Saturday, June 23, 2012


Savings deposits growth has been exceptional
During FY12, Axis Bank witnessed a strong of 27% in savings deposits. This was despite increased rate differential on retail term deposits (TDs) and savings rate de-regulation induced rate competition from smaller private banks. Amongst the larger banks, the second highest savings growth was 17% for HDFC Bank. Axis Bank attributed robust savings traction to improving maturity of branches added during 2009 and 2010. Over FY08-11, the bank grew its branch network 2.2x by adding 746 branches; of these 516 branches were opened in new centers thereby widening distribution. A bulk of the addition was in semi urban areas
which have higher savings concentration. In the past two years, bank has opened 3.8mn savings account.

Axis Bank is confident of at least 20% growth in savings deposits in the current year. The bank would continue to add 200-250 branches per annum with focus on widening the network further by improving penetration in Tier 3-6 cities. According to the bank, smaller private banks have reported significant savings ratio improvement on a miniscule base and therefore incremental improvement would be much slower. Axis Bank also does not expect large banks to increase rate as savings deposits mobilization has been decent. Management believes that savings growth in future would be determined by reach and service levels.

Deposits mix to strengthen; steady increase in CASA and retail TD share
Terminal CASA ratio has been stable near 41% over the past eight quarters. On daily average basis (DAB), it has moved in a narrow range of 37-39% supported by robust savings balance mobilization. As per the bank, decline in retail term deposit rates would not necessarily drive an improvement in the CASA ratio. Bank would be content even if the ratio improves by 15-25bps every year. Axis Bank has witnessed robust growth in retail term deposits on the back of higher interest rates being offered. Within term deposits, its share increased from 33% to 37% during FY12. The term deposits mix is expected to gradually move in this direction in the longer term.

Unlike HDFC Bank, Axis Bank has a higher share of wholesale deposits at 37%. Bank attributes its higher dependence to the ALM requirement ie need to resort to bulk borrowings to meet large corporate disbursements. The large and mid corporate (LMC) loans comprise 54% of advances and about 30-35% of these loans are short term (<1year maturity) working capital loans. Bank expects the share of wholesale funding to remain near 35%. Presently, the cost of borrowing is in the range of 9.5-10%, lower by 50bps since March.

Loan growth to be a function of CASA growth; segmental mix to shift towards retail After growing balance sheet significantly faster than system in the past five years (36% CAGR), Axis Bank intends to enhance focus on profitability and building predictability in growth. In line with this strategy, bank’s loan growth would be a function of CASA growth. Bank is unwilling to grow balance sheet ahead of CASA deposits. As Axis Bank is confident of achieving 20% savings growth, we expect similar loan growth for the year.

Retail advances of the bank grew by strong 35% in FY12 with the share improving to 22% from 19% as at the end of FY11. The retail asset portfolio is dominated by housing loans (75%); auto loans (13%) being the second largest component. Axis Bank’s strategy is to increase the retail share to 28-30% by FY15; a significant 200-250bps increase pa. Mortgages would remain the largest piece in the portfolio but its concentration would likely decline. Loan against property (LAP) within mortgages is expected to grow very fast but on a small base. Within auto loans, passenger car financing would continue to grow at brisk pace. Bank intends to expand presence in Commercial Vehicle (CV) financing by entering into funding of new CVs, HCVs, fleet operators and small road transport operators (SRTO). As per the bank, CV financing is not only one of the most profitable segments but also has lower asset quality risks. Competition is expected to intensify in this space but remain healthy ie differentiation not based on rates but
service levels. Personal loan portfolio is estimated to grow faster than overall retail book over the next three years with contribution increasing from current 6% to 10-12%. The bank is more confident about growing this segment aggressively having learnt from the mistakes incurred during 2008-09.

NIM may decline further in Q1 FY13; expected near 3.5% for full year
There is a structural annual seasonality in Axis Bank’s NIMs; it is stronger in Q2 and Q3 while it is weaker in Q1 and Q4 of a fiscal. This seasonality is a function of the movement in loan mix. The proportion of low yielding agri/PSL loans is higher during Q4 and Q1 while higher yielding SME loans are mainly disbursed in Q2 and Q3. Further, banking system liquidity tends to get tighter towards the end of fiscal affecting banks such as Axis having relatively significant dependence on bulk deposits. For aforementioned reasons, NIM is expected to correct sequentially by 15-20bps in Q1 FY13. Given the inelasticity in reducing deposit rates, Axis Bank has not cut its lending rates post the 50bps repo rate cut by RBI in April. As per the bank, lending rate reduction in unlikely to happen in the near term. Bank’s loan portfolio would re-price faster in interest rate down cycle as ~85% of the book is floating. The structural maturity of the loan book is 3-5 years with mortgages averaging around seven years and long term loans having 7-10 years maturity. Axis Bank is confident of achieving NIM near 3.5% for FY13, at the higher end of its stated guidance. Key drivers of higher margin would be favorable shift in loan mix and gradual improvement in CASA.

Fee income to track loan growth; C/I ratio to increase slightly
Axis Bank’s fee income has witnessed a robust CAGR of 40% in the past five years. In FY12, it grew by resilient 25% despite slowdown in new project investments. Retail fees grew by 30%, ahead of the strong growth in retail advances. Enam would be financially merged with the bank after the receipt of shareholders approval. Considering the current state of capital market, bank believes that the merger is unlikely to provide a big boost to fee income. With moderation in corporate fees expected, Axis Bank expects its fee income to track balance sheet growth in FY13. With substantial addition to network over the past three years and moderation estimated in revenue growth, the C/I ratio is likely to inch up marginally.