Axis Bank’s shares experienced a notable rally of 4.7% following the release of its Q2 results for the financial year 2024-25 (FY25). The stock reached an intraday high of ₹1,186 on the Bombay Stock Exchange (BSE), contrasting sharply with a 0.4% decline in the benchmark BSE Sensex during the same trading session. This upward movement comes despite a mixed earnings report that has left analysts exercising caution regarding the bank’s future performance.
Q2 results overview
Axis Bank’s net profit for the quarter came in at ₹6,918 crore, up from ₹5,864 crore in the same period last year. This figure exceeded expectations, largely due to a one-time reversal of tax provisions amounting to ₹550 crore. However, while the profit numbers might seem encouraging, several key metrics have raised eyebrows among analysts.
Loan growth for the bank slowed to 11% year-on-year (YoY), a decline from the 14% growth recorded in the previous quarter (Q1 FY25). On a quarter-on-quarter (QoQ) basis, loan growth was minimal, increasing by only 2%. Specific segments showed varying performances: retail loans grew by 2% QoQ, small and medium enterprises (SMEs) saw a 6% increase, while corporate loans remained flat.
On the liabilities side, deposits rose by 13.7% YoY and 2.3% QoQ, but the bank’s current account-savings account (CASA) ratio declined by 100 basis points (bps) QoQ to 41%. Analysts noted that the bank anticipates FY25 credit growth to be closely tied to deposit growth and the loan-deposit ratio, which remains a challenge.
Analyst reactions and earnings forecasts
Following the Q2 results, several brokerages revised their earnings forecasts downward by up to 5% for FY25-27, reflecting a cautious outlook based on the subdued performance. Emkay Global cut its FY25 credit growth estimates from 14% to 12% and reduced earnings estimates by 1-4% for the subsequent years. Nevertheless, the brokerage maintained a ‘Buy’ rating with an unchanged target price of ₹1,400, citing limited valuation downside from current levels.
Operationally, Axis Bank’s core net interest income (NII)—excluding one-off interest from tax refunds—grew a modest 2% QoQ. The core net interest margin (NIM) remained stable at 3.99%.
Improvement in asset quality
On a positive note, Axis Bank reported an improvement in its gross non-performing asset (GNPA) ratio, which decreased to 1.54%, down 10 bps QoQ, largely due to higher write-offs. The net non-performing asset (NNPA) ratio remained flat at 0.34%. The bank’s total recoveries improved significantly, rising from ₹1,500 crore to ₹2,000 crore QoQ.
Despite these improvements, the bank’s management highlighted concerns regarding stress in the unsecured loans segment, which it expects to address in the second half of FY25. The bank has also set aside additional contingent provisions of ₹520 crore, bringing total provisions for the quarter to ₹2,204 crore, compared to ₹815 crore in Q2 FY24.
Cautious optimism from analysts
Nuvama Institutional Equities maintained a ‘Buy’ rating but adjusted its target price down to ₹1,335 from ₹1,430. Analysts trimmed their net interest income estimates and net profit forecasts for FY25 and FY26, reflecting lower loan growth expectations and higher credit costs.
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Analysts are closely monitoring several factors that could impact Axis Bank’s near-term growth, including the current loan-deposit ratio, macroeconomic conditions, and potential stress in the unsecured loans segment. Furthermore, they are watching for any senior management attrition and the upcoming term extension for the Managing Director, which expires in December 2024.
Motilal Oswal Financial Services, which had downgraded the stock earlier this year, now holds a ‘Neutral’ rating with a target price of ₹1,225. ICICI Securities echoed this sentiment, cutting FY25 and FY26 profit estimates by about 2% and 5%, respectively, while maintaining a ‘Buy’ rating with a lowered target price of ₹1,350.
In conclusion, while the recent rally in Axis Bank shares reflects some investor confidence, the overall sentiment remains cautious among analysts. The bank’s mixed Q2 results and revised earnings forecasts signal that, despite some positive trends in asset quality and profitability, significant challenges lie ahead. Investors will be keeping a close watch on the bank’s performance in the upcoming quarters as it navigates through a complex economic landscape.
