Axis Bank Q2 profit miss: Why the market isn’t worried

In June, the RBI cut key lending rates by 50 basis points (bps) and shifted to a neutral stance from accommodative, pushing yields higher. This was seen as a double whammy for banks: net interest margins (NIMs) would bear the full impact of the rate cut, while trading gains would suffer from rising yields. For Axis Bank, analysts had pencilled in a sequential NIM compression of 25-30 bps, even as higher “technical" expenses following its FY25 annual inspection continued to weigh on its reported asset quality and profits. But barring some one-offs such as making standard provisions on two discontinued crop loan variants, the lender fared better on many parameters against sombre expectations. Yields on advances did compress 30 bps sequentially, but cost of funds was down 24 bps, resulting in a 7 bps fall in NIM to 3.73% in Q2FY26. Loan growth of 12% year-on-year (YoY) outpaced industry-level credit growth of 10.4% in the fortnight ended 19 September, as 20% corporate-credit growth negated sluggish retail loans. The outcome? Instead of the expected decline in net interest income (NII), Axis Bank saw a 2% increase. Fee income also saw a healthy 10% YoY increase to ₹6,037 crore, which compensated for the 55% drop in its trading income to ₹498 crore caused by higher yields. Yet, pockets of risk remain. Deposit growth of 10.7% was slower than credit growth, leading to an acceleration of credit-deposit ratio to 92.8%. This not only limits room for credit growth, but can also weigh on margins if the bank is forced to borrow at higher rates to plug the gap. Furthermore, following the RBI’s FY25 annual inspection, which found its non-performing asset (NPA) norms to be too liberal, Axis Bank changed its NPA classification standards. This had led to a spike in slippages to ₹8,200 crore in Q1FY26 from about ₹4,800 crore in Q4FY25, which the bank maintained were “technical", and not indicative of asset-quality deterioration. The impact carried over into Q2FY26, with standard-asset provisions of ₹1,231 crore and a priority sector lending certificate of ₹474 crore eroding profits during the quarter. Another ₹474 crore will be absorbed over the next two quarters. Operating performance Operating profit declined 3% year-on-year on lower trading income. Credit cost (gross of recoveries) was reported at 0.95%, which would have been 0.86% had it not been for the “technical" provisions. The bank wrote off ₹3,265 crore worth of assets in Q2FY26. Still, asset quality improved sequentially, as seen in lower slippages and credit costs. Gross and net NPAs fell from 1.57% and 0.45% in Q1FY26 to 1.46% and 0.44% in Q2FY26. While further RBI rate cuts could pressure NIM, the bank aims to improve asset quality in its unsecured retail book, supporting future retail loan growth. This sets the stage for the bank to push retail lending, potentially benefiting from the goods and services tax (GST) rate cuts driving festive demand. Along with the RBI’s CRR cut, management expects to outpace industry credit growth by 300 bps. These silver linings appear to have eased investor concerns over the 26% YoY decline in net profit. Following a year of underperformance—shares are up 4% versus Nifty Private Bank’s 9% returns—Incred Research Services estimates place the stock at an attractive 1.3x September 2027F book value, leaving room for appreciation.