Stock Review: AXIS BANK

AXIS Bank has once again displayed the ability to outgrow its peers. The bank grew its bottomline at 38% yearon-year (y-o-y) in the September 2010 quarter. The bank's stock reached its 52-week high of 1,606.7 during Thursday's trade after it announced its quarterly results. The robust profit growth was on account of the 36.5% growth in advances. Though this is lower compared with the 39% jump in the previous quarter, it is still much higher than the level seen in December 2009, when credit growth had slipped to around 13%. The bank's asset quality has also improved. Net nonperforming assets (NPAs) formed 0.3% of net advances. The bank has shown exemplary performance in this area as its net NPAs have been hovering around 0.4% in the last nine quarters. The bank also improved its net interest margin (NIM) – the spread between the bank's borrowing and lending rates — to 3.7%, up by about 16 basis points yo-y. Among its peers, only HDFC Bank and Punjab National Bank have reported better NIMs.

   In an industry where large-size banks strive hard to maintain the spread, Axis Bank has managed to keep it in excess of 3.5% for the past five quarters. A possible reason for this could be the high share of the low-cost current and savings account (CASA) balances. For any bank, a higher share of lowcost deposits drives NIM, since it reduces the overall cost of borrowing for the bank, thereby improving the spread. CASA balances stood at 41.6% of the total deposits at the end of the September quarter.

   Another feature of the results was that the bank maintained high profitability even after it saw a 52% fall in trading income. Bond yields hardened during the September 2010 quarter. In such an event, bond prices fall and opportunities for making trading gains are limited. The bank might not be able to grow its loan book at a high rate, but its profit growth can be expected to be high. This is because it has a clean book and sufficient provision coverage. At 80%, the provision coverage is well above the minimum 70% prescribed by the banking regulator. This shows that it will not require higher provisioning, which, in turn, will allow its profit to grow at a high rate.

   The bank already has investors' confidence as its stock has outperformed the benchmark on a consistent basis for the past eight months. Given that the bank has reported robust numbers in the September quarter, the tempo is likely to continue going forward.