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Business News/ Market / Mark-to-market/  Axis Bank operating profit growth slowest in 13 quarters
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Axis Bank operating profit growth slowest in 13 quarters

Better control of non-performing assets, higher growth in loans and earnings might be needed to sustain stock rally

Non-interest income slipped 5% and cost-to-income ratio swelled to 42%, leading to slowing of operating profit growth. Photo: Abhijit Bhatlekar/MintPremium
Non-interest income slipped 5% and cost-to-income ratio swelled to 42%, leading to slowing of operating profit growth. Photo: Abhijit Bhatlekar/Mint

April-June is typically a dull quarter for banks and a slowing economy added to the torpor. Axis Bank Ltd’s earnings suitably reflected that gloom. While net profit grew by 18.3% from a year ago it was hefted by a reduction in provisions by almost half.

Operating profit growth was just 1.83%, the slowest in 13 quarters. That was owing to a couple of reasons. One, non-interest income slipped 5%, the first such fall since the September 2010 quarter. That was mainly because of the dullness in corporate banking. Loan growth in that segment was a measly 2% and, therefore, fee income here fell 12%. Two, in a slow quarter, Axis Bank couldn’t control its expenses. Cost-to-income ratio swelled to 42%, up 3 percentage points from a year ago though it must be said that a significant portion of its branch network expansion was back-ended in the last fiscal; therefore, costs might take some time to stabilize.

If Axis Bank is still able to maintain 16.5% growth in its loan book, it’s thanks to its focus on retail banking. Loans to this segment, which now includes retail agricultural advances, grew 35% from a year ago. Retail fees grew 22%. Net interest margins also remained largely stable owing to the beneficial effect of low-cost FCNR (foreign currency non-resident) deposits raised in the third quarter of the last financial year.

Asset quality numbers also didn’t hold any surprise. Axis Bank added 317 crore to its gross non-performing assets during the quarter. That compares with a 219 crore average additions to bad loans in the past three quarters. There was one positive though. The bank recast only 480 crore of loans in the June quarter compared with 1,115 crore in January-March.

Gross slippages plus restructuring amounted to 1,100 crore, in line with the bank’s guidance of 6,500 crore for the whole financial year. However, total stressed assets (gross non-performing assets plus outstanding recast loans) stood at 3.8% of advances. While that is not as high as some public sector banks, it is big enough to cause some discomfort to investors and explains its valuation discount to peers such as HDFC Bank Ltd. Given that Axis Bank shares have already run up 56% this year, ahead of S&P BSE Bankex’s 36%, better control of non-performing assets (NPAs) and higher growth in loans and earnings might be needed to sustain the rally.

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Published: 22 Jul 2014, 09:11 PM IST
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