Axis Bank’s second quarter 2015 earnings were up 18.3% over prior year, in line with our five-year growth estimate of 18.6%.
Net interest income grew very strongly (up 20%) as interest income (up 13%) grew ahead of interest expenses (up 9%). Average net interest margins, or NIMs, have expanded to 3.67% in the last six months, versus 3.58% in 2104. Management now expects NIM to be above 3.50% guidance given at the start of the year, as exposure to high-yield retail loans (up 27%) continues to grow ahead of total loans (up 20%). Retail loans accounted for 39% of the loan book as of 30 September 2014, versus 35% last year (figures adjusted for re-classification of rural farm loans). We are increasing our valuation for Axis Bank to Rs 393.70 or $6.45 per GDR, as we adjust our NIM forecast upwards and adjust the share count for the 5 for 1 share split undertaken on 28 July, 2014.
Funding costs fell 6 basis points to 6.19% as low-cost current accounts, savings accounts, and retail deposits formed 79% of all deposits versus 69% last year. Axis is following a two-pronged approach to grow its retail business –by both lending as well as borrowing more from retail customers. In our view this is a prudent way to grow its retail franchise. By building out multiple revenue streams from existing clients, the bank is strengthening its customer switching costs and supporting our narrow economic moat rating. The bank continues to maintain a low cost-to-income ratio of 41.8% on a trailing twelve-month basis, and we have adjusted our 2015 forecast to 41.5% from 42.9% previously assumed.
Overall, the bank continues to fire on all cylinders of cost management while expanding its retail banking franchise. CEO Shikha Sharma recently won the Forbes India CEO of the Year award, for successfully transforming the bank from a corporate lender to a full-service bank over the past five years. We continue to remain positive on the bank’s future prospects in her able hands.
To read the analysis of Axis Bank, click here.
