Stock Review: AXIS BANK

For Axis Bank, the country's third-largest private lender, profit growth has been trimmed to 27% from 30% plus growth in the past two fiscals. However, even at this level of profit margin, the bank seems to have exceeded market expectations. The rise in profit was mainly driven by high fee income and a sharp fall in provisions. However, a fall in interest rate margins from the past two quarters is sure to raise concerns.

Net interest income — the difference between interest earned and interest paid — have grown almost 14% from a year-ago period due to a 21.5% growth in loans. Retail portfolio constitutes only 20% of Axis Bank's loan portfolio, of which more than 75% is home loan.
A major concern for Axis is its shrinking interest margins. This is a combined result of increasing cost of funds and falling low-cost current account and saving account deposit. NIM, a key measure of profitability, fell for the second consecutive quarter by almost 43 basis points on a yearly basis to 3.28% for March 2011. However, the good thing about Axis is that it has maintained a tight control on its asset quality. This quarter as well, its NPAs improved. For instance, net NPAs formed 0.31% of advances at the end of the June 2011 quarter compared with 0.35% a year ago. Among large banks, only HDFC Bank has a better asset quality than Axis Bank.

The bank may not be able to grow its loan book at a higher rate, going forward. However, its clean book and sufficient provision coverage will definitely boost its profit growth. At 80%, the provision coverage of Axis Bank is well above the minimum 70% prescribed by the banking regulator. This helps bank make lower provisioning, which, in turn, allows its profit to grow at a high rate.

Given the healthy numbers reported in the June quarter, it seems to have kept investors' worries at bay yet again. At a P/E ratio of 15.8, the bank's stock looks reasonably priced when compared to some of its closest peers like HDFC Bank.