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Axis Bank: Positive surprise on margins

Oct 28, 2011

Axis Bank declared the results for the second quarter and first half of financial year 2011-2012 (1HFY12). The bank has reported 19% YoY growth in net interest income and 26% YoY growth in net profits for the half year period. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 19% YoY during 1HFY12 on the back of 27% YoY growth in advances.
  • Net interest margins (NIM) improve to 3.8% in 1HFY12 from 3.7% in 1HFY11 despite rise in cost of funds.
  • Net profits grow by 26% YoY in 1HFY12 backed by higher fee income and provision writebacks.
  • Net NPA to advances remain steady at 0.3% of advances at the end of 1HFY12 as in 1HFY11.
  • Capital adequacy ratio (CAR) at 11.4% at the end of September 2011, Tier 1 capital at 8.5%.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 36,242 52,759 45.6% 69,498 101,573 46.2%
Interest expense 20,091 32,687 62.7% 38,209 64,260 68.2%
Net Interest Income 16,151 20,072 24.3% 31,289 37,313 19.3%
Net interest margin (%)       3.7% 3.8%  
Other Income 10,332 12,349 19.5% 20,340 24,027 18.1%
Other Expense 11,619 14,665 26.2% 22,265 28,000 25.8%
Provisions and contingencies 3,787 4,056 7.1% 7,118 5,814 -18.3%
Profit before tax 14,864 17,756 19.5% 29,364 33,340 13.5%
Tax 3,725 4,497 20.7% 7,476 8,900 19.0%
Profit after tax/ (loss) 7,352 9,203 25.2% 14,770 18,626 26.1%
Net profit margin (%) 20.3% 17.4%   21.3% 18.3%  
No. of shares (m)         412.3  
Book value per share (Rs)         509.0  
P/BV (x)*         2.2  
*Book value as on 30th September 2011

What drove performance in 1HFY12?
  • Despite being slightly constrained in terms of its capital adequacy ratio, Axis Bank managed to outdo most of its peers in balance sheet growth for the first half of FY12. As per the management, even if the bank goes in for equity dilution, the growth in loan book may be muted over the next 1 to 2 years. The growth so far has been while sustaining net interest margins above sector average. In fact for 1HFY12, the NIMs are well above our estimates. However, if the bank chooses to increase borrowings to sustain growth rates, the same may come in at the cost of margins.

  • The growth in deposits for the bank was primarily through CASA. The CASA base (low cost deposits) improved despite the hike in term deposit rates. The bank is targeting NIMs in the range of 3.5% to 3.7% in the medium term.

    Outperforming peers..
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 1,105,880   1,400,892   26.7%
    Agriculture 90,730 8.2% 106,160 7.6% 17.0%
    Retail 209,970 19.0% 293,280 20.9% 39.7%
    SMEs 168,120 15.2% 207,550 14.8% 23.5%
    Large corporates 637,060 57.6% 793,902 56.7% 24.6%
    Deposits 1,568,870   1,944,550   23.9%
    CASA 651,860 41.5% 821,400 42.2% 26.0%
    Term deposits 917,010 58.5% 1,123,150 57.8% 22.5%
    Credit deposit ratio 70.5%   72.0%    

  • Axis Bank also continued to build an India-wide presence through its 1,438 branches and 7,590 ATMs across 953 cities. During 1HFY12, the bank added 56 branches and 1,324 ATMs. The daily average balances of the savings bank deposits during the quarter grew by 32% YoY and those of current account deposits grew 20% YoY. Demand deposits constituted 41% of total daily average deposits during 1HFY12.

  • While Axis Bank's fee income registered a growth of 32% YoY during 1HFY12, the proportion of fee to total income improved from 30% in 1HFY11 to 37% in 1HFY12. There was a drop in fees from business banking and capital markets. The fees from retail segment recorded the highest growth.

  • Axis Bank's net NPAs as a percentage of advances remained stable at 0.3% with a marginal improvement in the past quarter. Gross NPAs were at 1.0% at the end of 1HFY12 and the provision coverage was 77.6% (above RBI's mandate). Having said that the management cited concerns over possible delinquencies in the restructured assets.

    Axis Bank currently has restructured assets comprising 1.49% of advances at the end of 1HFY12. Most of the restructured loans belonged to the textile and shipping sectors.
What to expect?
At the current price of Rs 1,117, the stock is trading at a multiple of 1.6 times our estimated FY14 adjusted book value. Axis Bank’s performance in the first half of FY12 has been well in line with our estimates in terms of asset growth and net interest margins for the full fiscal. 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 some capital constraints impacting asset growth in the medium term, we reiterate our positive outlook on the bank from a long term perspective.

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