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Axis Bank 5yr Consolidated Performance
March 13, 2009 Axis Bank has the reputation of being one of the most cost-efficient among the private sector banks and has been recording above-average growths for the past few years. However, it's stock price has seen major declines in the last 2 months since Feb 2009, among concerns on credit quality deterioration. It deserves a closer look at 5-yr performance snapshot to see if it's worthy of further diligence for investment-worthiness. 
Strong Capital BaseA strong capital base is the number one issue to consider before investing in a lenderAxis Bank has its Capital Adequacy ratios at 13.99 percent much above the mandatory 9 percent requirement stipulated by RBI. Its nice to see a focus on reducing Gross and Net NPA (Non-Performing Assets) levels. These have been brought down sequentially, year on year. FY08 Gross and Net NPAs stand at 0.83% and 0.42%, respectively. The record on financial leverage though, is patchy. Though current financial leverage is down to conservative levels of around 12 times, it has mostly seen high financial leverages ranging from 15x to over 21x in the last 5 years. (An average bank has a Financial Leverage of 12x as compared to 2x or 3x for a company) Return on Equity (RoE) and Return on Assets (RoA)These metrics are the defacto standards for gauging bank profitability. Generally investors should look for mid to high-teen returns on equity. It is easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, which can be unduly risky over the long term. For this reason, it is good to see a high level of return on assets as well. For Banks a top RoA is in the 1.2 to 1.4 percent rangeThere are only three levers for boosting ROE -Net Margin, Asset Turnover and Financial Leverage. While Net Margins and Asset Turnover ratios have been comparable to other banks - it is the high financial leverages employed (a sign of its rapid push for growth) - that Axis Bank has been recording realtively high Return on Equity ranging from 17% to over 27% in earlier years. However to its credit, FY08 financial leverage is down to conservative levels. This has resulted in a lower RoE at 14.5 percent. On a comparative basis, this is still among the best in the Industry with only HDFC Bank and SBI bettering it. While net Margins have remained in a 12-14 percent range, Asset Turnover ratios have seen consistent improvement leading to better Return on Assets ratios. Efficiency RatioThe efficiency ratio or cost to income ratio, measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better)It has been generally maintaining cost-efficiency ratios at below 40 percent, which is one of the best in the industry. Net Interest Margins (NIM)Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.Net Interest margins have been generally consistent, around the 3 percent mark. FY08 has shown NIMs climbing to 3.47 percent Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthAxis Bank has been growing at above-average rates for the last 5 years. This shows in the overall growth track record of over 42 percent CAGR over 5 years. Interest Income has grown at over 44 percent CAGR, while Fee Income has galloped over at 58 percent CAGR. This has resulted in Axis Bank crossing milestones of Rs. 1000 Cr Net Profit and Rs.1,00,000 Cr in Total Assets in FY08. Price to BookBecause a bank’s balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.Axis Bank is currently (Mar 13, 2009) trading at 1.35 Book Value, historically at its lowest levels in the last 5 years. Similarly on a price-to-earnings measure too it is quoting at 7x TTM earnings, again historically the lowest levels in 5 years. Overall verdictWorthy of further investigation. If interested in Private Bank stocks in the Indian stock market, its time to get to |
