A persistent concern around Axis Bank concerns its margins.
Axis Bank has seen its net interest margins hover between 3% and 3.5% for a while, well below its large peers where margins are in the range of 4% to 4.5%.
Suresh Ganapathy of Macquarie Research says Axis Bank’s net interest margins have moved within the current range since June 2017. This indicates more structural issues within the bank’s balance sheet.
Management explained that weaker loan growth hurts margins as excess liquidity is carried. While this may indeed be the case for this quarter, we are unable to explain a four-year trend. low margins, “Ganapathy said in a statement. Report of October 26.
Chaudhry does not disagree.
There are three major structural factors affecting Axis Bank’s margins, which the bank is trying to address, Chaudhry said.
Mix of loan books
To improve the composition of its loan portfolio, Axis Bank is driving growth in segments such as personal and small business loans, where it can generate higher returns.
“We picked some of the big companies because we don’t earn a lot of interest there. It’s not that we’re not doing business, but we’re not going to smash the gangs there,” Chaudhry said.
Currently, personal loans represent about 56% of the bank’s loan portfolio. Small and medium-sized enterprises represent around 10% and the rest comes from the enterprise portfolio.
Cost of deposits
To improve the quality of its liability profile, the bank is working on a âprimeâ strategy, Chaudhry said. This includes the exploitation of a premium clientele through its offers under the Burgundy wealth management platform.
âAs we deepen our accountability relationships and acquire quality customers as part of our premierization strategy, this will improve the share of our lower cost deposits,â said Chaudhry.
As of September 30, the cost of bank deposits stood at 3.69%, down 68 basis points year on year.
Dependence on RIDF
RIDF bonds are a way for banks to meet Reserve Bank of India‘s priority minimum lending standards, without actually having to lend. Banks are required to direct at least 40% of their total credit to priority sector borrowers. If they are unable to meet this target, banks subscribe to RIDF bonds issued by the National Bank for Agriculture and Rural Development.
RIDF bonds make up around 4% of Axis Bank’s Rs 10.5 lakh crore balance sheet, Chaudhry said. These continue to weigh on the bank’s margins since the interest they earn is 200 basis points lower than the market can give.
âLast year is the first time in a long time that Axis Bank has achieved all of the PSL targets. If this continues, the share of RIDF bonds will decrease and should also improve our NIMs,â Chaudhry said.
However, each of these issues will be resolved over time, which the bank aims to do.