Axis Bank: A creditable show

THE COMPASS

The numbers are excellent when compared with last year but there's been a sequential fall in the net interest margin

What's disappointing about Axis Bank's numbers for the June 2008 quarter is the sequential contraction in the net interest margin (nim) by about 60 basis points to 3.35 per cent. Moreover, there has been a slight rise in net non-performing loans to 0.47 per cent from 0.36 per cent at the end of the March 2008 quarter.

The March quarter numbers had seen the nim steady at 3.9 levels and a sequential rise in the net interest income over the December 2007 quarter. That trend has now been reversed in a challenging interest rate environment.

Axis Bank's cost of funds the June quarter of 6.11 per cent is higher than the 5.82 per cent in the March quarter. The smaller share of low cost deposits, which has fallen to 40 per cent from 46 per cent at the end of March, has also resulted in money becoming dearer and, consequently, a falling nim.

That's why even though the bank turned in an excellent set of numbers when compared with Q1FY08 "" operating profits up 118 per cent y-o-y at Rs 802 crore "" the stock fell 5 per cent in Monday's session to Rs 636. The Street feels that the impact of the slowdown in the economy will be felt over the next few quarters and could hurt the bank's growth.

The management, however, is confident that it can grow the loan book by about 35 per cent this year; for the June 2008 quarter, advances grew a strong 48 per cent y-o-y, driven by a 73 per cent increase in loans to small and medium enterprises.

While there is some concern that smaller companies will find it harder to operate in an economy that is slowing down, the management says the portfolio is a seasoned one and appears confident of maintaining the quality of credit.

The bank's Tier I capital adequacy ratio now stands at a much lower 9.93 per cent, down from 10.2 per cent in March 2008 and 13 per cent post its equity issue about a year back. However, an equity dilution is unlikely before FY11. At the current price of Rs 636, the stock trades at around 2.4 times estimated FY 09 book value.