Management of banks and financial institutions

Assignment
Du-Pont analysis of AXIS bank LTD.

Submitted to
Dr Gautam
Negi
Submitted by
Rishabh
Yadav
043/2023
Section - A
 Dupont analysis
DuPont analysis is a financial performance measurement method that breaks down a company's
Return on Equity (ROE) into three key components to understand the drivers behind the
company's profitability. Named after the DuPont Corporation, which first introduced this model,
it allows investors and analysts to assess how effectively a company is using its equity to
generate profits.

Formula

ROE=Net Profit Margin×Asset Turnover×Equity Multiplier

In order to do the dupont analysis of the AXIS bank 7 ratios were taken which are as follows

 Net profit margin

 Equity multiplier
 Return on equity
 Return on capital employed
 Return on assets
 Asset utilization
 Expenses ratio

Calculations

Historical data of the last 5 years were taken to analyze March 2020-March -2024

Calculated values of the abovementioned ratios are as follows

Analysis
Net profit margin

The Net Profit Margin increased significantly from 2.31% in March 2020 to 19.12% in March
2024. This upward trend indicates that the bank has become more profitable over time,
possibly due to better cost management, higher revenue growth, or improved operational
efficiency.
COVID can be the possible reason for the 2.31% net profit margin because of the defaults on the
loan, low economic activity, market volatility, low interest rates, etc. Generally, banks have net
profit margins between 10% and 20%. The bank's net profit margin is at the high end of the
industry benchmark, indicating very strong profitability relative to its peers

An increase in interest rates could have allowed the bank to earn more on loans and other
interest-bearing assets, improving the net profit margin. The bank may have improved the quality
of its loan portfolio, leading to fewer non-performing loans and lower provisioning costs, thereby
boosting profitability. The bank might have diversified its income streams by increasing fee-
based services (e.g., wealth management, advisory services), contributing to a higher profit
margin.

Equity multiplier

The Equity Multiplier fluctuates slightly, ranging from 9.66 to 10.75 over the years. The
consistent Equity Multiplier suggests that the bank's leverage has remained relatively stable. A
multiplier of around 10 is typical for banks, indicating that they are using significant financial
leverage. Typical equity multipliers for banks are between 8 and 12. The bank’s equity
multiplier is within the industry norm, suggesting a standard level of leverage. A value around
10 indicates the bank is using its equity effectively while maintaining industry-standard leverage

The consistent equity multiplier suggests that the bank has maintained a stable balance between
debt and equity. This might indicate disciplined capital management, avoiding excessive
reliance on either debt or equity. The bank may have been adhering to regulatory capital
requirements, which often limit how much leverage a bank can take on, leading to a stable
equity multiplier.
The bank could have pursued a balanced growth strategy, using leverage effectively
without overextending, which is reflected in the steady equity multiplier.
Return on Equity

ROE increased from 2.15% in March 2020 to 16.80% in March 2024, with a peak of 16.80% in
the 2024. This rising ROE is a positive sign, showing that the bank is generating higher returns
for its shareholders. The growth aligns with the improvement in Net Profit Margin and indicates
effective use of equity to generate profits. ROE for banks generally ranges from 10% to 20%.
The bank’s ROE is at the upper end of the benchmark, reflecting strong performance
in generating returns for shareholders.

The rise in ROE may indicate that the bank has been more efficient in allocating its capital,
focusing on high-return investments or business segments. If the bank engaged in share
buybacks, it would reduce the equity base, potentially boosting ROE as profits are spread over
fewer shares. The bank might have implemented cost-cutting measures, improving operational
efficiency and thereby enhancing returns on equity.

Return on capital employed

ROCE remained relatively stable, with slight fluctuations between 4.83% and 7.06%. A
relatively steady ROCE suggests that the bank is maintaining consistent efficiency in using its
capital to generate profits. The increase in March 2024 to 7.06% may reflect better capital
allocation or improved earnings. ROCE for banks is usually between 5% and 10%. The
bank's ROCE is within the benchmark range, indicating it is effectively using its capital to
generate returns, with the latest value nearing the upper end of the benchmark.

