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Axis Bank: Its not just the name… - Views on News from Equitymaster
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Axis Bank: Its not just the name…
Oct 15, 2007

Performance summary
  • Interest income grows by 64% YoY on the back of 54% YoY growth in advances and higher PLR.

  • Net interest margin stable at 2.9%.

  • Rise in operating costs compensated by higher fee income.

  • Bottomline grows by 60% YoY despite higher provisioning.

  • Capital adequacy ratio (CAR) comfortable at 17.6%.

Rs (m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Interest income 10,254 16,765 63.5% 19,553 31,875 63.0%
Interest expense 6,849 10,878 58.8% 13,170 21,779 65.4%
Net Interest Income 3,405 5,887 72.9% 6,383 10,096 58.2%
Net interest margin (%)       2.9% 2.9%  
Other Income 2,048 3,823 86.7% 4,293 7,511 75.0%
Other Expense 2,955 5,087 72.1% 5,346 9,299 73.9%
Provisions and contingencies 341 1,145 235.8% 1,349 2,154 59.7%
Profit before tax 2,498 4,623 85.1% 5,330 8,308 55.9%
Tax 737 1,206 63.6% 1,356 2,126 56.8%
Profit after tax/ (loss) 1,420 2,272 60.0% 2,625 4,028 53.4%
Net profit margin (%) 13.8% 13.6%   13.4% 12.6%  
No. of shares (m) 280.5 356.5   280.5 356.5  
Book value per share (Rs)         224.7  
P/BV (x)*         3.6  
*Book value as on 30th September 2007

Aggressive on growth
Axis Bank is one of the most aggressive players in the private sector banking industry having nearly doubled its share in non-food credit over the last 6 years from 0.9% in FY00 to 2.0% in FY07. The bank in the last few years has changed its focus from the corporate segment and is currently focusing on the retail segment to fuel growth going forward. Its exposure to the retail segment stood at 22% of total advances at the end of FY07. The bank's strategy is to aggressively tap the retail domain via the use of ATMs. Following this strategy, the bank has set up a network of 2,500 ATMs, the third largest in the country. The bank changed its name from UTI Bank to Axis Bank in 2QFY08.

What has driven performance in 2QFY08?
Moving as per the demand: Axis Bank’s performance in this quarter - that has been a difficult one for the banking sector in terms of growth and margins - camouflages the change in the brand identity of the bank. While the focus of Axis Bank’s retail business seems to have clearly shifted to low cost retail deposits as against high-risk retail assets, the trend towards slowing its retail advance growth and going back to adding more large corporates to its customer base is not novel to Axis Bank’s business strategy. However, the same is more visible this quarter. It must be noted here that the overall growth in advances for the bank is at rates more than double the sector average (23% YoY). Despite a sizeable advance book, Axis Bank showed no signs of slowing down in its incremental advance growth, clocking over 50% YoY growth for the ninth consecutive quarter in 2QFY08. Also, a rise in the proportion of CASA (current and savings accounts) suggests a cost conscious strategy with respect to deposit accretion.

Cost focused growth..
(Rs m) 1HFY07 % of total 1HFY08 % of total Change
Advances 291,210   447,010   53.5%
Agriculture 18,320 6.3% 33,650 7.5% 83.7%
Retail 85,417 29.3% 108,480 24.3% 27.0%
SMEs 51,330 17.6% 78,010 17.5% 52.0%
Large corporates 136,143 46.8% 226,870 50.8% 66.6%
Deposits 489,860   641,120   30.9%
CASA 195,790 40.0% 290,850 45.4% 48.6%
Term deposits 294,070 60.0% 350,270 54.6% 19.1%
Credit deposit ratio 59.4%   69.7%    

On the net interest margin front, the bank has sustained it at 2.9% in as 1HFY07. Despite the costs of funds having lowered by nearly 20 basis points this quarter due to the raising of equity capital, the yields having been impacted by the change in composition of assets (towards low yielding ones), which have capped the NIM growth. The bank had earlier clarified that the downward pressure on spreads had arisen partly on account of the acquisition of short-term priority sector assets towards the end of the final quarter of the previous year, for purposes of regulatory compliance. As these assets go off the bank’s books, the NIMs can be expected to rise.

