The March quarter results of the country’s third largest private sector lender, Axis Bank Ltd, have been well above expectations, with net profit growing at an astonishing 60.8% compared with the same period last year and operating profit up 57.5%. In the December quarter, the bank’s net profit was up 63.2% year-on-year (y-o-y). Small wonder the stock is up 48% in the past month, easily beating the 35% rise in the BSE (Bombay Stock Exchange) Bankex over the period.
Bank results in the March quarter were expected to be affected by a combination of slower credit growth, falling treasury income and worsening asset quality, which would mean higher provisions.
Let’s take the credit quality issue first. Axis Bank’s bad loans did indeed increase quite a bit in the March quarter, rising from Rs787 crore at the end of December to Rs897 crore at the end of March, an increase of 14%. But the deterioration in its gross non-performing assets (NPA) ratio has been marginal, from 0.90% of gross customer assets at end-December to 0.96% at end-March.
A big reason for that is the huge amount of restructured loans. In the March quarter, assets restructured by the bank rose from Rs963.59 crore at the end of December to Rs1,625.87 crore, an increase of 68.7%. For 2008-09 as a whole, restructured assets have gone up an astounding 158% and they now account for 1.74% of gross customer assets, against 0.92% at the end of March 2008. Clearly, but for this restructuring, the rise in bad loans would have been much more. Thanks to the liberal restructuring norms, the bank’s net NPA ratio has improved, from 0.39% at the end of December to 0.35%.
Axis Bank’s net interest income rose by 24.6% in the March quarter, at about the same rate as in the previous quarter. Loan growth has slowed substantially, from a y-o-y rate of 55% at the end of December to 37% by March-end, but it remains far above the average for all banks.
Deposit growth also slowed compared with the December quarter, as did growth in low-cost demand deposits. Nevertheless, lower interest rates during the quarter pulled down the cost of funds, enabling the bank to post a net interest margin of 3.37%, higher than the 3.12% recorded in the December quarter.
Non-interest income was higher by 52% y-o-y, a pace of growth higher than that in the December quarter. Fee income growth, at 42%, was lower than the 57% notched up during the December quarter. But trading profits were substantially higher. Nevertheless, core operating profit—that is, operating profit less trading income— increased by 43% y-o-y in the March quarter, compared with 35% in the December quarter.
There have been two concerns about the bank—one, its rapid growth will lead to increasing bad loans; and two, the uncertainty about who would be its chief executive officer (CEO).
The first concern is undoubtedly correct, but, as an analyst pointed out, the bank has been able to grow profits substantially despite the rise in NPAs. The uncertainty about a new CEO, however, has now been laid to rest, after the bank’s board said on Monday that Shikha Sharma would be the new Axis Bank CEO.
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