The bank has managed to sustain its net interest margin and rein in non-performing loans.
Although Axis Bank’s loan book grew at a slower pace of 37 per cent in the March 2009 quarter, compared with the 55 per cent seen in the December 2008 quarter, the growth has been far higher than that clocked by some of its peers. That is somewhat disconcerting given that the environment hasn’t exactly been conducive to lending.
Nevertheless, the bank has posted a strong net interest margin of 3.3 higher by about 20 basis points sequentially with the cost of funds coming down. Both income from fees and treasury have been strong; interest income less so. Axis Bank has also managed its risk fairly well; although gross non-performing loans (NPLs) were up slightly on a sequential basis, net NPLs have fallen sequentially to 0.35 per cent from 0.39 per cent at the end of December 2008.
If provisions have risen sequentially it’s because there was a writeback in provisions in the December 2008 quarter Of course, the RBI has allowed banks to restructure loans which means, they can be classified as good assets and require less or no provisioning. To that extent, one doesn’t have a clear idea of how good the assets are.
But, as of now, the easier norms for classifying assets,have helped the bank post a smart increase in the net profit of 61 per cent y-o-y in the March 2009 quarter. After a difficult December 2008 quarter when interest rates were volatile, the cost of funds has come down sequentially to 6.64 per cent and the proportion of cheaper current and savings accounts (CASA) is up at 43 per cent.
If the stock trades at around 1.5 times estimated adjusted 2009-10 book value, and appears to be cheap despite having a a strong return on equity, it’s because the Street is concerned about a possible rise in NPLs. It’s a fact that the bank has lent aggressively in the past few years especially to the SME sector. Merrill Lynch believes that a weak economic environment could result in a fairly sharp increase in NPLs in the current year.
