Stock Review: AXIS BANK

AXIS Bank continued its winning streak, reporting a 36% net profit growth on a year-on-year basis in the December 2010 quarter. Although the bank's net interest income took a bit of a hit due to an increase in interest expenses, it surprised analysts with a loan growth of 46% and a 16% increase in fee income. The bank's results exceeded street estimates with a strong loan growth, higher margins and lower provisions. The bank maintained a tight control on its asset quality'; its net non-performing asset ratio, or bad debts, is at an all-time low. In percentage terms, its nonperforming assets (NPA) formed 0.29% of its advances. This has helped the lender reduce its provisions coverage ratio.

   The bank's net interest margin (NIM) — a key measure of profitability from core operations — improved 13 bps on a quarter-onquarter basis at 3.81%. The management has indicated that it expects NIM to remain in the range of 3.4-3 .6% in the coming quarter, due to high cost of funds and shrinking margins.

   Advances growth was mainly driven by a strong growth in the large and mid-corporate segment, which grew 69.5% on a year-on-year basis. In the retail loan segment, personal loans increased by 140% on a sequential basis. However, according to a Prabhudas Liladher report, the increase in personal loans is on account of certain one-off loans to the tune of . 25 billion pertaining to specific housing loan scheme applications. These are short-term loans and are likely to get repaid by the first quarter of the financial year 2012.

   The bank restructured loans of . 1.6 billion during the quarter. The restructuring has been mainly with the textile and shipping sectors. The cumulative restructured assets are now close to 1.7% of net advances.

   While its CASA ratio — an indicator of relatively low-cost deposits — increased sequentially to 42%, term deposits declined. PLR and base rate hikes, coupled with an impressive increase in CASA balances (despite rising term deposit rates), led to sequential improvement in margins. But, margins are likely to contract as the full impact of a deposit rate hike will be felt in the coming quarters.

   Axis Bank has delivered healthy core operating performance. Margin pressures are likely to persist, which is in line with the industry trend. An improvement in asset quality should result in lower credit cost. The healthy growth momentum for the bank is likely to be maintained.