Stock Review: AXIS BANK

The country's third-largest private lender, Axis Bank, posted a 33.5% jump in net profit to . 1,020 crore in the fourth quarter ending March 31, 2011, on the back of fee-based income.

The net interest income of the bank has remained almost flat at . 1,701 crore (a fall of 2% sequentially) on account of rising cost of funds. What could be of concern is the compression in its interest margin.

Axis Bank's loan book grew 36.5% — outpacing the 21% growth at the industry level, but lower when compared with the 46% jump in the previous quarter. Large and mid-corporate credit continued to dominate the loan book of Axis, although retail lending is catching up fast. Total deposits grew 34%, bringing down the credit-to-deposit ratio of the bank to 75% from 79% in the previous quarter.

A major concern for the bank is its rising cost of deposits. The bank's interest on deposits on an average has risen by 125 bps at 5.7% on a year-on-year basis. As a result, interest expense rose 79% on a Y-o-Y basis. This has led to a contraction in its net interest margin (NIM) — a key measure of profitability — by almost 65 bps on a yearly basis at 3.4% for March 2011.

Axis Bank recorded a fall in NIM, as expected by most analysts. Additionally, the bank's CASA also fell marginally this quarter, further accentuating the pressure on NIM.

The bank's trading income also fell by 43% in the quarter on account of the rising bond yields. As bond yields rise, bond prices fall and opportunities for making trading gains are then limited.

A positive feature of the result was the improvement in the banks asset quality, with net nonperforming asset (NPA) improving by 30 bps to 2.3% the quarter. A cleaner loan book will help the bank to report lower incremental provision coverage ratio, which currently is at 81% (after accumulated write-offs). This, in turn, will allow the bank to grow at a higher rate.

At a price to earning (P/E) ratio of 18, the bank's stock appears to be reasonably priced when compared with some of its closest peers, such as HDFC Bank.