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Axis Bank: Provision write backs boost profits

Jul 28, 2014 | Updated on Oct 30, 2019

Axis Bank declared the results for the first quarter of financial year ended March 2015 (1QFY15). The bank has reported 15.5% YoY growth in net interest income and 18.3% YoY growth in net profits for 1QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 15.5% YoY during 1QFY15 on the back of 16% YoY growth in advances.
  • Net interest margins (NIM) move up from 3.7% in 1QFY14 to 3.9% in 1QFY15. The average NIM over the past 5 fiscals has been above 3.3%.
  • Net profits grow by 18.3% YoY in 1QFY15 backed by higher NIMs and growth in fee income (22% YoY).
  • Gross NPAs move up to 1.3% while net NPAs also came in higher at 0.4% of advances at the end of 1QFY15, provision coverage at 77%.
  • Capital adequacy ratio (CAR) on a firm footing at 15.5% at the end of June 2014 as per Basel III norms (Tier 1 capital at 12.1%).

Rs (m) 1QFY14 1QFY14 Change
Interest income 72,778 82,894 13.9%
Interest expense 44,126 49,789 12.8%
Net Interest Income 28,652 33,105 15.5%
Net interest margin (%) 3.9% 3.9%  
Other Income 17,813 16,910 -5.1%
Other Expense 18,029 21,058 16.8%
Provisions and contingencies 7,123 3,866 -45.7%
Profit before tax 28,436 28,957 1.8%
Tax 7,223 8,423 16.6%
Profit after tax/ (loss) 14,091 16,668 18.3%
Net profit margin (%) 19.4% 20.1%  
No. of shares (m)**   2,356.5  
Book value per share (Rs)**   169.9  
P/BV (x)*   2.3  
*Book value as on 31st March 2014
**Adjusted for stock split in the ratio 5:1

What has driven performance in 1QFY15?
  • Despite slower growth in deposits and advances, Axis Bank did a reasonably good job of protecting margins in 1QFY15. The bank's loan growth at 16.3% YoY remains above our estimates for the fiscal. Its earlier focus on corporate loans, however, has taken a backseat. The retail loan portfolio, of which housing loans comprised 53% and auto loans comprised 10%, helped Axis Bank's advance growth meet the RBI's target. With 13.6 m savings bank accounts from 2,421 branches at the end of June 2014 the bank has undoubtedly leveraged its franchise well and capitalized on CASA deposits. The latter was at 42.4% of overall deposits at the end of June 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 safeguarding the bank's net interest margins (NIMs) at 3.9% in 1QFY15. Axis Bank is targeting NIMs in the range of 3.3% to 3.7% in the medium term.

    Corporate loans take backseat
    (Rs m) 1QFY14 % of total 1QFY15 % of total Change
    Advances 1,981,510   2,305,350   16.3%
    Retail 676,240 25.7% 912,230 22.0% 34.9%
    SMEs 307,090 13.7% 374,710 15.1% 22.0%
    Large corporates 998,180 53.5% 1,018,410 56.6% 2.0%
    Deposits 2,384,410   2,720,040   14.1%
    CASA 1,010,960 42.4% 1,152,420 42.4% 14.0%
    Term deposits 1,373,450 57.6% 1,567,620 57.6% 14.1%
    Credit deposit ratio 83.1%   84.8%    

  • During 1QFY15, the bank added 18 branches and 8 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 20% YoY and those of current account deposits grew 7% YoY.

  • While Axis Bank's overall fee income registered a growth of 22% YoY during 1QFY14, the retail fees grew by 10% YoY in 1QFY15 offering a big boost. However, the proportion of fee to total income dropped from 35% in 1QFY14 to 34% in 1QFY15. 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 1QFY14. Gross NPAs, also moved up from 1.1% at the end of 1QFY14 to 1.3% in 1QFY15 and the provision coverage was 77%. Having said that the management has not offered enough clarity over possible delinquencies in the restructured assets. The latter were around 2.47% of gross advances at the end of June 2014. The bank had an exposure of 8% each to infrastructure and power and 2.3% to real estate at the end of 1QFY15. 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 1QFY15 given its experience in restructured loans from the segment.

  • Axis Bank's return on equity of 17.9% is lower than that of past 3 years.
What to expect?
At the current price of Rs 396 (adjusted for stock split in the ratio 5:1), the stock is trading at a multiple of 1.7 times our estimated FY17 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. We recommended investors to Sell the stock in May 2014. Even as per our FY17 estimates for the stock, there is hardly any upside from current levels.

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