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Axis Bank: Margins in higher territory - Views on News from Equitymaster

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Axis Bank: Margins in higher territory

Jul 15, 2010

Axis Bank declared its 1QFY11 results. The bank has reported 15% YoY growth in interest income and 32% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 45% YoY during 1QFY11 on the back of 39% YoY growth in advances.
  • Net interest margins (NIM) move up to 3.8% in 1QFY11 from 3.3% in 1QFY10.
  • 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 1QFY11 as against 0.35% in 1QFY10.
  • Capital adequacy ratio (CAR) comfortable at 14.5% at the end of 1QFY11, after capital raising in FY10.

Rs (m) 1QFY10 1QFY11 Change
Interest income    29,055     33,255 14.5%
Interest expense    18,599     18,118 -2.6%
Net Interest Income    10,456     15,137 44.8%
Net interest margin (%) 3.3% 3.7%  
Other Income      9,585     10,007 4.4%
Other Expense      8,278     10,645 28.6%
Provisions and contingencies      3,152       3,330 5.6%
Profit before tax    11,763     14,499 23.3%
Tax      2,990       3,751 25.5%
Profit after tax/ (loss)      5,621       7,418 32.0%
Net profit margin (%) 19.3% 22.3%  
No. of shares (m)      359.7       407.4  
Book value per share (Rs)         414.5  
P/BV (x)*              3.2  
*Book value as on 30th June 2010

What drove performance in 1QFY11?
  • Outperforming its peers in terms of growth and margins is something that Axis Bank has managed in some of the most difficult periods of last 2 years. In the results conference call today, the management of Axis Bank seemed sanguine about continuing this trend. However, the 39% YoY growth in loans that the bank has clocked in 1QFY11 is certainly not sustainable. For one this growth has come on a much lower base in 1QFY10 when the retail loan growth had fallen drastically. Also the management believes that growth during the current fiscal will get moderated hereon.

    The bank balanced the growth in deposits through term deposits as well as CASA (low cost deposits). However, with a higher proportion of CASA, the differential in lending and borrowing rates aided the improvement in the bank’s NIMs by a healthy 0.4%. The bank is targeting NIMs in the range of 3.5% to 3.7% in the medium term. While our estimates are slightly conservative, we nonetheless believe that it will continue to remain amongst the best in the industry.

    Outperforming peers..
    (Rs m) 1QFY10 % of total 1QFY11 % of total Change
    Advances 781,360   1,086,090   39.0%
    Agriculture 82,180 9.2% 105,870 9.0% 28.8%
    Retail 167,800 22.8% 210,730 22.0% 25.6%
    SMEs 142,320 19.3% 168,180 20.0% 18.2%
    Large corporates 389,060 48.7% 601,310 49.0% 54.6%
    Deposits 1,102,560   1,474,790   33.8%
    CASA      441,760 40.1%      592,490 40.2% 34.1%
    Term deposits 660,800 59.9% 882,300 59.8% 33.5%
    Credit deposit ratio 70.9%   73.6%    

  • Axis Bank also continued to build an India-wide presence through its 1,035 branches and 4,293 ATMs across 643 cities. During 1QFY11, the bank added 15 branches and 181 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 39% YoY and those of current account deposits grew 37% YoY. Demand deposits constituted 37% of total daily average deposits during 1QFY11, same as observed during 1QFY10. This aided the bank’s improvement in spreads.

  • Axis Bank’s fee income registered a strong growth of 19% YoY during 1QFY11. The proportion of fee to total income however dropped from 32% in 1QFY10 to 30% in 1QFY11. The growth in fees from agri business and capital markets segment slowed down while those from retail and large and mid corporate banking were the lead driver for the bank’s overall fee income growth during 1QFY11.

  • Axis Bank’s net NPAs as a percentage of advances remained stable at 0.35% with a marginal improvement in the past quarter. Gross NPAs were at 1.1% at the end of 1QFY11 and the provision coverage was 77% (above RBI’s mandate). Having said that the management cited concerns over possible delinquencies in the restructured assets.

    Axis Bank restructured assets worth Rs 300 m in 1QFY11. While the bank currently has Rs 21.5 bn of restructured assets the total restructured assets comprised 1.8% of advances at the end of 1QFY11. 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 and agricultural loans that form 27% of restructured assets.

  • The bank had 61% of investments in the HTM basket in 1QFY11, 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 1,345, the stock is trading at a multiple of 2.2 times our estimated FY13 adjusted book value (for ResearchPro subscribers, our latest view can be tracked here) 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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Mar 26, 2019 (Close)


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