Axis Bank Results Analysis - Equitymaster

Performance summary Interest income grows by 55% YoY on the back of 50% YoY growth in advances. Net interest margin improves to 3.3% due to lower cost of funds and higher proportion of CASA. Cost to income ratio remains stable at 50%. Bottomline grows by 66% YoY aided by strong traction in fee income, despite higher provisioning. Capital adequacy ratio (CAR) comfortable at 16.9%. Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change Interest income 11,648 18,023 54.7% 31,201 49,898 59.9% Interest expense 7,737 10,550 36.4% 20,908 32,329 54.6% Net Interest Income 3,911 7,473 91.1% 10,293 17,569 70.7% Net interest margin (%)       2.9% 3.3%   Other Income 2,797 4,879 74.4% 7,090 12,390 74.8% Other Expense 3,369 5,629 67.1% 8,715 14,928 71.3% Provisions and contingencies 515 2,001 288.5% 1,864 4,154 122.9% Profit before tax 3,339 6,723 101.3% 8,668 15,031 73.4% Tax 977 1,654 69.3% 2,333 3,780 62.0% Profit after tax/ (loss) 1,847 3,068 66.1% 4,471 7,097 58.7% Net profit margin (%) 15.9% 17.0%   14.3% 14.2%   No. of shares (m)       281.2 357.4   Book value per share (Rs)         234.3   P/BV (x)*         4.7   *Book value as on 31st December 2007 What has driven performance in 3QFY08? Axis Bank touched the 50% mark in its advance growth for the tenth consecutive quarter in 3QFY08. What makes the growth more sustainable is that the bank has not concentrated its exposure to any single segment but has been altering its asset mix depending upon the industry scenario and its risk appetite. Also, a rise in the proportion of CASA (current and savings accounts) suggests a cost conscious strategy with respect to deposit accretion. Cost centric growth.. (Rs m) 9mFY07 % of total 9mFY08 % of total Change Advances 323,370   486,320   50.4% Agriculture 23,370 7.2% 36,790 7.6% 57.4% Retail 91,780 28.4% 120,090 24.7% 30.8% SMEs 57,210 17.7% 90,080 18.5% 57.5% Large corporates 151,010 46.7% 239,360 49.2% 58.5% Deposits 509,200   685,510   34.6% CASA 188,830 37.1% 310,320 45.3% 64.3% Term deposits 320,370 62.9% 375,190 54.7% 17.1% Credit deposit ratio 63.5%   70.9%     Continuing with the trend seen in the past few quarters, Axis Bank's fee income registered a strong growth of 81% YoY during 3QFY08 and 71% YoY during 9mFY08. The proportion of fee income to total income remained stable at 30%. Although the trading profits grew by 65% YoY, the share of trading profits to operating revenue decreased marginally to 11% in 3QFY08 from 12% in 3QFY07. While the bank's net NPAs as a percentage of advances have shrunk to 0.4% in 3QFY08 against 0.7% in 3QFY07, the bank has also 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 amounted to 83.1% in 9mFY08. If the accumulated write-offs are excluded, then the provisions held as a proportion of gross NPAs amounted to 47.7%. 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. This made the bank well equipped to sustain its growth in the medium term. What to expect? At the current price of Rs 1,094, the stock is fairly valued at 3.3 times our estimated FY10 adjusted book value. While Axis Bank continues to outperform our expectations in terms of asset growth and fees, we also derive comfort from its cost-centric approach. Although the fact that the bank has chosen to guard its asset quality rather than chase high yielding assets is encouraging, 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.