Axis Bank profit rises, but so do bad loans

Axis Bank profit rises, but so do bad loans
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First Published: Mon, Jul 14 2008. 11 49 PM IST

Updated: Mon, Jul 14 2008. 11 49 PM IST
One of the few banks to buck the trend of slowing profit growth during the March quarter, Axis Bank has buttressed that reputation with its June quarter results. Despite the harsher environment, net profit growth has accelerated from 71% year-on-year in Q4 FY08 to 89% in Q1 FY09.
How did the bank manage this feat? Net interest income was up 92.6%, even better than the 89% growth notched up in Q4. That was in spite of the net interest margin coming down to 3.35% from 3.93% in Q4. Margins were squeezed on account of cost of funds rising from 5.82% in Q4 to 6.11% in Q1. That’s mainly because current and savings account (CASA) deposits were 40% of total deposits at the end of June, well below the 46% level they had reached by March-end.
Growth in advances was at 48% y-o-y, well below Q4’s scorching 62% growth, but that’s only to be expected, considering that April-June is the slack season for credit growth. The bank’s 48% rate of growth in credit is far above the 26% rate of growth for the banking sector as a whole. Moreover, it continued to increase its retail loans, with retail advances accounting for 24% of total advances at the end of June, compared with 23% at the end of March. Much of the increase in volumes has come from growth in investments which, at 34%, has been much higher than the 25% rate of growth in the Q4. Fee income growth was also higher, although lower trading income led to overall growth of 70% in non-interest income, compared with 85% growth in Q4. That’s a good sign, proving that the bank is not dependent on volatile trading income.
Operating expenses were kept in check, with growth at 50% in Q1, compared with a growth of 93% in the March quarter. The upshot is that operating profit growth has been a very high 118% in Q1, topping even the 82% growth in Q4. Despite higher provisions on account of depreciation of the bank’s bond portfolio, Axis Bank has been able to show a higher rate of profit growth than during the previous quarter.
In view of the adverse external environment and given Axis Bank’s rapid growth, most observers expected growth to slow, margins to contract and bad loans to increase. While growth has been robust, the area of concern is the sharp rise in gross non-performing assets (NPAs).
Gross NPAs went up to Rs638 crore from Rs495 crore at March-end, or from 0.7% to 0.92% of gross customer assets. Similarly, net NPAs increased from 0.36% at end-March to 0.47%.
At its current price of around Rs630, the Axis Bank stock trades at around 2.47 times its book value as on 30 June, which is cheap. But it’s an indication of the fragile nature of the larger market that Axis Bank’s excellent results led to a bout of profit-taking in the stock on Monday when the stock fell 5.15% to Rs635.10 on BSE.
A temporary US boost won’t help markets
Markets on Monday were supported by the announcement on Sunday by the US treasury secretary that a plan was in place to bail out the US mortgage refinance corporations Freddie Mac and Fannie Mae. Not only does the plan talk about more loan funds for these institutions but it also says that the treasury could also buy equity in them, if needed.
This is yet another clear indication from the US government that it will do whatever it takes to provide a helping hand to the markets. It has supported the market by slashing interest rates, taking in junk securities as collateral and by rescuing Bear Stearns. The bailout of the mortgage finance institutions was a foregone conclusion, but the promise to buy equity, if needed, is reminiscent of the equity market support operations conducted by the Japanese and Hong Kong governments in the 1990s.
The immediate impact on the markets is likely to be favourable—the dollar has firmed, oil prices have slipped a bit, Asian bond yields have tightened and equities in Europe have bounced back. But any improvement is likely to be temporary. If the US government socializes the mortgage losses, as it now seems increasingly clear that it will have to do, it will add to the US fiscal deficit and the higher government borrowing will keep interest rates up. Already, US mortgage rates are higher than where they were six months ago, despite a series of policy rate cuts- and policymakers are getting worried about inflation.
In short, the US housing crisis is likely not only to keep growth low but also keep the credit crisis simmering.
A Band-Aid for South Indian Bank stock
Most bank results are unlikely to be anywhere as good as those of Axis Bank. South Indian Bank Ltd, a private sector bank that has declared its June quarter results, is a case in point.
Credit growth has been 25%, the average for the sector.
Net interest income growth has been much lower, at 10.8%. Interest expended as a percentage of interest earned has worsened to 72.3%, compared with 69.8% in the previous quarter.
Nevertheless, net profit growth has been a good 27%, mainly because of higher “other income” and containment of operating expenses. Provisions have increased, as have bad loans.
Gross non performing assets (NPAs) have increased from 1.79% at end-March to 1.98%, while net NPAs have gone up from 0.29% to 0.49%.
So here are the trends: slowing growth, margins squeezed, rising bad loans and profits being maintained by reducing operating expenses.
All that didn’t prevent the management from announcing a bonus. That is likely to be, at best, a Band-Aid for the stock.
Write to us at marktomarket@livemint.com
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First Published: Mon, Jul 14 2008. 11 49 PM IST