In recent times, investor concerns about Axis Bank Ltd have revolved around the lender’s asset quality and margins, despite decent growth in net profits. That’s why, despite double-digit growth in net profits quarter after quarter, the bank’s stock has underperformed the banking index on the BSE.

By Indranil Bhoumik

Fee income and net interest income continued to grow robustly. Yet, investor attention would be held by the margin and non-performing asset (NPA) numbers, which might just assuage some fears.

Axis Bank reported a net interest margin of 3.78%, up 50 basis points (bps) from the end of the June quarter. One basis point is one-hundredth of a percentage point. This boost was primarily owing to a pick-up in loan yields as the bank raised rates twice over the quarter. Also, low cost current and savings account (Casa) deposits grew 1.71 percentage points over the course of the quarter to 42.24%. That is a bit of a plus considering deposit rates are rising and other banks are having trouble in growing these accounts.

Secondly, gross NPAs came in at 1.08% of advances. That’s just a 2 basis point increase over the June quarter. The bank also restructured loans worth 312 crore in the September quarter, which brings total restructured assets to 2,410 crore—around 1.7% of its outstanding loans.

While the bank does have about 9% exposure each to power and infrastructure (roads, ports, airports, etc.) sectors, it is not unduly more than some of its peers.

Advances grew 26.7% from a year ago, better than the sector. Still, overall deposit growth came in a tad less at 24%. There is also a concern whether the bank will face problems on the liability side when re pricing its deposits. In a conference call, the management brushed this fear aside and said re-pricing was happening at a steady pace and the situation was “not alarming". The cost of funds for Axis Bank rose to 6.19% in the September quarter, only about 6 bps from the previous one.

That said, with a diminishing ability to pass on costs and still rising interest rates, margins will come under pressure for the rest of the fiscal. The bank has predicted 3.25-3.5% margins and credit growth to moderate, not surprising given the macro environment. These concerns are priced into all banking stocks. Axis Bank, which is trading at two times its estimated book value for fiscal 2012—at a higher discount to its long term average compared with most private sector banks, as per IDFC Securities Ltd estimates—has had to bear the brunt of asset quality fears as well. The September numbers may just see it recover some lost ground.

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