Stock Review: Axis Bank

Higher cost of funds and lower margins restrict profit growth during the September quarter

Margin pressure was the key takeaway from Axis Bank's September quarter results, with increase in cost of funds making an impact. Net interest margins (NIMs) fell marginally by three basis points on a sequential basis to 3.68 per cent during the quarter due to a 60-basispoint increase in the cost of term deposits. The decline in margins would have been higher had the share of lowcost current and saving account deposits not increased –it rose 138 basis points sequentially to 41.55 per cent.

Going by the management's guidance, margins will remain under pressure despite a rise in the prime lending rate and the base rate announced in September. NIMs are seen settling lower at 3.253.5 per cent for 2010-11.

While advances and deposits grew 36 per cent yearon-year due to a low base, the management's loan growth guidance of about 26 per cent for 2010-11 is comforting. The focus seems to be on quality, considering that loan growth was skewed towards large and mid-sized corporates (up six per cent sequentially).

Retail loan portfolio, where exposure to home and mortgage loans increased, dipped marginally on a sequential basis, but increased 17 per cent year-on-year. This helped stabilise portfolio quality, with net non-performing loans at 0.34 per cent of total assets.

Improving economic activity helped the bank's fee income grow about 14 per cent sequentially to `849 crore, with gains coming from large- and mid-corporate credit and treasury and debt capital market segments. On the flip side, higher operating expenses dragged net profit, albeit marginally, to

`735 crore. The stock fell 1.81 per cent on Thursday, double the 0.91per cent decline in Nifty, reflecting the market's disappointment with the results. At CMP, the stock trades at three times its price to 201112 book value estimates.