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Axis Bank: Quality concerns vindicated - Views on News from Equitymaster
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Axis Bank: Quality concerns vindicated
Aug 1, 2015

Axis Bank declared the results for the first quarter of financial year ended March 2016 (1QFY16). The bank has reported 22.5% YoY and 18.7% YoY growth in net interest income and net profits respectively in 1QFY16. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 22.5% YoY during 1QFY16 on the back of 23% YoY growth in advances.
  • Net interest margins (NIM) come down marginally from 3.9% in 1QFY15 to 3.8% in 1QFY16. The average NIM over the past 5 fiscals has been above 3.3%.
  • Net profits grow by 18.7% YoY in 1QFY16 backed by growth in fee income.
  • Gross NPAs move up to 1.4% while net NPAs also came in higher at 0.5% of advances at the end of 1QFY16, provision coverage at 78%.
  • Capital adequacy ratio (CAR) on a firm footing at 15.0% at the end of June 2015 as per Basel III norms (Tier 1 capital at 12.1%).

Standalone financial performance
Rs (m) 1QFY15 1QFY16 Change
Interest income 82,894 99,361 19.9%
Interest expense 49,789 58,799 18.1%
Net Interest Income 33,105 40,562 22.5%
Net interest margin (%) 3.9% 3.8%  
Other Income 16,910 22,982 35.9%
Other Expense 21,058 22,624 7.4%
Provisions and contingencies 3,866 11,217 190.1%
Profit before tax 28,957 40,920 41.3%
Tax 8,423 9,918 17.7%
Profit after tax/ (loss) 16,668 19,785 18.7%
Net profit margin (%) 20.1% 19.9%  
No. of shares (m)*   2,375.7  
Book value per share (Rs)   197.1  
P/BV (x)*   2.8  
*Book value as on 30th June 2015

What has driven performance in 1QFY16?
  • Versus its earlier focus on retail loans, Axis Bank saw most of the growth coming in from corporate loans in the quarter gone by. With 13.6 m savings bank accounts from 2,589 branches (187 added in FY15) at the end of March 2015 the bank had undoubtedly leveraged its franchise well and capitalized on CASA deposits. The latter continued to remain 40% of overall deposits at the end of June 2015. However the growth in CASA deposits was miniscule.

  • While Axis Bank's overall fee income registered a growth of 17% YoY during 1QFY16, the retail fees (37% of fee income source) grew by 10% YoY in 1QFY16 offering a big boost. However, the proportion of fee to total income dropped from 35% in FY14 to 34% in 1QFY16.

  • Axis Bank's net NPAs as a percentage of advances moved up to 0.5%, as against 0.4% in FY14. Gross NPAs, also moved up from 1.2% at the end of FY14 to 1.4% in 1QFY16 and the provision coverage was 78%, not accounting for the accumulated write-offs. The restructured assets were also higher at around 2.8% of gross advances at the end of June 2015.

    Deposit growth lags...
    (Rs m) 1QFY15 % of total 1QFY16 % of total Change
    Advances 2,314,220   2,846,490   23.0%
    Retail 988,172 42.7% 1,138,596 40.0% 15.2%
    Corporate 1,326,048 57.3% 1,707,894 60.0% 28.8%
    Deposits 2,723,752   3,077,840   13.0%
    CASA 1,184,832 43.5% 1,231,136 40.0% 3.9%
    Term deposits 1,538,920 56.5% 1,846,704 60.0% 20.0%
    Credit deposit ratio 85.0%   92.5%    
What to expect?
At the current price of Rs 574 the stock is trading at a multiple of 2.0 times our estimated FY18 adjusted book value. Axis Bank has seen consistent deterioration in asset quality over the past year. Although the growth in retail loans may accelerate, we believe the bank will have to provide more for NPA risks. 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 have arrived at a target price of Rs 690 for Axis Bank from FY18 perspective, which offers CAGR of 9% from current levels. We recommend investors to not buy the stock at current valuations.

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