Treasury complements fee income: Higher treasury gains (up 339% YoY) buoyed the bank’s other income growth for the first quarter. The share of trading profits to the operating revenue increased from 4% in 2QFY07 to 11% in 2QFY08. A 69% YoY growth in fee income in 2QFY08 took the contribution of fee-based income to the bank’s total income to 52% in 1HFY08, from 33% in 1HFY07. The bank has outperformed our estimates on this parameter and continued to surpass closest competitor HDFC Bank (25%) in terms of fee income contribution.

While both retail and corporate segments contributed an appreciable proportion of the fee income growth, Axis Bank has also succeeded in growing its market share in cash management services (CMS) and improving its stronghold on placement and syndication of corporate bonds and project advisory services. The number of CMS clients has grown to 2,592, from 1,432 a year earlier (cash remittance throughput up 77% YoY). Besides, given the fact that the bank has 90% of its investments in the HTM (held to maturity) category and AFS (available for sale) duration of less than a year, its treasury portfolio is one of the best hedged in the sector.

‘Relatively’ lower NPAs: The aggressive growth in retail assets had earlier shown a red signal to the bank in the second and third quarter of FY07, as there had been a visible growth in incremental delinquencies in absolute terms. The same has, however, got camouflaged in percentage terms due to the higher growth in advances. While it is heartening to see that the bank’s net NPAs as a percentage of advances have remained stable at 0.6% in 2QFY08 against 0.7% in 2QFY07, the bank has not succeeded in arresting the incremental delinquencies (in absolute terms) this quarter. The provisions held together with accumulated write-offs as a proportion of gross NPAs and accumulated write-offs amount to 77.6% at end of 1HFY08. If the accumulated write-offs are excluded, then the provisions held as a proportion of gross NPA amount to 42.4%.

Cost heavy: Axis Bank that had one of the lowest cost to income ratio in the Indian banking sector has seen its operating costs escalate over the past few quarters, understandably due to accretion of franchise and branches. The bank has over the last 12 months added 125 branches and 479 ATMs across 84 new towns and cities. The same has spurted its cost to income ratio from 47% in 4QFY07 to 52.4% in 1HFY08, largely due to the high employee intake in the past few quarters. This will impact the bank’s efficiency ratios in the medium term. Axis Bank also opened its overseas branch in Hong Kong in February 2007 and in Dubai in April 2007. This is in addition to its existing overseas branches in Singapore and Shanghai. The total assets under overseas operations were US$ 1.2 bn as at the end of September 2007.

Capital raising: The bank’s capital adequacy ratio (CAR) of 11.5% in 1QFY08 was not sufficient to sustain growth at the current rates and for Basel-II compliance by March 2008. During 2QFY08, Axis Bank successfully raised US$ 218 m by way of a GDR offering, Rs 17 bn through a QIP and Rs 19 bn through a preferential allotment to promoters. As a consequence, the CAR increased to 17.6%, being comfortable to accommodate future growth as well as Basel II compliance.

What to expect?
At the current price of Rs 815, the stock is fairly valued at 2.9 times our estimated FY10 adjusted book value. While Axis Bank continues to outperform our expectations in terms of asset growth and fees, we remain skeptical about the downside in margins. Although the fact that the bank has chosen to guard its asset quality rather than chase high yielding assets is a matter of comfort, this may put its net interest margins at risk. Nevertheless, the bank’s consistency in fee income growth makes it a safe play in the rising interest rate scenario. Our outlook on the bank continues to remain positive from a long-term perspective, however, the current valuations warrant a cautious approach.

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