Axis Bank – Net Margins to Improve

Axis Bank held its conference call on 9^th January 2009 to discuss on the company’s performance for nine months ended December 2008.

Highlights

• Axis Bank registered 24% y-o-y growth in Q3FY09 in its Net Interest Income of Rs 929.68 crore. Substantial rise in cost of funds restricted the growth of NII for the quarter under review.
• The daily average cost of funds increased substantially to 6.91% in Q3FY09 as compared to 5.72% in Q3FY08 of the corresponding previous year. The rise in cost of funds is mainly due to the much higher cost of term deposits offered. The term deposit rates peaked up in the month of October and November. Further slow down in CASA share in the overall deposits share has also contributed to the cost of funds to move up.
• The global (viz, whole-Bank) Net Interest Margin for Q3FY09 decreased to 3.12% from 3.51% in Q2FY09 and from 3.91% in Q3FY08 of the previous year. The domestic (India-business) Net Interest Margin for Q3FY09 decreased to 3.20%, from 3.67% in Q2FY09 and from 4.09% in Q3FY08 of the previous year. The bank believes that margins will probably improve in the Q4FY09 with the bulk and retail term deposits rates likely to go down.
• The share of low cost deposits – Savings Bank and Current Account – was 38% as at end December ’08, lower than the 40% as at end of the previous quarter, and 45% as at end December ’07. The slowdown in CASA was because of the general movement of funds towards term deposits naturally because the term deposit rates were so high. But the bank expects a reversal of that and expectation is that we will probably see a revival of CASA deposits in this quarter.
• Savings Bank deposits registered a growth of 39% y-o-y, from Rs 15,768 crore as at end December ’07 to Rs 21,888 crore as at end December ’08. Current Account deposits grew at 20% y-o-y, from Rs 15,264 crore as at end December ’07 to Rs 18,258 crore as at end December ’08.
• The Bank’s balance sheet size has grown by 52% to Rs 137471 crore as on end December’08 with the deposits growing by 54% to Rs 105716 crore and net advances growing by 55% to Rs 75328 crore for the period.
• Although credit has grown at 55% on y-o-y basis to Rs 75328 crore, the Year to date growth in loans has been lower and has grown at an annualized rate of 35%. On y-o-y basis the split up of loan book remains – large and mid corporate loans have grown at 67%, SME at 57%, agricultural loans at 52% and retail loans at 30%.
• Retail has slowed down since during Q2FY09 the bank had a large chunk of loans that got repaid so therefore sequentially, the de-growth. Going forward the loan growth is going to be kind of moderate in retail.
• The quality of assets has continued to be high, in the case of large and mid corporate loans 82% of the portfolio is rated `A’ and above and in the case of the SME segment 79% of the loans are between SME1 and SME3 and as we have mentioned in the past SME3 is roughly equivalent to a single `A’ in the corporate rating.
• The bank haven’t had any change of PLR during the quarter, however it will be reviewing it, depending upon the cost of funds. Currently the PLR stands at 15.75%.
• The NPAs in value terms witnessed a rise during the quarter under review. The gross NPA increased by 76% to Rs 787.85 crore and Net NPA increased by 46% to Rs 341.94 crore.
• The Gross NPA as a proportion of Gross Customer Assets were at 0.90% as at end December ’08, up from 0.80% at the end of December’07, while the Net NPA as proportion to Net Customer Assets declined to 0.39% compared to 0.42% in the corresponding previous year.
• The provision coverage continues to be adequate, provisions and accumulated write-offs as a percentage of Gross NPAs was 83.39%.
• The Net Worth of the Bank stood at Rs 9,587.99 crore at as at end December ’08 as compared to Rs 8,374.50 crore a year earlier, a growth of 14% y-o-y.
• The book value per share as at end December’08 was Rs 279.86 as compared to Rs 242.00 a year earlier.
• The Capital Adequacy Ratio for the Bank was at 13.84%, as at end December ’08, as compared to 16.88% as at end December ’07. The Tier – I capital amounted to 9.46%. The bank raised subordinate debt of Rs 1,500 crore in November at average rate of 11.5% but it still has headroom to raise more than Rs 5,300 crore through subordinate debt upper tier II bonds and perpetual debt if the need arises.
• During the Q3FY09 the other revenue streams which has grown very strongly by 50% to Rs 732.17 crore. The growth in other income was aided by impressive 57% growth in fee Income at Rs 618.91 crore in Q3FY09 as compared to Rs 395.05 crore in Q3FY08.
• The fee income from retail businesses for instance was Rs 178 crore or 29% of the total fee income of the bank. Similarly the fee growth from the credit portfolio of the bank comprising large and mid corporate SME and agri segments have also been quite strong generating Rs 166 crore or 27% of the total fee income of the bank. The capitals market business actually earned Rs 101 crore which constituted 16% of the total fee income of the bank. Treasury contributed 15% of the fee income with Rs 94 crore.
• The bank has also booked trading profits of Rs 114 crore; this has grown 35% y-o-y. Breakup of the trading profits is as follows, the bank earned Rs 69.85 crore trading in Government securities and around Rs 40.42 crore trading in corporate bonds and Rs 28.42 crore in foreign exchange.
• The cost income ratio of the bank was 45.26% against 45.57% last year and the growth of the operating expenses including depreciation on fixed assets has been moderate at around 33.57% y-o-y.
• The business in overseas branches in Singapore, Hong Kong and Dubai International Financial Centers constitutes around 6% of the whole bank’s Balance Sheet and it has grown 8% over the year to US $1.7 billion.
• The bank continues to be the third largest issuer of debit cards in the country with more than 10 million cards issued and also the second largest merchant acquiring bank with an installed base of 1,00,760 point of sale terminals which is a 57% increase y-o-y.

During the quarter the bank opened 20 branches and we had setup 89 ATMs and we also recruited 1,415 employees. Axis Bank currently operates 752 branches including extension counters and overseas branches and two representative offices overseas. It has 3,171 ATMs and 19,719 employees as on December 2008.