Improving asset quality a positive for Axis Bank

Bank could gain most from improved macro economy hence, post better loan growth, earnings in FY16

Axis Bank delivered an in-line performance in the December quarter on most parameters, save asset quality. The private lender added lesser than expected loans to its restructured assets. As against analysts' expectations of Rs 1,000-1,100 crore additional restructured assets, the bank added a mere Rs 132 crore due to reduced stress in the mid-corporate segment, a pressure point for some time.

While the March quarter could witness a spurt in restructured assets, as the  window will be closed w.e.f. April and, hence, some corporate loans could enter into restructuring, the management remains cautiously optimistic and has maintained FY15 credit costs (provisioning for bad loans) forecast of 80 basis points. For FY16, however, the bank expects overall asset quality to be better, in the light of an improving macro economy and reducing interest rates.

Net profit was Rs 1,900 crore (up 18.5 per cent over a year), slightly ahead of the Bloomberg consensus expectation of Rs 1,865 crore, and  driven by strong loan growth of 23 per cent (the highest in six-seven quarters) and other income. All three segments, retail (38 per cent of advances), corporate (47 per cent of advances) and small and medium enterprises (SME) (15 per cent of advances), posted healthy double-digit loan growth,  between 17 per cent and 25 per cent in the quarter. The growth would have been better but for project loans, which did not witness any significant uptick.

Within the segments, the corporate loan book was fuelled by working capital loans, refinance demand and dollar financing, while retail loan demand remained strong in the vehicle loans, unsecured and consumer durables segments. Consequently net interest income (interest earned minus interest expended) grew 20.3 per cent in the quarter to Rs 3,590 crore, despite a slowing economic growth. Fee income, too, grew a decent 16 per cent due to continued momentum in the retail fees. While trading income jumped from Rs 35 crore to Rs 329 crore, the bank also reported a Rs 300-crore increase in provisions for bad loans to Rs 507 crore.

Axis expects retail and corporate segments to post 20-25 per cent loan growth.

Net interest margin (NIM) came off marginally by four basis points sequentially to 3.93 per cent. Part of this is due to a high base effect of the September 2014 quarter. The bank reduced its base rates by 10 basis points from October 15, which impacted NIMs.

At Friday's closing price of Rs 514.9, the scrip trades at 2.3 times the FY16 estimated book value and appears attractive vis-a-vis peers, believe analysts. Given its relatively higher exposure to the over-leveraged corporates and infrastructure sector, Axis appears to be highly levered to economic recovery and reforms. Most analysts thus remain positive on the scrip.