Axis Bank – Stock Analysis

Founded in August 1993, Axis Bank (“AXIS” or “Bank” or “Company”) is engaged in commercial banking activities in India. The Bank classifies its business in four segments:

1) Retail; Corporate

2) Investment Banking

3) Wealth Management; and

4) Other Banking Operations

Apart from Net Interest Income (NIMs), Axis Bank earns a sizeable portion of its revenue from commissions, expense and brokerage. These are primarily from a host of different services (non-interest income) including distribution of third part products like insurance and mutual funds, credit card charges, penalties, non-maintenance charges, loan processing fee and overdraft charges, ATM and forex transaction charges, safe deposit locker etc.

Here’s a look at how AXIS Bank makes its money

(In Rs. Crores)

Note on Axis Bank’s Expenditure

(in Rs. Crores)

Note: Other Expenses in Axis Bank’s Expenditure chart above were incurred on its process of acquiring Citigroup’s India retail and credit card division.

Axis Bank Subsidiaries as of 30 June 2024

In addition to its 8,851 branches, Axis Bank’s subsidiaries have their own network of branches and employees. Below is a snapshot of Axis Bank’s subsidiaries and how much the y contribute tot the profitability of Axis.

Two things are noteworthy here. First, Axis Mutual Fund’s contribution to Axis’ total profitability is less than how much Axis makes from distribution of third-party financial products like mutual funds of other fund houses (included in commissions, exchange and brokerage in the table on the first page of this report). Second, Subsidiary contribution to both topline and bottom line is very small. There is huge scope of improvement in income from asset management and capital markets services.

WHY WE ARE POSITIVE ON AXIS BANK?

[III] Axis Bank is available at its lowest valuations in the past 10 years

Currently, Axis Bank is available at its historically low valuations. Since its change of corporate name from UTI to Axis Bank in 2007, Axis has traded at very erratic valuations. This is largely on account of the various corporate restructurings that Axis has undergone over the past 17 years. First with UTI (2007), then acquisition of ENAM Securities and recently its acquisition of Citigroup India’s retail and credit card division. Over the past few years, Axis Bank incurred a lot of expense on these acquisitions. We believe that going forward, all these initiatives will augur Axis Bank’s overall revenue while most of the expense on these initiatives has already been incurred which should lead to reduced expenses.

[II] NET INTEREST MARGINS (NIMS)

[III] CASA RATIO

I have been avoiding private sector banks on two counts for about 3-4 years now.

First, falling CASA and term deposits. Over the past few years many new investment opportunities came about which not only offered higher interest payouts to investors but also were far more tax efficient than traditional bank deposits and FDs. The market for Debt mutual funds and Balanced advantaged funds (often mis sold as bank FD replacements) grew multi-fold over the past 5 years as more and more investors moved towards these tax efficient options. This meant lesser money for banks to advance credit. RBI governor on his part has been vocal about how skewed credit deposit ratio presents a systemic risk for banks wanting to advance more loans than they should.

The Union Budget on 23 July 2024 changed this. There is no longer any tax advantage to investing in debt mutual funds after change in tax policy for these instruments as below.

CASA ratio and NIMs are two very decisive factors for a bank. A higher CASA ratio is preferred as it reduces the liability of the banks to pay interest on the deposits. Similarly, a higher NIM is preferred as it reflects that interest income earned is higher than the interest paid out.

AXIS Bank Net Interest Margin

Unlike many of its peers, Axis Bank has maintained an increasing NIM over the past few financial years. Increase in deposits will not only further improve Axis Bank’s Net Interest Margins (NIMs) but will also help with expansion to tier III cities and beyond. Higher deposits will translate into higher net interest earnings since expenses are unlikely to go up with increasing deposits.

Also, Current Account Savings Account (CASA) growth is likely to improve with changes in tax policy. CASA deposits require very little interest payment (i.e. they are a cheaper source of raw material for the bank) and are a major boost to any bank’s NIMs. For FY 2024, CASA growth has been the weakest over the past decade.

IMPROVING ASSET QUALITY

Non-Performing Asset (NPA) position has improved across banking sector over the past few years on account of reduced interest rates. This however always remains a worry for banks in case of a recession and slowdown in the overall economy. When compared with best of industry players, Axis Bank’s NPA levels have improved drastically over the past five years.

Axis Bank’s current net NPA stand at 0.31% and Gross NPAs are at 1.43% which is the lowest in the industry.

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Rajat Sharma

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