The net profit growth of 63.24% for the December quarter at Axis Bank Ltd is excellent in the current business environment. Though the operating profit of the bank has grown at a less eye-popping pace, it is up 35% year-on-year (y-o-y).
Net profit growth has been higher because provisions have been lower, which was expected, given mark-to-market gains on its investment book.
So, hasn’t Axis Bank been affected by the slowdown? It has and that’s easily seen if we compare y-o-y growth rates in the September and December quarters.
Operating profit growth in the three months to September, for instance, was a huge 89% y-o-y. But growth in net advances was more or less the same: 54% y-o-y in the second quarter, 55% y-o-y in the December quarter.
Why, then, was operating profit growth so much lower? Because y-o-y growth in net interest income, or NIM, was much lower—24% in the December quarter compared with 55% in the September quarter. That was because net interest margin fell to 3.12% in the December quarter, compared with 3.51% in September quarter.
Also See Uncertainty Effect
“The decline in NIM was due to rising cost of funds on account of rising interest rates on deposits during October and November, as also greater pressure felt in the growth in demand deposits,” the bank’s press release said.
The pace of growth of demand deposits (current plus savings deposits) slowed during the third quarter and demand deposits now constitute 38% of total deposits, compared with 40% at the end of September.
Growth in other income slowed even more, although lower growth in fee income was offset by higher trading income. Bad loans as a percentage of customer assets fell a bit, with net non-performing assets, or NPAs, coming down to 0.39%, compared with 0.43% at the end of September.
Axis Bank has underperformed the Bank Nifty index in the last quarter, possibly on account of the uncertainty surrounding the stepping down the bank’s chief executive P.J. Nayak and the lack of visibility on the stake sale of Specified Undertaking of Unit Trust of India (UTI)—which manages the assured return schemes of erstwhile UTI.
In the December quarter, the bank has done a remarkable job of keeping its advances growing at a scorching pace while managing to keep its NPA ratios in check. It’s also worth noting that Axis Bank has changed the composition of its advances, with loans to the large and mid-corporate sector growing faster, while the pace of loan growth to small enterprises and the retail sector has slowed.
The bank currently trades at around 1.8 times book value per share, a reasonable valuation considering its performance.
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