Understanding Axis Bank Q4 2017 results

 

Did you get confused with the Axis Bank numbers? Is it hard to figure out whether the results are positive or negative? If that sounds like you then this article will help you to understand Axis Bank results and join all the dotted lines.

Understanding banking business first

In easy terms banks borrow money from you at certain interest rate and lend or invest those funds to others who are in need of extra cash. The difference between depositor’s interest rate and lending interest rate is called NIM (net interest margin) of bank. The difference is also called NII (Net interest income). Other than this they also make money by charging different fees. Do this exercise, look at your bank statement for the past year and jot down all the different fees you have been charged by the bank. You will be surprised with that figure! Few examples to give you will be credit, debit card yearly fees, check book fees, forex exchange fees, consolidation of accounts fees and account maintenance fees etc. All these fees come in the bracket of other income.

The biggest expenditure for the bank is the interest on your deposits. Then there is operating expense like paying its employees, IT  security and various branch and IT expenses. Once you deduct those from your total income you get operating profits.

Not everyone who borrows money from the bank pays it back for the various reasons. This is the risk every bank faces and it needs to mitigate that risk with wisdom. GNPA (Gross non-performing assets) are those loans which are outstanding including the interest charges on it.

Many people ask me about what percentage of GNPA are safe. There is no silver line to tell you about it. It is very hard to judge those percentages in isolation. Imagine you and me started a bank. I bring Rs 5 as mine equity and you bring your Rs 5 as your equity. We open a branch and get deposits of Rs 90 from our customers. So now we have Rs 100 to do business and make money for our enterprise. We decide to lend not more than Rs 80 out of Rs 100. Remaining Rs 20 we look at other investment opportunities available in the market. Imagine 5% of our loan book turns into GNPA (Rs 4). If that amount defaults and our lending practices does not stop those GNPA then we will have to keep putting our hands in our own pocket to recapitalise our enterprise. We will keep making profits but the net returns will be low.

Remember there are many other complex levers like CASA and other complex financial products to understand banking business model. But there is a saying you don’t need to know everything to take investment decisions.

Axis Bank quarterly and full year results

 

Axis Bank earned Rs 11,168.15 crore in interest and Rs 3013.16 crore in other income in the fourth quarter. Total income comes down to Rs 14,181.31 crore for the quarter. Last quarter this figure was Rs 14,501.21 crore and is down by 2.2% Q-Q basis.

The bank paid interest of Rs 6,439.55 crore on their deposits in the quarter. This means its gross margin stands at 54.59%. In the last quarter gross margin stood at 53.33%. Gross margins are better this quarter because deposit interest rates have fallen down (cost of funds have come down).

The operating expenses for the quarter stands at Rs 3367.02 crore. This brings their operating profits margin before any provisions to 30.85%. Last quarter this was at 32%.

So on Q-Q basis the results so far are not that impressive. Total income is flat and operational profit margin is down by 1.15% even when cost of funds is low.

But there was one big good news this quarter that everyone is cheering on the street. The provisions for the quarter stood at Rs 2,581.25 crore compare to Rs 3,795.80 crore in the last quarter. This is the only reason profits for this quarter looks far better than the last quarter.

You should not anchor one  good quarter results to come to any conclusion. The GNPA stands at 5.04%. Last quarter it was sitting at 5.22%. The management have mentioned that fourth quarter results are always positive on recoup of non-performing assets and the figures reported are showing them. Also because of the demonetisation of the currency, all the banks have seen a big chunk of cash coming to their doors as deposits.

The point over here many analysts are pointing the dilution of that GNPA percentage rather than the real deduction in the number compare to last quarter.

If we look at these numbers closely then the fresh slippages to GNPA stood at Rs 4,811 crore. Last quarter this figure was Rs 4,560 crore. They managed to upgrade and recover Rs 2,804 crore in the quarter. This is one of the highest number of recoveries in the past 5 quarters. They also had written off Rs 1,194 crore as losses and the actual GNPA figure has jumped up to Rs 21,280 crore from Rs 20,467 crore.

Conclusion

 

The GNPA figures are still in uptrend. I would like to see this figure to stabilise and start falling down. Any big write off are also not acceptable as those are the leakages which can impact heavily to your bottom line. This issue will not change in few quarters. It might take 7 – 10 quarters. But the management is upbeat and have said that they have plans to get over this issue in the next 4 quarters. There are many others who believe this NPA problem can be solved by the end of 2018.

We will be watching Axis Banks operating margins, GNPA’s and write offs closely. There is little excitement of recoveries that bank managed to recover but they also had to write down Rs 1,194 crore from their loan book.

The real question is what should you do with its stocks now? Should you buy, sell or hold?

We did not included Axis Bank shares in the  2017 -18 portfolio because of expensive valuations.

Axis banks stock price is trading 30% expensive from the expected upper band of its 2018 intrinsic value and very close to the upper band of 2019 estimate of its intrinsic value today. If we think rationally then it is best time to sell this stock today as you are getting future two year intrinsic value today.

In other words, the probability of stock price going up is far less than going down.

Also remember that we only give general advice and this advice should not be considered as personal advice. We do not know anything about your personal financial standing and this article should be used in conjunction to your own analysis.