Axis, HDFC Bank: Limping loan rangers

A worsening macro environment has pressured loan growth; trend unlikely to improve in the near term

Thanks to the weakening macro environment, the earnings quality of HDFC Bank and Axis Bank saw some pressure for the quarter ending September, reflecting in the trend in loan and fee-income growth and net interest margins (NIMs). And, given the slowdown, the trend is unlikely to improve in the near term. Though private banks are seen better placed compared to their public peers, analysts say given the near-term headwinds, investors could consider them on corrections.

While most brokerages like HDFC Bank for its consistency, stock valuations at 3.7 times FY14 estimated book value could cap upsides. “While we acknowledge HDFC Bank’s relative superiority to its peers on the consistency and predictability of its earnings, we opine that punchy valuations leave little room for any negative surprises. Increasing stress on its retail loan book, with increasing competition in the retail segment, means earnings would remain under pressure in the near term,” says Pankaj Agarwal, banking analyst at Ambit Capital.

Of the 46 analysts polled by Bloomberg after results, 27 have ‘buy’, 11 ‘hold’ and eight ‘sell’ on HDFC Bank, with an average target price of Rs 715, which indicates an upside potential of nine per cent. For Axis Bank, however, valuations at 1.4 times its FY14 estimated book value provide some comfort. Of the 28 analysts polled since September, 18 have ‘buy’, six ‘hold’ and four ‘sell’, with an average target price of Rs 1,233 (an upside of 13 per cent).

  Non-core boost
For the quarter ended September, both banks managed to beat the Street estimates on net profit. This growth, however, was partly a function of non-operational factors and, hence, may be difficult to sustain, say analysts.

Axis Bank beat estimates on net profit by nine per cent, aided by a seven-fold rise in miscellaneous income (includes recoveries) to Rs 329 crore from the year-ago period. Other income was boosted by Rs 282 crore gains on repatriation of accumulated profits from operations abroad.

Somnath Sengupta, executive director and head, corporate centre, Axis Bank, says, “These are largely foreign currency translation (revaluation) reserves on the operations abroad. We have utilised part of it towards provisions. While we transfer profits from our subsidiaries abroad every year, these exchange-driven gains are unlikely to sustain.” These gains more than offset a 97 per cent fall in trading profits to Rs 5 crore.

"While part of these gains could have been invested towards higher provisions, the net profit growth would be diluted after adjusting for these gains,” says Vaibhav Agarwal, banking analyst at Angel Broking, bullish on Axis Bank and has a one-year target price of Rs 1,290.

For HDFC Bank, the net profit was boosted by cost-efficiencies (operating expenses up just nine per cent year-on-year) and higher forex income (double on the previous year).

Growth slows, assets stable
A worsening macro environment has pressured loan growth (for both the banks), which moderated from 20 per cent-plus seen a year ago to mid-teens in the quarter gone by. Retail segment continues to lead loan book growth, given the muted corporate credit off-take. Axis Bank has increased the share of retail segment to 30 per cent from 26 per cent in the year-ago quarter.

Net interest margins (NIMs), too, contracted sequentially, though Axis managed to restrict the fall to a mere seven basis points (to 3.8 per cent) against a 30-basis-point fall for HDFC Bank (to 4.3 per cent). In the medium term, NIMs are likely to be under pressure for the two, given the rising interest rates and slowing credit offtake. Some cushion, though, will come from a stable current and savings account (CASA) ratio.

According to its presentation, the Axis Bank has seen a 200-basis-point improvement in its CASA ratio to 43 per cent. Sengupta says, “NIMs are unlikely to sustain at these levels, but would be above 3.5 per cent for FY14. Adjusted for rupee depreciation, loan growth is much lower than reported. Loan growth would be 15 per cent this financial year.”

HDFC Bank, too, kept its CASA stable at 45 per cent. The bank has forecast NIMs would be in the 4.1-4.5 per cent range, say Edelweiss analysts.

Fee income growth for both moderated further in the quarter. Axis' fee income grew 6.6 per cent (at Rs 1,432 crore) year-on-year and was driven by a nine per cent growth in retail fees (32 per cent of fee income). However, the growth is more than half the 14 per cent seen in the June quarter. Large and mid-corporate fees (30 per cent of fee income), though, fell by a per cent during the quarter. HDFC Bank, too, has seen a 11 per cent year-on-year growth in fee income to Rs 1,354 crore vis-a-vis 13 per cent year-on-year growth in the June quarter.

Stable asset quality was the key silver lining for both. While the managements indicated towards marginal upticks in asset quality pressures, they have managed the non-performing assets (NPA) ratio well (between 0.3 and 0.4 per cent) via adequate provisioning (also at comfortable levels).