Axis Bank: Managing Growth

Profit after tax rises 27% on lower provisioning requirement.

The market is baffled by the sturdy profit growth of private banks, which were otherwise expected to report a fall in net interest margins in the first quarter. The numbers, however, suggest the banks have found a way to beat margin fall. Axis is the second private bank to have shrunk its balance sheet in the first quarter and yet manage profitability. Clearly, growth is not coming at the cost of profits. Analysts say this rational growth has helped the bank hold on to its net interest margins at 2.9 per cent, which stood at three per cent in the fourth quarter of 2010-11.

Although it has reported year-on-year (y-o-y) growth, the bank has shrunk its loan book sequentially. The management claims this is because the fourth quarter sees a sharp rise in short-term lending, most of which is repaid in the first quarter. In a rising interest rate scenario, where term deposits are generally preferred, the bank’s Casa has remained steady at 40 per cent. Axis Bank’s net interest income is also above expectations at Rs 1,720 crore, up 14 per cent y-o-y.

The profit after tax has grown 27 per cent y-o-y to Rs 942 crore. Analysts say a lower provisioning requirement has also given a boost to net profit. However, other income has grown 16.7 per cent annually to Rs 1,168 crore, but it has declined sequentially by 19.5 per cent. Fee income has grown a robust 42 per cent to Rs 1,057 crore, from Rs 743 crore in the same period last year. This has not been driven by any segment. The largest contributor to fee income remains the corporate. The cost to income ratio has risen 400 basis points sequentially, to 46.1 per cent. What has taken the Street by surprise is the substantially lower provisioning at Rs 176 crore, below its expectation of Rs 400 crore.

The asset quality has improved, with gross non-performing assets (NPA) at Rs 1,570 crore (against Rs 1,340 crore in the first quarter of last year and Rs 1,600 crore in the fourth), and net NPA at Rs 460 crore (against Rs 410 crore and Rs 410 crore in the corresponding periods). According to Emkay Global, the provision cover has declined 400 basis points to 70.6 per cent, saving Rs 60 crore for the bank.