Axis Bank Tumbles 4% to Top Nifty Losers After Q2 Profit Misses Estimates

Shares of Axis Bank dropped over 4% in Monday morning trade to touch a low of Rs 1,238, emerging as the biggest laggard on both the benchmark Nifty 50 and the Bank Nifty index. The sharp drop eroded the private sector lender's market capitalisation to approximately Rs 3.86 lakh crore and extended its year-to-date decline to 3%.

The selloff followed the announcement of the bank's second-quarter earnings for FY27, where bottom-line figures came in below consensus forecasts despite strong headline growth.

Earnings Breakdown: PAT Misses Poll Despite Strong YoY Rebound

Axis Bank reported a 37.6% year-on-year increase in standalone net profit to Rs 7,003.3 crore for the quarter, compared to Rs 5,090 crore in the year-ago period. However, the figure fell short of Street expectations, trailing the CNBC-TV18 poll estimate of Rs 7,132 crore. The bottom-line miss was largely attributed to elevated operating expenses, higher staff costs, and relatively muted treasury income.

In contrast, core top-line metrics demonstrated notable strength:

• Net Interest Income (NII) grew 11.8% year-on-year to Rs 15,371.4 crore, beating the Street estimate of Rs 14,970 crore.
• Operating profit rose 6% year-on-year to Rs 11,083 crore.
• Loan-loss provisions dropped over 50% year-on-year to Rs 1,694 crore, reflecting a sustained easing in credit costs to 0.72% from 0.92% sequentially.

Margin Compression and High LDR Spook Investors

The primary friction point for Dalal Street appeared to be margin pressure. Reported net interest margin (NIM) compressed by 10 basis points sequentially to 3.36%.

Management noted that this compression was heavily skewed by the foreign currency non-resident deposit swap facility. The lender mobilised roughly $10.62 billion through FCNR(B) deposits, creating an 11-basis-point drag on headline margins. Excluding the FCNR-B effect, the bank's core domestic NIM improved marginally by 1 basis point to 3.47%.

Additionally, analysts and traders flagged concerns over a elevated loan-to-deposit ratio (LDR) hovering around 95%, as borrowing-led advances outpaced low-cost Current Account Savings Account (CASA) deposit accretion.

Asset Quality Continues to Strengthen

Despite the operational headwinds, Axis Bank demonstrated steady improvement in its loan book quality:

• Gross Non-Performing Assets (GNPA) fell to 1.16% of gross advances, improving from 1.46% in the corresponding quarter of the previous year.
• Net Non-Performing Assets (NNPA) declined to 0.35%, compared to 0.44% a year ago.
• Fresh slippages during the quarter declined 14% on a quarter-on-quarter basis, indicating healthy repayment trends across wholesale and retail portfolios.

Brokerages Remain Bullish: Targets and Recommendations

While short-term investors offloaded shares, major brokerage houses maintained positive medium-to-long-term stances, viewing the post-earnings decline as an attractive entry opportunity.

Brokerage Views and Target Prices:

• Jefferies: Maintained a 'Buy' rating with a target price of Rs 1,700, citing core operational outperformance, declining credit costs, and potential return on equity (RoE) expansion in the coming fiscal year.
• JPMorgan: Maintained an 'Overweight' rating while lifting its price target to Rs 1,620 from Rs 1,590, highlighting that earnings beat its internal estimates alongside attractive valuation levels.
• Citi: Retained a 'Buy' rating with a price target of Rs 1,620, pointing out that core margins were stable when accounting for the temporary distortion from FCNR(B) flows.
• Bernstein: Retained an 'Outperform' rating with a target price of Rs 1,600, balancing robust corporate lending against a stretched loan-to-deposit ratio.
• Nuvama Institutional Equities: Reiterated a 'Buy' rating with a target price of Rs 1,650, noting that credit growth remained healthy at 22% year-on-year.

Analysts broadly anticipate that the bank's net interest margins will begin recovering from the third quarter as foreign currency liquidity is redeployed and asset-liability yields rebalance.

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