A fall in net interest margin (NIM) for two quarters in a row notwithstanding, the Axis Bank stock closed higher by 4.6 per cent on the BSE. As a consequence of NIM shrinking, NII growth moderated.
Yet, Axis Bank managed to post better-than-expected growth in net profits of Rs 942 crore (27 per cent year-on-year growth). Robust fee income growth and lower provisions — despite RBI's mandate of higher provisioning for standard, doubtful and restructured assets — may have led to strong growth in profits.
Declining NIM
The NIM of Axis Bank continued on its downward trajectory for the second successive quarter. From 3.81 per cent in the December 2010 quarter, the NIM declined to 3.44 per cent in the three months ended March 2011 and further to 3.28 per cent in the June 2011 quarter. The NIM a year ago was 3.71 per cent
A stagnant CASA ratio at around 41 per cent (average daily balances fell to 37 per cent from 40 per cent a year ago), increase in the cost of savings deposits from 3.5 to 4 per cent and a rise in the cost of term deposits have been the key reasons for the decline. A fall in credit-deposit ratio from 75 per cent in the March 2011 quarter to about 72 per cent now has also curtailed the margins.
Provisions fall sharply
In line with its private peers, the provisions and contingencies of the bank for the quarter June 2011 fell by 48 per cent year-on-year to Rs 175 crore. Provisions were lower even as compared to the March quarter provisioning, which stood at Rs 254 crore. The reduction in provisions is surprising given that Axis Bank may have suffered from mark-to-market loss on its investment book.
The fall in provisioning may be attributed to the bank utilising excess provisioning it has done during the previous quarters.
This may have more than compensated for the additional requirement arising from RBI's change in provisioning norms. The provision coverage of the bank has fallen from 74.3 per cent to 70.6 per cent sequentially.