Rising interest rates have taken a toll on banking and financial stocks with many stocks sharply off their November 2010 highs. The stock of Axis Bank is a preferred pick in the sector for investors with a two-year horizon.

The bank is better poised to tide over current adverse conditions than most rivals. After a sharp fall, the Net Interest Margin (NIM) seems to have bottomed out for the bank and the bank has superior asset quality.

Axis Bank's strong fee income contribution (34 per cent of net revenues as of June 2011) also leads to a high Return on Asset ratio of 1.6 per cent.

At current price of Rs 1,072, the stock trades at two times its FY12 book value and 11 times its estimated FY12 earnings. The stock's valuation is also at a steep discount to its price — three year average book value of 3 times.

The bank's efforts to reduce wholesale deposits and improve its low-cost deposit ratio through retail savings augur well for its margins. It has managed to reduce the proportion of wholesale deposits from 41 per cent in March 2011 to 39 per cent in June 2011. The credit-deposit ratio at 71.8 per cent is also low which can further improve as the credit offtake picks up. Additionally, recent hikes in lending rates are yet to reflect on the bank's margins.

All these factors would help the bank maintain the NIM at current levels if not improve it in the coming quarters.

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