Axis Bank: Higher cost of funds tells on net interest margin

Beating expectations, HDFC Bank managed to maintain its net interest margins (NIM) at 4.2 per cent in Q4, but no such luck for Axis Bank.

The impact of the rise in cost of funds (5.56 per cent against 4.79 per cent in Q3) showed up in its fourth quarter numbers with NIM falling to 3.44 per cent (3.81 per cent). This shrinkage can be attributed to a quarter on quarter fall in the net interest income (NII) of the bank. As against Rs 1,733 crore in the third quarter, the bank's NII stood at Rs 1,701 crore in the January – March 2011 period.

That this fall has happened despite a 15 per cent growth in net advances during the fourth quarter, points to deposit growth which, at 21.5 per cent, has outpaced advances growth for the quarter. Consequently, the credit-deposit ratio which had expanded to 79 per cent in December 2010 and aided the sequential growth in NIM then, has now fallen to 75 per cent. Going forward, the bank expects its NIM in the 3.25 to 3.5 per cent range in FY12.

Though NII growth remained subdued at 16.5 per cent, on a year on year basis, net profits grew 33 per cent to Rs 1,020 crore and core operating profits, by 37.5 per cent. Earnings growth has been supported by a 39 per cent growth in adjusted fee income. During the quarter, fee income constituted a similar 39 per cent of the total net revenues, up from 32.5 per cent a year ago. This trend of fee income supporting earnings growth can be expected to continue in the coming quarters, considering the bank's acquisition of Enam's investment banking and equity broking business in late 2010.

Given the focus on large and mid-corporate financing and secured retail financing, the bank's asset quality has continued to improve. Gross NPA and net NPA ratios as on March 2011 stood at 1.01 and 0.26 respectively, improving from 1.09 and 0.29 as at end December 2010.

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