Perfect Axis

POUND WISE

Proven execution capabilities, focus on quality assets and fee-income, and rapidly expanding business make Axis Bank a good investment.

With economic growth and industrial production showing signs of a slowdown, doubts being raised over the quality of assets held by domestic banks and the RBI tightening the noose by raising cost of funds to control inflation, it is not surprising that banking stocks have fallen by a higher margin as compared to the broader markets in the last six months.

Even good quality stocks have borne the brunt, thereby providing an opportunity to buy them cheap.

Axis Bank, the third largest private sector bank in India, is one such opportunity. The bank has a healthy asset mix, continues to witness strong growth in fund and fee-based income, has among the lowest non-performing assets (NPA), low exposure to unsecured loans and is expanding at a fast pace. All these factors make Axis Bank a good investment.

With the macro environment having deteriorated in the last 6-7 months, the bank has turned more aggressive in terms of managing risks, laid emphasis on asset quality, focused on core earnings (including fee-based) even as it continues to grow at a fast pace, its network strength and customer base included.

The proof: the bank's fee income grew by 80 per cent and net interest income by 93 per cent to Rs 483.54 crore and Rs 810.46 crore, respectively in Q1FY09 as compared to Q1FY08.

Despite the pressure on net interest margins (NIMs) and higher provisioning of Rs 225.20 crore on account of mark-to-market on its investment portfolio, its net profit grew by 89 per cent to Rs 330.14 crore.

Even in the past, growth rates have been robust. The bank's net interest income has grown at a compounded annual rate of 45 per cent, while its fee income galloped at 64 per cent, to Rs 2,585 crore and Rs 1,321 crore, respectively in the last four years. 
 

IN THE PINK OF HEALTH
Rs crore	FY08	FY09E	FY10E
Total Income	4,381	5,978	7,592
Operating income *	2,226	2,958	3,747
Net profit	1,071	1,366	1,765
EPS (Rs)	29.90	37.90	49.02
Price/Book-Value (x)	2.80	2.50	2.17
* before provisions   E: Analysts estimates

Well diversified
These robust numbers are the result of the management's focus on quality growth and profitability, as well as its execution capabilities.

Axis Bank has a diversified business model with income accruing from various fund-based and fee-based streams. Within each of these segments, too, the revenue streams are diverse.

In the fund based business, the bank has maintained a healthy asset (loan) mix. In the last two years at least, large companies have accounted for close to half the advances, while retail's share ranged 23-30 per cent.

The balance is split between small/medium enterprises (18-20 per cent) and agri loans (6-10 per cent). Likewise, the share of fee-income has been sustained at about 40 per cent of total income, with revenues accruing from diverse sources.

Quality assets
In the fund-based business, the bank has increasingly focused on quality assets, which is also visible from the increase in the share of high-quality customers. Beginning the December 2007 quarter, the share of loans to corporates with "AAA" rating has increased from nearly zero to one per cent in March 2008 quarter to seven per cent in June 2008 quarter.

Overall, 82 per cent of the corporate advances have at least an "A" rating, up from 77 per cent in December 2007 quarter. These have also helped in keeping the NPAs low.

Within sectors, the bank's fund-based exposure has been well spread across sectors; its exposure to a particular sector stood between 2-9 per cent of its total advances (as of June 2008), which reflects diversity.

Even with regards retail advances, whose share in total advances has hovered between 25-30 per cent in the last two years, increased focus on housing loans has led to its share in retail advances rise to 59 per cent in Q1FY09 as compared to 37 per cent in Q2 FY07. Since housing and vehicle loans are backed by lien on the respective assets, the default rate is typically very low.

All these efforts have meant that the bank's exposure to high-quality and secured assets has remained high; the bank reportedly has the lowest exposure to unsecured loans (at under 15 per cent of total assets) among the private banks.

Robust fee income
The bank has been able to grow its fee-income at a fast pace in the last five years. A broad range of products, customised offerings and focus on cross-selling to existing customers, has helped the bank in maintaining growth, especially in its corporate and retail banking businesses, which account three/fifth of total fee-income.

Likewise, in business banking (cash management services) and capital market services (debt placement and syndication), too, the bank's performance has been good.

For instance, the bank collects taxes on behalf of central and various state governments. This business has seen an increase in customer base as well as throughput. All these put together has seen the share of fee-income consistently rise in the last few quarters.

Manageable concerns
These pertain to a possible increase in non-performing assets, particularly from the retail side "�unsecured loans like credit card and personal loans. Analysts however don't expect any negative surprises, unless the economy gets into a recession or a prolonged slowdown (over a year), which seems very unlikely.

On the other hand, while the banks NIMs were lower at 3.35 per cent in Q1FY09 as compared to 3.93 per cent in Q4FY08, it is due to two reasons.

Firstly, due to seasonal factors, as Q1 typically witnesses a dip in the share of low-cost CASA (current and savings deposits), which means higher cost of funds.

Secondly, the trend in interest rates, too, has been upwards leading to higher cost of funds. But, since the bank has raised its lending rates in June 2008, the benefits therefore should reflect from Q2 onwards. Secondly, the bank hopes to improve the share of CASA deposits back to earlier levels of 45 per cent over the next few quarters. Together, these should help sustain NIMs at current levels going forward.

The road head
The management expects to achieve a loan book growth of 40-45 per cent in the current year.

Analysts though expect an average growth of 35 per cent in the bank's loan book and fee-income, each in FY09 and FY10. In either case, going by the bank's track record, achieving these should not be a difficult task.

A professional management with proven execution capabilities, emphasis on improving asset quality, diverse revenue streams and focus on expanding its geographical reach and customer base, provide further confidence.

As the stock has gained 17.3 per cent in the last two trading sessions, buy on dips. At Rs 686.80, the stock trades at a price/book-value of 2.5 times it's estimated FY09 book-value and can deliver 20-25 per cent returns over the next 12 months.