Axis Bank announced its 1QFY2010 results, reporting a strong Net Profit growth of 70% y-o-y to Rs562 crore, ahead of our expectations on the back of substantial treasury profits of Rs326 crore.
Advances decreased sequentially from Rs81,557 crore to Rs78,105 crore, leading to a slowdown in growth rate to 28% y-o-y, directionally in line with industry trends, though still well above the industry growth rate of about 15-16%.
Deposits also decreased sequentially from Rs1,17,374 crore to Rs1,10,256 crore, at a slower growth rate of 24% y-o-y. That said, growth in average CASA balances improved to 25% y-o-y from 21% y-o-y at the end of 4QFY2009 and average balance-based CASA ratio improved from 35% to 37%.
The cost of funds reduced sequentially from 6.6% to 6.1%, on account of repricing of bulk deposits. This helped the bank maintain reported NIMs at about 3.3%, enabling it to post a reasonably healthy 29% y-o-y growth in Net Interest Income, in line with expectations.
Fee income growth slowed down further to 17% yoy, infact declining 6% sequentially. The bank earned a substantial Rs326cr of treasury profits, driving profit growth during the quarter.
Operating expenses were up by a substantial 12% sequentially, leading to an increase in the cost-to-income ratio to 41%. The management explained that this was partly on account of salary increments during the quarter.
The bank made substantial NPA provisions of Rs336cr, though Gross and Net NPA ratios still increased marginally on a sequential basis from 0.96% and 0.35% to 1.01% and 0.41% respectively.
The Bank restructured additional loans aggregating to Rs996 crore during the quarter. Cumulative outstanding restructured loans consequently increased to Rs2,520 crore, constituting 2.8% of gross customer assets, as compared to 1.7% at the end of FY2009 and 0.9% at the end of FY2008.
The Bank’s Capital Adequacy Ratio stood at a healthy 15.3%, with Tier 1 CAR at a comfortable 9.4%.
At the CMP, the stock is trading at 10.2x FY2011E EPS of Rs73.9 and 2.0x FY2011E Adjusted Book Value (ABV) of Rs379.1.
We remain positive on the Bank and believe it deserves premium valuations on account of its attractive CASA franchise, multiple sources of sustainable fee income, strong growth outlook and A-list management.
We maintain a BUY on the stock, with a target price of Rs1,024, implying an upside of 35%.