Result Flash on Axis Bank for 4QFY2011

Axis Bank registered a healthy 33.4% yoy growth in its net profit for 4QFY2011 to Rs1,020cr, which was in line with our estimates of Rs995cr. However NII was lower than estimated due to a sharp sequential compression in Reported NIMs of 37bp which was offset by stronger other income led primarily by fee income. Strong yoy growth ahead of peers in balance sheet, fee income and branch network was the key positive from the results.

The sequential NIM compression of 37bp was unusually high during 4QFY2011 as the bank had to fulfill its priority sector lending obligations through term deposits (in a sharp rise in term deposits rates scenario), as CASA deposits growth moderated (CASA ratio on a daily average basis down by 400bp qoq). Also the full benefit of re-pricing on the advances side did not flow through during 4QFY2011, as the lending rate hikes were carried out in mid-January and mid-February. During 4QFY2011, apart from NIM, performance of the bank on other operating parameters was strong as evident from the strong fee income growth (39% adjusted yoy), cost-to-income ratio stable at 42.2%, slippages rate contained within 1.0% and gross NPAs brought down to 1.01% with a strong 80.9% provision coverage ratio (including technical write-offs).

The stock is currently trading at valuations of 2.3x FY2013E ABV. We remain positive on the bank owing to its attractive CASA franchise which is likely to be bolstered further on the back of strong branch expansion (increased network by 41.4% during FY2011), multiple sources of sustainable fee income, strong growth outlook and A-list management. We maintain a Buy recommendation on the stock with a Target Price of Rs1,770.

Exhibit 1: 4QFY2011 Actual vs. Estimates
(Rs cr)	Actual	Estimates	Var (%)
Net interest income	1,701	1,803	(5.7)
Non-interest income	1,450	1,219	19.0
Operating income	3,151	3,022	4.3
Operating expenses	1,331	1,245	6.9
Pre-prov. profit	1,821	1,777	2.5
Provisions & contingencies	254	250	1.6
PBT	1,566	1,527	2.6
Prov. for taxes	546	532	2.7
PAT	1,020	995	2.5

  Source: Company, Angel Research

Exhibit 2: 4QFY2011 Performance summary

(Rs cr)	4QFY2011	3QFY2011	% chg (qoq)	4QFY2010	% chg  (yoy)
Interest earned	4,367	3,838	13.8	2,988	46.1
Interest expenses	2,666	2,105	26.6	1,528	74.4
Net interest income	1,701	1,733	(1.9)	1,460	16.5
Non-interest income	1,450	1,148	26.4	934	55.4
Operating income	3,151	2,881	9.4	2,394	31.7
Operating expenses	1,331	1,222	8.9	1,010	31.8
Pre-prov. profit	1,821	1,658	9.8	1,384	31.6
Provisions & contingencies	254	314	(19.0)	202	26.0
PBT	1,566	1,345	16.5	1,182	32.5
Prov. for taxes	546	453	20.5	417	31.0
PAT	1,020	891	14.4	765	33.4
EPS (Rs)	24.8	21.7	14.3	18.9	31.6
Cost-to-income ratio (%)	42.2	42.4		42.2
Effective tax rate (%)	34.9	33.7		35.3
Net NPA (%)	0.3	0.3		0.4

Source: Company, Angel Research

Exhibit 3: Trends in NPAs

Particulars	4QFY11	3QFY11	2QFY11	1QFY11	4QFY10	3QFY10	2QFY10	1QFY10
Gross NPAs (Rs cr)	1,599	1,483	1,362	1,341	1,318	1,174	1,132	915
Net NPAs (Rs cr)	410	386	409	413	419	430	417	367
Gross NPAs (%)	1.0	1.1	1.1	1.1	1.1	1.2	1.2	1.0
Net NPAs (%)	0.3	0.3	0.3	0.4	0.4	0.5	0.5	0.4
NPA coverage (%)	74.3	74.0	70.0	69.2	68.2	63.4	63.2	59.9

Source: Company, Angel Research; Note: NPA coverage excluding technical write-offs

Key Highlights

1.       Business growth momentum was pretty strong partly aided by the usually busy fourth quarter. Advances registered a strong growth of 15.3% qoq and 36.5% yoy, driven primarily by Agricultural lending (for fulfilling the priority sector requirements) which grew by 60.8% qoq and constituted 34.7% of the incremental credit during 4QFY2011. Apart from Agri, growth was also strong in SME (up 25.5% qoq) and Retail segment (up by 10.1% qoq).

2.       Deposits also grew at a strong clip by 21.5% qoq and 33.9% yoy. However the growth was driven by term deposits which grew by 24% qoq and accounted for closer to 65% of incremental deposit accretion for 4QFY2011. Sequentially, saving account deposits growth was muted at 4.4% while current account deposits increased by 37.8%. Overall pace of CASA deposits growth moderated to 17.8% yoy, however on a daily average basis, they grew by 22.7% during the quarter. CASA ratio on a daily average basis declined by ~400bp to 37%, while period-end CASA ratio declined by 120bp qoq to 41.1%.

3.       During 4QFY2011, reported NIM declined by a sharp 37bp qoq to 3.44% as the bank had to aggressively raise term deposits (~65% of incremental deposits) to fulfill its priority sector obligations. Given the rising interest rate scenario, cost of term deposits for the bank went up by 121bp qoq and cost of funds went up by 77bp qoq to 5.56%. As a result Net Interest Income de-grew by 1.9% qoq which is the first sequential decline in the last 9 quarters. However, for FY2011 NII growth was strong at 31.1% yoy.

4.       The non-interest income registered a strong growth of 26.4% qoq and 55.4% yoy to Rs1,450cr, primarily due to a robust 57.9% yoy growth in fee income and a 215.2% yoy spurt in miscellaneous income (primarily recoveries from written-off accounts). Adjusting for the change in accounting policy for recognition of BG commission, fee income grew by 39% yoy. Fee income from Large and Mid-corporate credit group, treasury and retail business witnessed strong traction with yoy growth of 68%, 78% and 45%, respectively.

5.       The operating costs increased by 31.8% yoy on the back of 18.7% increase in employee costs and 38.2% increase in other operating expenses. The cost to income ratio was stable sequentially as well as on a yoy basis at 42.2%

6.       The asset quality improved further during the quarter, with the slippages coming down to Rs248cr compared to Rs334cr in 3QFY2011 and Rs446cr in 2QFY2011. For FY2011, slippage ratio improved to 1.4% compared to 2.2% in FY2010, while for 4QFY2011, slippage ratio dipped to 1.0%. However, gross NPAs increased by 7.9% sequentially to Rs1,599cr on account of lower write offs. Net NPAs also increased sequentially by 6.4% Rs410cr. The provision coverage ratio including technical write-offs remained strong at 80.9% (82.7% in 3QFY2011).

7.       During FY2011, the bank added 407 branches (a strong yoy growth of 41.4%), taking its network size to 1,390. It also opened 1,977 ATMs, to increase its ATM count to 6,270.