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Axis Bank: Well capitalised for growth - Views on News from Equitymaster
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Axis Bank: Well capitalised for growth
Oct 12, 2009

Performance summary
  • Net interest income rises by 27% YoY during 1HFY10 on the back of 18% YoY growth in advances.
  • Net interest margins (NIM) move up to 3.5% in 1HFY10 from 3.3% in 1HFY09.
  • Net profits grow by 49% YoY backed by strong traction in other income (up 53% YoY), despite higher provisioning.
  • Net NPA to advances remain stable at 0.5% at the end of 1HFY10.
  • Capital adequacy ratio (CAR) higher at 16.5% at the end of 1HFY10 after capital raising in 2QFY09.

Rs (m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Interest income 25,450 28,603 12.4% 48,114 57,659 19.8%
Interest expense 16,315 17,106 4.8% 30,875 35,706 15.6%
Net Interest Income 9,135 11,497 25.9% 17,239 21,953 27.3%
Net interest margin (%)       3.3% 3.5%  
Other Income 6,944 10,656 53.5% 13,192 20,241 53.4%
Other Expense 7,334 9,095 24.0% 13,663 17,373 27.2%
Provisions and contingencies 2,557 4,988 95.1% 5,525 8,141 47.3%
Profit before tax 8,745 13,058 49.3% 16,768 24,821 48.0%
Tax 2,157 2,752 27.6% 3,919 5,742 46.5%
Profit after tax/ (loss) 4,031 5,318 31.9% 7,324 10,938 49.3%
Net profit margin (%) 15.8% 18.6%   15.2% 19.0%  
No. of shares (m)       359.0 402.0  
Book value per share (Rs)         375.3  
P/BV (x)*         2.7  
*Book value as on 30th September 2009

What drove performance in 1HFY10?
  • Axis Bank managed to sustain its balance sheet growth at a relatively moderated pace (as compared to the past quarters) in 2QFY09. However the bank’s 1HFY09 results show that the bank has not sacrificed profitability. While the moderated growth in advances (37% YoY) was primarily on the back of a cut-down in the exposure to retail advances, the Axis Bank managed to improve its margins this quarter. With a higher proportion of CASA, the differential in lending and borrowing rates aided the improvement in the bank’s NIMs by a healthy 0.2%. The management believes that the same may not be sustained going forward as the cost of funds rise and the bank’s leverage increases. It is targeting NIMs in the range of 3.2% to 3.4% for this fiscal. Nonetheless, we believe that it will continue to remain amongst the best in the industry.

    Keeping moderated pace..
    (Rs m) 1HFY09 % of total 1HFY10 % of total Change
    Advances 688,530   810,440   17.7%
    Agriculture 55,070 9.2% 82,170 9.0% 49.2%
    Retail 135,920 22.8% 160,520 22.0% 18.1%
    SMEs 115,360 19.3% 160,770 20.0% 39.4%
    Large corporates 290,260 48.7% 412,110 49.0% 42.0%
    Deposits 1,028,850   1,155,990   12.4%
    CASA 414,360 40.3% 494,620 42.8% 19.4%
    Term deposits 614,490 59.7% 661,370 57.2% 7.6%
    Credit deposit ratio 66.9%   70.1%    

  • Axis Bank also continued to build an India-wide presence through its 916 branches and 3,866 ATMs across 564 cities. During 2QFY10, the bank added 55 branches and 143 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 33% YoY and those of current account deposits grew 21% YoY. Demand deposits constituted 39% of total daily average deposits during 2QFY10, higher than the level of 37% observed during 2QFY09. This aided the bank’s improvement in spreads.

  • Axis Bank’s fee income registered a strong growth of 16% YoY during 1HFY10. The proportion of fee to total income however dropped from 38% in 1HFY09 to 32% in 1HFY10. The growth in fees from capital markets segment slowed down while that from retail and large and mid corporate banking were the lead driver for the bank’s overall fee income growth during 1HFY10. The retail segment contributed 21% of total fees.

  • Axis Bank’s net NPAs as a percentage of advances remained stable at 0.45% with a marginal slippage in the past quarter. Gross NPAs were at 1.2% at the end of 1HFY10 and the provision coverage was 86.7%. While the bank currently has Rs 24 bn of restructured assets the total restricted assets coupled with gross NPAs comprised 3.74% of advances at the end of 1HFY10. The management does see the risk of some restructured assets moving into NPAs in the near term.

What to expect?
At the current price of Rs 1,010, the stock is trading attractively at a multiple of 2.1 times our estimated FY12 adjusted book value. Axis Bank has performed in line with our expectations 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. However, given the change in the bank’s top management, our long-term outlook on the bank may warrant a review in the event of any material policy changes seen over the next few quarters.

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