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Better core performance, though one-offs continue to hurt

After a disappointing 1Q, Axis Bank reported better than expected credit growth (~12% YoY/5% QoQ) and a contained margin contraction (7bps QoQ to 3.7%) in 2Q. However, higher PSL costs, lower treasury gains, and one-off std asset provisions of Rs12.3bn/46bps of loans (as advised by the RBI) on discontinued agri loan variants led to a sharp 17% PAT miss at Rs51bn/1.2% RoA. Though 2Q growth acceleration was led by corporate and SME lending, the management expects a steady pick-up in retail as well. Margins are expected to bottom out in Q3, in the absence of any further rate cuts; this coupled with moderation in LLP should lead to better profitability in 2H. Factoring in the 2Q miss, we cut FY26E earnings by 5% and expect RoA to first dip to 1.5% in FY26E, impacted by one-off asset quality events, and then gradually recover to 1.7% by FY28E. The stock is trading at cheap valuations of 1.3x Sep-27E ABV/1.2x FY28E ABV. Hence, we retain BUY on Axis with unchanged TP of Rs1,400, rolling forward the standalone bank valuation on 1.6x Sep-27E ABV and subs at Rs125/sh.

Corporate lending drives growth; margin contraction contained

After 4 quarters of soft growth, Axis reported better than expected credit growth at ~12% YoY/5% QoQ in 2Q, mainly led by strong traction in corporate and SME lending, while retail growth (barring cards) remains subdued. Deposits grew at a relatively moderate pace – 11% YoY/4% QoQ – leading to slight improvement in LDR. This, coupled with sharp improvement in funding costs and lower interest reversals, led to contained margin contraction of 7bps QoQ to 7.3%. The management did not give guidance on growth for FY26, though it guides for improving growth impulses after the recent regulatory measures and, thus, a re-acceleration in retail lending. The recent RBI clarification also removes the overhang on immediate stake pruning in subsidiaries engaged in overlapping businesses.

Headline asset quality improves; one-off provisions drag earnings

Gross slippages were elevated at Rs57bn/2.3% of loans (though lower QoQ, as gross slippages due to a technical hit fell 44% QoQ to Rs15bn/0.6% of loans from Rs27bn); however, better recoveries/write-offs led to 11bps QoQ improvement in GNPA ratio at 1.5%. However, Axis made additional one-off standard (@5%) asset provisions of Rs12.3bn/46bps of loans (as advised by the RBI) on two discontinued agri loan variants, which have been declassified from the PSL pool. These provisions will be reversed on the full book run-down or latest by FY28E. Adjusted for the one-off impact, which will be reversed by FY28, provisions were lower at 0.7% of loans in 2Q. Axis indicated that unsecured retail loan stress is easing and should reflect in the moderation in slippages.

We retain BUY with TP at Rs1,400

Building in the 2Q miss, we cut FY26E earnings by 5%/RoA to 1.5%. However, 2HFY26E would be better aided by steady improvement in growth/asset quality, and then gradually recover to 1.7% by FY28E. Thus, we retain BUY with unchanged TP of Rs1,400. Key risks: Macro-dislocation, delay in unsecured retail NPA stress moderation, KMP attrition.

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