Axis Bank’s retail focus is paying off

Axis Bank Ltd did well in the December quarter, with its net interest income rising by 16.6% over the year-ago period. Some analysts had expected growth of 12-13%, primarily because of a high base effect.

add_main_imageThis effect was visible in its net interest margin (NIM) figure, which came in 18 basis points lower than the year-ago figure. But NIM was up by 11 basis points sequentially. One basis point is one-hundredth of a percentage point.

The real surprise was net profit growth of 22.2% which came in much higher than the Street’s expectations. But this was due to a write-back in its provisions and contingencies, resulting in an 8.4% decline in this figure. The operating figure growth of 14.7% was more representative of its actual performance during the quarter.NextMAds

Axis Bank’s operational performance was partly driven by an increase in its loan book, with net advances rising by 4.2% over the end of the September quarter, and by 20.7% over the year-ago period. Two key segments driving loan book growth were retail and small and medium enterprises.

Higher retail loan growth also aided fee income growth, which was up by 15% over the year-ago period. But other income (fee income, trading and miscellaneous income) played a muted role in this quarter, growing by 13% compared with 29% growth in the preceding quarter.

Net interest margin growth was aided by a flat trend in its cost of funds, down by 2 basis points sequentially. This was chiefly due to a declining trend in deposit rates. Axis Bank’s gross non-performing assets (NPAs) as a percentage of total assets were unchanged compared with the preceding quarter. Restructured loans rose during the quarter, up at ₹ 368 crore compared with ₹ 323 crore in the preceding quarter.

The bank management said in a conference call that retail loans will continue to drive growth, and both NIM and net NPAs are expected to be stable. That is good, but investors will pay particular attention to trends in restructured loans, especially if any large exposures require restructuring.

The bank’s share rose by 2.64% on Tuesday, as investors appeared to cheer both income and profit growth numbers. Its ability to grow its business, without an increase in bad loans, is a key positive in its favour, especially given slower overall credit growth. If the Reserve Bank of India does cut benchmark rates later this month, banks such as Axis Bank will see their cost of funds decrease If it can sustain loan growth, then a lower cost of funds will drive further growth in margins.