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Axis Bank: Research meet excerpts - Views on News from Equitymaster

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Axis Bank: Research meet excerpts
Dec 3, 2007

We recently met the management of Axis Bank (erstwhile UTI Bank) to understand the prospects of new generation private sector banks going forward and the strategies being adopted by the bank to stay ahead of competition. The case for new generation private sector banks over foreign
As against common perception, the new generation private sector banks do not perceive their foreign counterparts as threatening competition. The reason being the former’s well-entrenched reach and technological superiority. The share of the new generation private sector banks has increased from 7% of the total banking sector’s assets in 2000 to 18% in 2007 and is expected to move up to 30% by FY10. They have cannibalised on the share of PSU and foreign banks in the bargain.

Differentiated business model
The more successful private sector banks today have adopted a two-pronged approach for growth. While some are concentrating on the CASA-led model, others have vouched for the fee-led model. Axis Bank belongs to the former clan and, along with HDFC Bank, has been one of the pioneers of the CASA led model followed by fee income and has been fairly successful at that. Its peers, Kotak Mahindra Bank and ICICI Bank, have been the most successful ones in the fee-led model followed by CASA. Axis Bank benchmarks the business model of California-based Wells Fargo Bank against its own.

Shift from auto loan concentration
Axis Bank had to shift its loan portfolio concentration from auto loans to a diversified mix with the vehicle financing NBFC Shriram Transport Finance opting to stop securitisation of its vehicle loans to the former and keeping it in its own books. The bank currently has more than 50% of is retail assets allocated to mortgage loans where it maintains a loan to value ratio of 85% and 65% in case of loan against property. Having said that, the bank has not compromised on its margins despite the shift in asset mix and has sustained NIMs in the range of 2.8% to 3.0%.

Cost analysis
The cost to income ratio of Axis Bank has averaged at around 50% over the last couple of fiscals and the bank sees this remaining more or less consistent in the medium term. The bank plans to hire 4,000 employees over the next twelve months and set up 150 branches in the current fiscal. Meanwhile, the bank will continue to concentrate on opening new CASA accounts, which will give it the benefit of low cost funding. As a matter of fact, the average cost of opening a new zero balance account is Rs 180 while that for a normal savings account is Rs 400. The account breaks even when the average balance maintained on the same is Rs 18,000. Axis Bank currently has an average balance of Rs 27,000 per account.

Fees – the way forward
Axis Bank currently has a cost to income ratio of 32% of which 40% is contributed by retail, while corporate, cash management & government business and treasury contribute 30%, 20% and 10% respectively. The fee income base of the bank has witnessed a CAGR of 50% over the last 3 years and the bank sees this being sustained going forward. Mutual fund and insurance sales comprise 10% of the bank’s fee income. The bank plans to utilise the capital raised by way of QIP for funding its organic growth and seeks to attain a weighted average return of shareholders’ equity (ROE) of 22% until the capital is fully employed. We expect ROE to be at 21% in FY10.

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