The bank may have concentrated on projects or business lines that generate higher returns,
leading to a stable or improving ROCE. Refinancing existing debt at lower interest rates
could have reduced capital costs, helping to maintain or slightly increase ROCE. Streamlining
operations or divesting low-performing assets could have contributed to better capital efficiency,
keeping ROCE relatively stable.

Return on assets

ROA increased steadily from 0.20% in March 2020 to 1.74% in March 2024. The rising ROA
indicates that the bank has become more effective in utilizing its assets to generate profits.
Although still low (which is typical for banks due to their leveraged nature), the trend is positive.
ROA for banks typically ranges from 0.5% to 1.5%. The bank's ROA is slightly above the industry
average, indicating effective asset utilization and profitability relative to its asset base. The increase in
ROA
might reflect an improvement in asset quality, such as reducing non-performing assets or
optimizing the loan book. Investments in technology, such as digital banking platforms, may
have enhanced operational efficiency, allowing the bank to generate more income with
existing assets. The bank could have grown organically through increased lending or
investment
activities, leading to a higher ROA as these assets begin to generate income

Asset utilization

Asset Utilization decreased slightly from 8.63% in March 2020 to 9.09% in March 2024, with
some fluctuations in between. A generally stable asset utilization ratio suggests the bank has
maintained consistent efficiency in using its assets to generate revenue. The slight decrease in
some years might indicate reduced efficiency, but the final increase to 9.09% shows
improvement. Asset Utilization ratios for banks typically range from 7% to 10%. The bank's
ratio is within the industry range, reflecting a stable performance in generating revenue from its
assets. The bank may have invested in automation or process improvements, leading to better
utilization of assets and slightly higher asset turnover. Entering new geographic or business
markets could have driven revenue growth, improving asset utilization even as the asset base
expanded. The bank might have diversified its asset base into higher-yielding assets, which could
have contributed to more efficient asset utilization.

Expenses ratio

The Expense Ratio decreased from 8.43% in March 2020 to 7.35% in March 2024. The
declining Expense Ratio is a positive sign, indicating that the bank has reduced its operating
expenses
relative to its assets, contributing to improved profitability over time. Expense ratios for banks
usually range from 6% to 9%. The bank’s expense ratio is within the benchmark range, with
the decreasing trend showing effective cost management. The bank may have implemented cost-
saving initiatives, such as reducing staff through automation, consolidating branches, or
renegotiating supplier contracts, leading to a lower expense ratio. As the bank grew, it might
have benefited from economies of scale, spreading fixed costs over a larger asset base, thereby
reducing the expense ratio. The bank could have outsourced non-core functions like IT
services or customer support to reduce operational costs and improve the expense ratio.

Conclusion

From March 2020 to March 2024, AXIS Bank demonstrated exceptional financial improvement,
highlighted by a dramatic increase in its Net Profit Margin from 2.31% to 19.12%. This
remarkable growth, surpassing the industry benchmark of 10% to 20%, reflects enhanced
profitability driven by higher interest rates, a stronger loan portfolio, and an increased focus
on fee-based income. The bank’s ability to generate substantial profits underscores its
effective operational strategies and market positioning.

The stability of the Equity Multiplier, ranging from 9.66 to 10.75, shows that AXIS Bank has
maintained a balanced capital structure, adhering to industry norms (8 to 12) without
excessive risk. Additionally, the Return on Equity (ROE) rose significantly from 2.15% to
16.80%,
aligning with or exceeding the industry benchmark of 10% to 20%, which indicates improved
capital efficiency and higher shareholder returns. The Return on Assets (ROA) also increased
from 0.20% to 1.74%, surpassing the typical range of 0.5% to 1.5%, highlighting enhanced asset
utilization.

Furthermore, the Return on Capital Employed (ROCE) remained within the industry range of 5%
to 10%, and the Expense Ratio decreased from 8.43% to 7.35%, reflecting successful cost
management. These trends, along with improved asset and capital efficiency, showcase AXIS
Bank’s strategic adjustments and effective management practices. Overall, the bank’s
performance has strengthened significantly, positioning it robustly within the industry
through strategic growth and operational excellence.