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Axis Bank: Core income remains steady - Views on News from Equitymaster

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Axis Bank: Core income remains steady

Oct 15, 2010

Axis Bank declared its 2QFY11 results. The bank has reported 27% YoY growth in interest income and 38% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 42.5% YoY during 1HFY11 on the back of 37% YoY growth in advances.
  • Net interest margins (NIM) move up to 3.7% in 1HFY11 from 3.5% in 1HFY10.
  • Net profits grow by 35% YoY in 1HFY11 despite negligible growth in other income.
  • Net NPA to advances marginally lower at 0.34% at the end of 2QFY11 as against 0.35% in 1QFY10.
  • Capital adequacy ratio (CAR) comfortable at 13.7% at the end of 2QFY11.

Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income 28,603 36,242 26.7% 57,659 69,498 20.5%
Interest expense 17,106 20,091 17.5% 35,706 38,209 7.0%
Net Interest Income 11,497 16,151 40.5% 21,953 31,289 42.5%
Net interest margin (%)       3.5% 3.7%  
Other Income 10,655 10,332 -3.0% 20,241 20,340 0.5%
Other Expense 9,095 11,619 27.8% 17,373 22,264 28.2%
Provisions and contingencies 4,988 3,787 -24.1% 8,141 7,117 -12.6%
Profit before tax 13,057 14,864 13.8% 24,821 29,365 18.3%
Tax 2,752 3,724 35.3% 5,742 7,476 30.2%
Profit after tax/ (loss) 5,317 7,353 38.3% 10,938 14,772 35.1%
Net profit margin (%) 18.6% 20.3%   19.0% 21.3%  
No. of shares (m)         408.8  
Book value per share (Rs)         432.5  
P/BV (x)*         3.6  
*Book value as on 30th Sept 2010

What drove performance in 2QFY11?
  • Despite negligible support from its non-core revenues streams of fees and treasury income, Axis Bank has managed to put up a credible performance in the second quarter of FY11. While the 37% YoY growth in loans that the bank has clocked in 1HFY11 may not be sustainable, it must be remembered that this growth has come on a lower base in 1HFY10 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 0.2%. 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) 1HFY10 % of total 1HFY11 % of total Change
    Advances 810,440   1,105,930   36.5%
    Agriculture 79,423 9.8% 110,593 10.0% 39.2%
    Retail 179,496 22.0% 210,010 19.0% 17.0%
    SMEs 156,415 19.3% 243,305 22.0% 55.6%
    Large corporates 395,106 48.8% 542,022 49.0% 37.2%
    Deposits 1,155,420   1,534,160   32.8%
    CASA 494,620 42.8% 651,860 42.5% 31.8%
    Term deposits 660,800 57.2% 882,300 57.5% 33.5%
    Credit deposit ratio 70.1%   72.1%    

  • Axis Bank also continued to build an India-wide presence through its 1,103 branches and 4,846 ATMs across 676 cities. During 1HFY11, the bank added 68 branches and 553 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 1HFY11, same as observed during 1HFY10. This aided the bank’s improvement in spreads.

  • Although Axis Bank’s fee income registered a growth of 18% YoY during 1HFY11, the proportion of fee to total income however dropped below 30%. There was a drop in fees from business banking and capital markets. The share of trading profits to operating revenue decreased from 10% in 2QFY10 to 4% in 2QFY11.

  • Axis Bank’s net NPAs as a percentage of advances remained stable at 0.34% with a marginal improvement in the past quarter. Gross NPAs were at 1.1% at the end of 2QFY11 and the provision coverage was 80% (above RBI’s mandate). Having said that the management cited concerns over possible delinquencies in the restructured assets.

    Axis Bank restructured assets worth Rs 600 m in 2QFY11. While the bank currently has Rs 20.6 bn of restructured assets the total restructured assets comprised 1.7% of advances at the end of 1HFY11. 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 64% of investments in the HTM basket in 2QFY11, 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 1,563, the stock is trading at a multiple of 2.5 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 inconsistency in fee income of late has been a matter of concern.

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