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Axis Bank Stock Analysis | Long Term Outlook and Future Prospects

HomeAxis Bank Stock Analysis | Long Term Outlook and Future Prospects

Stock of the Month (December 2013) – Axis Bank

05 December, 2013

Price: Rs. 1,241.20

This Stock Analysis report presents a long term outlook and the future prospects of Axis Bank.


Robust loan growth coupled with healthy asset quality

Axis Bank Stock Analysis

Over the last five years (i.e. 2009-2013), total deposits with Axis Bank Limited (“Company”) have grown at a CAGR of 23.58%. For the same period, profit after tax grew at a CAGR of 37.06 %. 

For FY 2013, Axis Bank reported a healthy 16.03 % loan growth (compared to 19.21 % for FY 2012) despite sluggish economy and lower loan off-take in both wholesale and retail segments. Net Profit for the same period grew 22.09 % (compared to 25.19 % for FY 2012). Operating expenses grew by only 15.10 % in comparison to a 25.69 % increase for FY 2012.

The asset quality for Axis Bank is amongst the healthiest in the industry. Gross Non-Performing Assets (“GNPAs”) for FY 2013 stood at 1.06 % of gross advances, and Net Non-Performing Assets (“NNPAs”) came at just 0.32 % of customer assets. In the last few years, there have been many challenges with respect to NPAs for the banking sector due to bad economic and business environment. 


Axis Bank Stock AnalysisAxis Bank’s healthy asset quality has been achieved primarily due to a combination of strong risk management practices and nominal exposure to the troubled sectors like aviation, infrastructure and textile.

Over the next 1-2 years, we expect the Government of India to continue with its aggressive reforms programme and an improvement in the overall economic scenario. The Indian banking sector will be a direct beneficiary as growth momentum picks up in other industry sectors.

We believe that in long term, Axis Bank will outperform its peer group in the next 2-3 years and expect the net profit to grow at a CAGR of 19.5% in the period between 2012 and 2015E.

Consistently high shareholder returns

Axis Bank Stock AnalysisAxis Bank has consistently generated a high Return on Equity (ROE) for shareholders.  This has been achieved mainly because of Axis Bank’s high net interest margins and CASA (current account and savings accounts) deposits maintained by the Bank. Interest rate paid on CASA deposits is much lower compared to other deposits like term deposits or recurring deposits. While banks do not pay any interest on current account, interest paid on savings account deposit is set by RBI at 4%. Banks therefore make maximum effort to increase the share of CASA on their books to reduce their overall cost of deposits and increase their Net Interest Margin (NIM). 

Despite worsening economic conditions, in FY 2013, Axis Bank reported a healthy 20.56 % jump in its Net Interest Income (“NII”) over FY 2012. NIM, stood at 3.53% compared to 3.59% in FY 2012.

We expect that in the next 2-3 years, the Company will continue to enjoy this advantage of having wide spread on its interest income given its large low cost deposit base coming from its CASA accounts. As on 31st March 2013, 44.38% of total deposits with Axis Bank were in the form of low cost CASA deposits.

Deal with ENAM: Growth from non-funded revenue stream 

Non-funded revenue (i.e. other income) largely constitutes of fee income such as commission and brokerage fees and client based merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management services), syndication and placement fees, processing fees from loans and commission on non-funded products (such as letters of credit and bank guarantees) etc. Growth in other income or non-funded revenue is good for the bottom line (i.e. net profit) as income from this stream is derived without significant mobilisation of deposits and hence the cost associated with this income is relatively lower compared to interest income. Banks in developed countries derive nearly 50% of their income from these non-funded sources. For financial year 2013, ~ 41% of Axis Bank’s operating revenue came from non-funded segments such as fees and commissions for services.

In November 2010, Axis Bank entered into a deal to buy the investment banking and equities business of Enam Securities (“Enam”). On 22 October 2012, almost two years after Axis Bank took over Enam, the Company started operations of its subsidiary, Axis Capital Markets (India) (“Axis Capital”). Axis Capital focuses on investment banking and institutional equities work, while the retail brokerage business of Enam merged with Axis Securities and Sales Limited, a wholly owned subsidiary of Axis Bank. As financial markets begin to improve and deal activity picks up, we expect Axis capital to contribute significantly to the Company’s non-funded revenue stream in future.


Increasing cost of funds and high Inflation 

Indian Banking Sector

Over the last few quarters, banking sector as a whole has suffered from lower availability of loanable funds as R.B.I. has kept the interest rates high in order to control inflation. For September 2013, inflation was recorded at 6.46 %. R.BI. is likely to continue with its tight monetary policy and is unlikely to cut policy rates unless it is sure that inflation is under control. There are signs of improvement in the rate of inflation over the last 12-18 month period. We expect tight monetary policy to continue until inflation is under control. At the same time R.B.I. has mandated that all banks pay a minimum of 4% interest rate on all savings accounts. This has increased the cost of funds and kept margins under pressure.

Unless inflation comes under control and RBI cuts policy rates the cost of funds will continue to remain high creating margin pressures which could have a negative impact on the financial performance of Axis Bank. 

Intense competition, threat of new entrants and stringent capital requirements as per Basel III

Many of the services that were traditionally performed by the banks are now being performed by other players such as depositories, NBFCs and brokerage houses which has intensified competition in the banking sector. Additionally, R.B.I. has released the new Banking License Guidelines for NBFCs and is likely to award new banking licenses which will further intensify competition. Additionally, development of technology has resulted in availability of multiple delivery channels for customers such as ATMs and phone and internet banking.  As technology develops further, some of the advantage enjoyed by larger banks like Axis Bank, such as a large branch network could become a drain on the revenue stream.

The Basel Committee on Banking Supervision has finalised the Basel III framework which will begin to take effect from the beginning of 2013 and will be progressively phased in by 2019. The main goal of the new framework is to make the banking sector more resilient in times of economic slowdowns. The Basel III framework sets out requirements for higher and better-quality capital and better risk coverage especially related to capital markets activities. For example, the longstanding 8.0% minimum total capital requirement (as per Basel II norms) will increase to 10.5%, including 2.5% “capital conservation buffer” to be used in periods of economic stress. Further, the new norms introduce a 3% minimum leverage ratio of Tier 1 capital to total assets and two new global liquidity standards (viz. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio) to be formally introduced from 2015 and 2018 respectively, after an initial observation period.

These new regulations would not only require the banks to arrange for additional capital and maintain more stringent liquidity measures, but are also likely to pose integration challenges for the banking sector.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.