MUMBAI: India's No. 3 private lender Axis Bank narrowly beat street estimates on Saturday with a 25 percent rise in second-quarter net profit, led by loan growth and higher fee income.
The bank however, expects its net interest margins (NIM) to moderate from current levels as cost of funds rise due to successive rate hikes by India's central bank.
Axis Bank said its net profit in the September quarter rose to 9.2 billion rupees ($184.6 million) from 7.35 billion rupees a year ago. Its net interest income grew 24.2 percent to 20.07 billion rupees, higher than street estimates.
A Reuters poll had projected net profit at 9.1 billion rupees and net interest income at 17.7 billion for the bank.
The lender's net interest margin, a key gauge of profitability, rose to 3.78 percent compared with 3.68 percent a year ago.
"I don't think we will be able to sustain the current levels because they are pretty high. It will moderate from here," Axis Bank Executive Director and Chief Financial Officer Somnath Sengupta said, referring to the bank's NIMs.
He said the bank is expecting net interest margins between 3.25 and 3.5 percent for the whole year.
Most Indian banks, including top lenders State Bank of India and ICICI Bank have seen a rise in loan demand in the past few quarters in Asia's second-fastest growing major economy. However, higher interest rates are expected to curb spending and hit demand.
Credit at Indian banks has grown at 19.5 percent so far this year while deposits have grown 17.4 percent, according to central bank data.
The Reserve Bank of India has raised interest rates 12 times since March 2010 to fight high inflation and signalled more to come.
"Loan growth will probably slow down for the sector going ahead, and we are probably going to grow a little higher than what the sector grows," Sengupta said.
"The ability to pass on further costs will probably be limited but we will have to wait and see".
Sengupta said rising interest rates have led to an increase in the bank's cost of funds which has gone up to 6.19 percent as of September, from 4.75 percent in the same period a year earlier.
"We have seen funding rates go up a bit in the last month or so, and I suppose as the term deposit portfolio reprices, that will put a little bit of upward pressure on the cost of funds," he said.
"If the RBI does hike rates that also will have some bearing on the cost of funds."
Axis Banks' net non-performing assets or bad loans as a proportion of net customer assets were flat at 0.34 percent for the quarter.
Its demand deposits grew by 26 percent to 821.4 billion rupees in the second quarter that ended in September, from the same period a year ago.
Fee income rose 32.08 percent to 11.21 billion rupees as all its major businesses, including corporate credit, retail banking, treasury and agri and SME banking, rose during the September quarter.
Axis Bank said it had a capital adequacy ratio of 11.35 percent as of the end of September.
Its net advances grew 26.7 percent from a year ago to about 1.4 trillion rupees as of end-September.
Earlier this week, larger rival HDFC Bank posted a forecast-beating 31.5 percent rise in profit on higher revenues and stable asset quality, but said offtake of loans by corporates have slowed down and there were no enquiries for new projects.
Axis bank on Saturday also said it expects to complete the transfer of brokerage Enam Securities' investment banking and equities businesses into itself by the last quarter of the current financial year ending March, after obtaining the necessary approvals.
Late last year, Axis Bank had said it would buy the Enam two units for $456 million in an all-stock transaction, but regulatory hurdles prevented the acquisition from taking effect.
Shares of Axis Bank, which the market values at $9.3 billion, ended down 0.26 percent on Friday in a weak Mumbai market.
They are down more than a fifth during the quarter underperforming a nearly 13 percent fall in the benchmark BSE index The BSE bank index has fallen more than 15 percent in the period.
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