.3%  
No. of shares (m)**         469.8  
Book value per share (Rs)         813.5  
P/BV (x)*         1.9  
*Book value as on 31st March 2014

What has driven performance in FY14?
  • Axis Bank did a reasonably good job of protecting margins in FY14 despite slower growth in deposits and advances. The bank's loan growth at 16.8% YoY has come in higher than our estimated growth of 14.8% for the fiscal. The retail loan portfolio, of which housing loans comprised 63% and auto loans comprised 12%, helped Axis Bank's advance growth meet the RBI's target. With 13.3 m savings bank accounts from 2,402 branches at the end of March 2014 the bank has undoubtedly leveraged its franchise well and capitalized on CASA deposits. The latter went up to 45% of overall deposits at the end of March 2014

    The accretion to low cost deposit base (CASA), albeit at a slower pace, also helped the bank tide over the pressure on cost of funding. Nevertheless, the CASA support was instrumental in boosting the bank's net interest margins (NIMs) by 0.2% to 3.9% in FY14. Axis Bank is targeting NIMs in the range of 3.3% to 3.7% in the medium term. The bank plans to raise the limit for authorized share capital. As per the management, even if the bank goes in for equity dilution, the growth in loan book may be muted over the next 1 to 2 years.

    Cautious on corporate loans
    (Rs m) FY13 % of total FY14 % of total Change
    Advances 1,969,660   2,300,670   16.8%
    Agriculture 148,450 7.1% 178,360 6.3% 20.1%
    Retail 539,600 25.7% 744,910 22.0% 38.0%
    SMEs 299,220 13.7% 355,020 15.1% 18.6%
    Large corporates 982,390 53.5% 1,022,380 56.6% 4.1%
    Deposits 2,526,140   2,809,440   11.2%
    CASA 1,121,000 44.4% 1,264,620 45.0% 12.8%
    Term deposits 1,405,140 55.6% 1,544,820 55.0% 9.9%
    Credit deposit ratio 78.0%   81.9%    

  • During FY14, the bank added 455 branches and 1,677 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 15% YoY and those of current account deposits grew 7% YoY.

  • While Axis Bank's overall fee income registered a growth of 8% YoY during FY13, the retail fees grew by 10% YoY in FY14 offering a big boost. However, the proportion of fee to total income dropped from 35% in FY13 to 34% in FY14. 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 FY13. Gross NPAs, also moved up from 1.1% at the end of FY13 to 1.2% in FY14 and the provision coverage was 78%. Having said that the management has not offered enough clarity over possible delinquencies in the restructured assets. The latter were around 2.4% of gross advances at the end of March 2014. The bank had an exposure of 8% each to infrastructure and power and 2.3% to real estate at the end of FY14. This exposure remains most vulnerable to slippages. Most of the restructured loans too belonged to the power, textile, oil and shipping sectors. The bank seems to have been very cautious about lending to large corporate projects in FY14 given its experience in restructured loans from the segment.

  • Axis Bank's net profit in FY14 has come in around 11% higher than our estimates. However, the bank's return on equity of 18.2% is lower than that of past 3 years.

What to expect?
At the current price of Rs 1,536, the stock is trading at a multiple of 1.6 times our estimated FY16 adjusted book value. Axis Bank's balance sheet growth is expected to remain muted in the near term. Also 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. Since the stock has moved up by almost 30% over the past two months, we would recommend that investors hold on to the stock at current levels. Please also ensure that no stock comprises more than 5% of your portfolio.

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