Axis Bank

The Axis Bank stock has outperformed its peers in the private sector with a 16.1 per cent gain in its price over the past one year, when other private bank stocks have failed to generate positive returns. A lower exposure to retail lending, where there are concerns about credit quality, has helped the stocks’ performance.

At Rs 713, the stock trades at a price-book value of around 2.8 times, which is at a discount to HDFC Bank but at a premium to most other private banks. Investors can nevertheless buy the stock, given the growth momentum in the business.

Axis Bank reported strong financial results in FY-08 and continued its good performance in the first quarter of this year, even as other private banks have turned in unimpressive numbers.

This growth may be moderate, as growth in the loan book slows down on the corporate and retail side with trading operations also likely to yield lower returns. However, this may be offset by growth in fee income and rapid branch expansion in Tier-1, Tier-2 towns and the small and medium enterprise (SME) segment.
Business overview

Axis Bank has been growing faster than the industry over the past five years. Its net interest income has grown at a 45 per cent compounded annual growth rate (CAGR) from 2003-04 to 2007-08, while net profits have grown at 40 per cent. A focus on branch expansion and an established ATM/branch network have helped attract retail clients. The bank’s corporate: retail asset mix is 76:24 presently, which might insulate it from the more credit risk -prone retail segment.

To enable focussed lending, the bank has set up 24 SME centres and 39 agri-clusters. In retail, the bank offers high-end services, with specialised branches for high net worth clients.

Fee from banking and advisory services such as cash management services and cross-selling of financial products, debt syndication and placement, have made a significant contribution to income, growing by 53 per cent CAGR over the past four years.

On the costs front, the bank’s high current account and savings account over total deposits (CASA-40 per cent) may help it contain cost of funds amid rising interest rates. Axis Bank’s leading position in debt syndication and private placement may help it to capitalise on an expanding corporate debt market over the medium term.

A high level of capital adequacy (13.3 per cent) allows room for investment in risky assets such as realty and capital markets. It also circumvents the need for fund-raising in the present high cost environment to bankroll growth plans.

On the flip side, the company’s expansion plans for the retail business (specifically credit cards) entail risks.

As a new entrant, higher delinquencies will remain a risk and this is already evident in this segment’s 64 per cent contribution to the incremental NPAs, a chunk of it from the credit-cards business. On the corporate side, the exposure to rate/market-sensitive sectors such as real estate (7.68 per cent), infrastructure (7.7 per cent), capital markets (5.64 per cent) and textiles (5.43 per cent), may expose the business to risks if interest rates continue to surge.
Financials

For FY-08, Axis Bank’s net interest income (NII) grew by 76 per cent and non-interest income by 78 per cent. The surge in NII is due to the increase in advances and demand deposits.

Advances grew by 61 per cent. The operating expenses also matched the earnings growth because of the increase in employee costs, branch expansion, re-branding and advertising expenses apart from the increase in the cost of funds. For the June quarter, the bank reported a 93 per cent growth in NII and an 89 per cent growth in post tax profit, with NIMs at 3.35 per cent.

Though the bank has managed strong credit growth, the cost of funds too has increased at a higher rate than the yield on assets.

Of the bank’s investment book, Rs 20,740 crore is in the held-to-maturity category, Rs 15,058 crore is available for sale and Rs 245 crore is in held for trading. This represents a potential risk, as the bank may have to provide for erosion of a significant portion of the investment book, in the form of mark-to-market losses.
Risks

Higher cost of funds, slowdown in advances, deteriorating asset quality and treasury losses present key risks to Axis bank’s earnings. Though the bank’s June quarter results have surprised, amid a rising interest rate scenario, a moderation in growth appears to be on the cards.

Growth in non-operating core income may hold the key to growth. Focus on under-banked sectors such as micro small and medium enterprises (MSMEs) and agriculture, and the expansion into areas such as international business, offer potential.