Mumbai: Private sector lender Axis Bank Ltd’s fourth quarter (Q4) net profit rose 70.55% to Rs361.40 crore, up from Rs211.9 crore a year ago despite making a Rs71.97 crore provision to take care of mark-to-market losses of two of its corporate borrowers that had bought derivatives such as cross-currency options and swaps from the bank.
“By going in for 100% provisioning, we have set a very strong benchmark for transparency for others to follow,” said P.J. Nayak, chairman and managing director of the bank.
The cross-currency options that banks sells to corporate customers are hedged back-to-back with the same tenure and amount with a foreign bank. So, if a company defaults, banks are required to pay up and settle the contracts with counterparties.
Role model: Chairman P.J. Nayak says the 100% provisioning sets a very strong benchmark for transparency for others to follow.
According to an Axis Bank release, on 31 March, there were 188 outstanding derivative transactions structured by the bank in which companies had an aggregate mark-to-market loss of Rs673.55 crore.
Of these, 113 outstanding transactions pertain to forex derivatives in which the companies had an aggregate mark-to-market loss of Rs547.72 crore. According to the release, six transactions have been repudiated (or challenged) by two customers, involving a mark-to- market loss to the companies of Rs71.97 crore. Both the companies have filed cases in courts against the bank.
Marking to market is an accounting practice that values investments according to the prevailing market prices and not at the price at which they were made.
The bank’s net profit for the quarter increased on a healthy growth in advances and investments. Advances for the quarter surged 62% to Rs59,661.14 crore and investments rose 25% to Rs33,705.10 crore.
Axis Bank is the second private sector lender to report its Q4 earnings. Yes Bank Ltd, the first private lender to announce its results early this month, reported a 108.7% rise in its Q4 earnings, although on a smaller base.
Axis’ net profit for the year rose 62.52% to Rs1,071.03 crore. Shares of Axis Bank rose 6.83% to close at Rs881.10 each on the Bombay Stock Exchange on Monday, even as the Bankex, the index for the sector, gained 3.43%.
The bank’s net interest income for the period rose 89% to Rs828.43 crore against Rs438.97 crore in Q4 of the preceding year. The net interest margin, a measure of a bank’s returns in its core business of borrowing and lending, for the quarter stood at 3.93%, compared with 2.89% in the year-ago quarter.
“The bank’s results were above market expectations. It has done well both in terms of bottom line and topline,” said Hatim Brochwala, an analyst with Khandwala Securities Ltd, a Mumbai-based brokerage.
Axis Bank’s low-cost deposits increased 46% for the quarter. Its savings bank deposits, on which 3.5% interest is paid, grew 65% at Rs19,982 crore from Rs12,126 crore at the end of March 2007, while current account deposits, on which no interest is paid, grew 77% year-on-year, from Rs11,304 crore to Rs20,045 crore.
Axis Bank registered a 67.19% rise in fee income, which stood at Rs415.32 crore, against the Rs248.46 crore a year ago.
The net non-performing assets of the bank have come down from 0.61% of its advances to 0.36% during the quarter.
An Axis Bank release said in its asset portfolios in Singapore, Hong Kong and Dubai, the bank has no collateralized debt obligations and no credit default swaps.
The bank said it has a portfolio of $153 million (Rs610.5 crore) of credit-linked notes, or CLNs, constituting the credits stripped from convertible bonds issued overseas by Indian companies.
As of end-March, the CLNs had a depreciation of $5.09 million, and this has been fully provided for following the guidelines of the Reserve Bank of India, it said.