Stock Review: Axis Bank

DESPITE a challenging environment comprising high interest rates and intense competition for deposit mobilisation, Axis Bank is confident of growing at a rate higher than that of the industry's. No wonder, the private sector bank has emerged as a favourite of foreign institutional investors, as the ownership pattern of Nifty 50 shows. What makes the bank popular with most analysts is its diversified income source and the ability to grow lowcost current and savings account (Casa) deposits. However, Religare believes mobilisation of Casa deposits could well have come under pressure in the fourth quarter of FY11 due to migration of savings deposits to term deposits, thanks to a sharp increase in rates. This would, in turn, exert pressure on the net interest margins, which is why analysts are forecasting them to compress by 20 basis points in the fourth quarter. The bank, however, is confident of maintaining the same at 3.6 per cent.

Owing to a fairly strong operating matrix, the bank is expected to post a compounded annual growth rate (CAGR) of 22 per cent for core operating profits over FY1013, led by 23 per cent CAGR for net interest income (backed by robust loan growth), fee income growth of 22 per cent and controlled operating expenses, says Motilal Oswal. The confidence stems from the bank's third quarter performance, wherein Casa growth stood strong at 36 per cent year-on-year and the average daily Casa ratio clocked at 41 per cent. In the same period, loans grew 46 per cent on-year and 12 per cent quarter on quarter.

While Axis Bank had been ramping up its retail presence over the last year, it intends to continue leveraging its strong corporate platform to benefit from an upturn in corporate capital expenditure and infrastructure cycle. Also, the bank's overseas strategy ties in with its strong corporate relationship in India.

Its international business accounts for 17 per cent of its loans. The bank plans to open a branch in the UK, aiming to collect retail deposits that could be used for lending to Indian companies there for their trade finance and ECB needs.

Over the last year, Axis has strengthened processes in its retail asset business and is now targeting to scale-up the same. It is also focusing on wealth management and retail broking (recently launched an online broking portal) and believes its recent acquisition of Enam Securities will help scale-up these businesses, says CLSA. However, what concerns analysts is the bank's higher exposure to the infrastructure and power sectors, as higher losses in SEBs and execution risks in upcoming projects could weigh on valuations.