Why These Fundamentals Make Axis Bank Limited’s (NSE:AXISBANK) More Attractive

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Post-GFC recovery has driven major financial institutions’ return to health, increasing market confidence in these “too-big-to-fail” banks. As a large-cap stock with market capitalization of ₹1.8t, Axis Bank Limited (NSE:AXISBANK) falls into this category. After the crisis, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks to vulnerabilities. AXISBANK operates predominantly in and is held to stringent regulation around the type and level of risk it can take on, exposing it to higher scrutiny on its risk-taking behaviour. Investors should be more cautious when it comes to financial stocks given the different type of risk to which they are exposed. Today we will analyse some bank-specific metrics and take a closer look at leverage and liquidity.

See our latest analysis for Axis Bank

Is AXISBANK's Leverage Level Appropriate?

Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. Though banks are required to have a certain level of buffer to meet its capital requirements, Axis Bank’s leverage level of 10.95x is very safe and substantially below the maximum limit of 20x. With assets 10.95 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.

How Should We Measure AXISBANK's Liquidity?

As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up the bank’s total assets. Normally, they should not exceed 70% of total assets, which is the case for Axis Bank’s ratio at 64%. This means slightly over half of the bank’s total assets are tied up in the form of illiquid loans, leading to a sensible balance between interest income and liquidity.

Does AXISBANK Have Liquidity Mismatch?

Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans tend to be fixed term which means they cannot be readily realized, yet customer deposits on the liability side must be paid on-demand and in short notice. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank’s financial position if an adverse event requires the bank to repay its depositors. Relative to the prudent industry loan to deposit level of 90%, Axis Bank’s ratio of over 99% is higher, which positions the bank in a risky spot given the potential to cross into negative liquidity disparity between loan and deposit levels. Essentially, for ₹1 of deposits with the bank, it lends out more than ₹0.9 which is risky.

Next Steps:

The bank’s liquidity and leverage ratios suggest its sensible operational risk management. This means it is well-positioned to meet its financial obligations in case of any unforeseen and adverse macro events. Keep in mind that a stock investment requires research on more than just its operational side. I've put together three key aspects you should look at:

1. Future Outlook: What are well-informed industry analysts predicting for AXISBANK’s future growth? Take a look at our free research report of analyst consensus for AXISBANK’s outlook.
2. Valuation: What is AXISBANK worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether AXISBANK is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.