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The banking sector started the 2014-15 fiscal on hopes of a revival in the economy, which would have helped credit growth pick-up and easing of asset quality pressures. But the year turned out to be one of the most challenging for the sector, as loan growth dipped to decade-low levels of 10 per cent.
Still, private banks proved their mettle by delivering strong earnings growth. With expectations of a slow recovery in economic activity over the next one to two years, credit growth will gain momentum only gradually. Asset quality concerns too will recede only if investment activity picks up in core sectors.
Investors should thus bet only on banks with a strong retail loan portfolio, sound profitability and healthy deposit base. Axis Bank is among the banks that delivered in a tough 2014-15. Its earnings grew 18 per cent over the previous year, backed by strong 27 per cent growth in retail loans. The bank is well capitalised with tier I capital ratio at 12 per cent to fund its next leg of growth.
The stock is currently trading at 2.5 times its one year forward book value, higher than its historical average of 2.1 times. But valuations of most private banking stocks have gone up due to the wide divergence in the performance of public sector and private banks. The premium valuations are likely to sustain.
Retail push While the bank’s retail loans witnessed good traction, corporate loans too have been gaining momentum since the September quarter. The bank’s net interest margin (NIM) has remained steady at 3.8-3.9 per cent through the year. Axis Bank has a healthy retail deposit base, thanks to its expanding low cost CASA (current account and savings bank) deposits and retail term deposits.
While the gross non-performing assets marginally increased to 1.34 per cent as of March 2015, from 1.22 per cent in the year before, restructured loans went up to 2.7 per cent of loans from 2.3 per cent.
However, slippages from restructured to non-performing category as well as addition to restructured assets have been within the limits the management had indicated earlier.
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