Axis Bank: Concerns reflect in valuations

Despite the tough macro environment, the bank improved its net and gross NPA ratios, which were down sequentially by 14 bps and 16 bps

Axis Bank posted good set of numbers for the quarter ended 31st March 2012, beating the consensus estimates. Higher than expected growth in interest income, strong loan growth and lower provisioning aided the bank’s performance in the quarter.

Strong loan growth of 19% over the same quarter of FY11 drove the bank's net interest income (NII) up by 26% for the quarter. Fee income growth, as expected, remained muted at 8%. Flattish growth in large and mid corporate credit fees (up 1%) coupled with fall in fee income from treasury (down 3%) and capital markets (down 35%) pulled down the fee income growth compared to the year ago quarter. The net interest margins (NIMs) for the quarter stood at 3.55%, down 20 basis points sequentially, largely driven by rise in the cost of funds for the bank. The latter increased by 11 basis points to 6.45%. One percentage point is 100 basis points. Despite the tough macro environment, the bank managed to improve its net non-performing assets (NPA) as well as gross NPA ratios which were down sequentially by 14 basis points and 16 basis points, respectively. As against addition of Rs 295 crore worth loans to its restructured loan portfolio in the December 2011 quarter, this figure nearly doubled to Rs 588 crore in the March 2012 quarter, indicating that the asset quality woes are far from over for the bank. Further, a steep fall of 45% in provisioning over last year, aided net profit growth for the bank.

Enam valuation slashed
Taking cognizance of the changed market value of Axis Bank since the buyout of Enam's investment banking business in November 2010 as well as to comply with regulation, the bank has revised the share swap ratio of the deal, slashing the deal valuations by about 30%. The value of Enam's equities and investment banking business is now reduced to Rs 1,396 crore, from Rs 2,070 crore in November 2010. Notably, the Axis Bank scrip has fallen by 23% since the deal announcement. As per the revised terms, Enam shareholders will now receive five shares of Axis Bank for every share held in Enam, that is, 2.93% shareholding in the Bank. Thus, against total outgo of 13.8 million shares earlier, the bank will now give only 12 million shares to Enam shareholders.

Outlook
Overall, analysts remain bullish on the bank. Analysts at Angel Broking believe, “The Axis Bank stock is currently trading at attractive valuations of 1.5 times FY2013 estimated adjusted book value–more than 50% discount to HDFC Bank, despite similar earnings quality, profitability and growth expectations over FY2013-14. Hence, we maintain buy with a target price of Rs 1,550.” The discount is to an extent due to the bank's asset quality, which in HDFC Bank's case is far better. In other words, a large part of these is factored in valuations.