Axis Bank’s fiscal 2014 earnings grew 20%, ahead of our 16% estimate, as revenue (up 20%) grew quicker than operating costs (up 15%), with the bank realizing the benefits of scale and a better business mix. Net interest income was up 24%, as net interest margin (NIM) expanded to 3.81%, versus 3.53% in 2013, ahead of management guidance of 3.5% for the year. Improved loan mix helped, as higher-margin retail advances now account for 36% of the loan book, versus 32% the year before. Fee-income grew 8%, aided by higher fees from a growing retail franchise, alongside some trading profits, and in line with management guidance.
Most notably, the bank’s cost-to-income ratio plunged, to 41.5% versus its historic average of 43%, despite investing in branch expansion. The bank added 455 branches during the year, of which 298 were smaller branches opened in semi-urban and rural areas where rents are cheaper. This strategy, of opening small rural branches to tap the savings potential of Indian households living outside of metropolitan areas, is not new. HDFC Bank and ICICI Bank are also stepping up their presence in these underserved markets.
We like the fact that growth is occurring with lean operations. Axis Bank’s cost-to-income continues to be the industry’s lowest, and is the basis for its narrow economic moat rating. We will be taking our fair value estimate up moderately to account for additional cash generated since our last update. Axis Bank’s shares now trade close to our fair value estimate, as the stock has rallied 96% since touching a low of INR 783 per share in September 2013.
Following the recent divestment, foreign investors hold 48.7% of equity as of March 2014 (versus 43.2% in December 2013). The government holds 11.7% (versus 20.7% before). The board announced an INR 20 per share dividend on each share of INR 10 face value, and a stock split, with each share being split into five shares of face value INR 2 each, once shareholders approve.
