Fresh investments with a two-year investment horizon can be considered in the stock of Axis Bank. While the stock has run up from its December lows, valuations continue to remain attractive from a long-term point of view. The stock currently trades at half its average five-year price-to-book value ratio.

At the current price of Rs 1,041, the stock trades at 1.44 times its adjusted FY14 book value. The bank enjoys high return on assets of 1.6 per cent. Given high return on assets and moderate leverage, the bank managed a return on equity of more than 19 per cent over the last four years.

This coupled with the bank’s ability to grow faster than the industry entail premium valuations for the stock.

The price to FY14 likely earnings multiple also works out to a modest 7.44 times. The earnings growth during the period from 2008-09 to 2011-12 was 32 per cent per annum.

Rapid expansion of Axis Bank’s branch network, which should aid retail loan growth, rising market share in savings bank accounts, diversified fee income sources and good risk management practices are the key positives for the bank.

Balance-sheet growth

Axis Bank in recent times has begun to focus on strengthening its retail banking business. It has nearly doubled its branch network and more than doubled its ATM network over three years.

Expanding branch network, predominantly in rural and semi-urban areas, offers scope for retaining its share of savings bank accounts and may help raise retail term deposits. A larger branch network may also generate fee income from cross-selling opportunities. Retail loans account for 24 per cent of the total loans, as of June 2012 against 20 per cent a year ago. The bank plans to increase the proportion of retail advances to 30 per cent by 2015.

While the current retail portfolio is dominated by mortgage loans, the bank is planning to add gold loans and two-wheeler loans to strengthen its loan bouquet. These high-yielding advances may support its margins in the medium term. Fee income from retail sources has also shown strong growth in recent quarters.

Corporate advances

Advances to large companies currently account for 54 per cent of the advances while SMEs account for 13 per cent. These two segments have slowed due to moderation in economic activity and higher interest rates.

Yet, the bank managed to keep its non-performing assets under check. The gross NPA ratio is at 1.06 per cent as of June 2012 and net NPA ratio is 0.31 per cent of the total advances. It is noteworthy that around 86 per cent of the loans are secured in nature. This reduces the risk of a complete write-off of loans. Recovery of NPAs is lower during the current quarter but the trend may change in the coming quarters.

While the proportion of restructured assets is on the rise, it is still at less than 2 per cent of the total advances. Around one-third of these restructured loans have a two-year track record of repayment. The bank has until now witnessed only 15 per cent of its restructured loans falling into NPA category.

While SME prospects may improve with rate cuts, big-ticket reforms are expected to boost infrastructure sector. These may benefit Axis Bank which has SME and Infrastructure as major focus areas. It is a big player in loan syndication and private placement markets.

Margin support

Axis Bank’s net interest margins (NIM) fell from 3.55 per cent in March 2012 to 3.37 per cent in June 2012. Even as the bank has around 40 per cent of its deposits in the form of low-cost deposits, it is highly dependent on wholesale deposits (37 per cent of the total). Funds parked in current accounts have also declined in recent times, given high rates offered for short-term deposits. But the relatively short average tenor of deposits allows the bank to benefit quickly from rate declines.

On an average, certificate of deposit rates have fallen by around 2 percentage points during the last three-and-a-half months. Given that more than half of its deposits mature in the next one year, this may reduce the pressure on margins even if the rates don’t decline sharply. Over the medium term, increased proportion of high-yielding retail loans and higher offtake from SMEs might support the margins at 3.5 per cent.

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