Axis Bank - Nirmal Bang

Results good at operating levels; asset quality woes continues

Axis Bank Ltd (Axis Bank) posted a healthy operating performance for Q3FY12 ahead of expectations. Net profit was driven by growth in NII, healthy fee income growth and stable CASA mobilization. However, the bank continues to witness higher slippages which pose a threat for the bank.

Loan book remains healthy
The bank's loan book grew at a healthy pace at 20.4% on YoY basis and 6.2% QoQ led by the retail loan book and large & mid corporate book whereas the proportion of Agri and SME portfolio continued to decline. Management continues to expect loan book to grow higher than industry growth.

NIM's decline marginally
NII increased both YoY and QoQ in Q3FY12. Higher growth in interest expended outpaced the growth in interest income which resulted in marginal decline in the bank's NIMs. Net Interest Margin of the bank declined marginally to 3.75% in Q3FY12 compared to 3.78% in Q2FY12 and 3.81% in Q3FY11. Management has indicated that NIMs will remain broadly in the range of 3.25%‐3.5% from a long term perspective. However, in the near term the bank may witness some pressure on NIMs owing to meeting up its PSL requirements.

Fee income continues to remain strong
Fee income of the bank reported a 26.0% YoY growth in Q3FY12 to Rs 1,223 crs witnessing growth in corporate banking fees, retail banking fees and treasury fees. However, treasury fees included proprietary forex gain of Rs 130 crs during the quarter resulting from the volatility in the forex market.

Asset quality deteriorates with higher slippages
Asset quality deteriorated with gross NPAs and net NPAs at 1.1% and 0.39% respectively. Slippages increased to Rs 535 crs in Q3FY12 from Rs 446 crs in Q2FY12. Bank's restructured assets increased by Rs.295 crs during the quarter vs Rs.312 in the previous quarter taking the total restructured assets at Rs 2,701 crs, constituting 1.55% of gross advances.

Outlook

We believe that the bank's results are a mixed bag. Although operating performance improved, asset quality continues to remain a cause of concern for the bank in the near term. Higher restructured book and higher exposure to power sector (around 10%) is likely to hamper the bank's asset quality going forward.

The fear of rising slippages has resulted in the recent underperformance of the stock leading to lower valuations. Currently, the stock is trading at a P/E of 10.44x on 12 month trailing basis and an adjusted P/BV of 1.95x. We continue to remain cautious over the performance of the bank in the near term considering the asset quality.

Source : Equity Bulls

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