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Margins disappoint; lower opex/LLP drive earnings beat Business growth remains healthy

* Axis Bank (AXSB) reported a 1QFY27 net profit of INR71.1b (up 22.5% YoY; 7% beat), led by lower opex (amid a small one-off reversal) as well as controlled provisions.

* NII grew 8% YoY/1.3% QoQ to INR146.5b (2% miss). NIM contracted by a sharp 16bp QoQ to 3.46% (vs. our est. of 3.57%).

* Loan book grew 19% YoY/2.3% QoQ, led by the corporate segment growth (up 5% QoQ; mix increased to 34.4% vs 29.8% in 1QFY26), while retail segment growth stood flat QoQ at 0.3%; SME grew 3% QoQ.

* Fresh slippages grew 19% QoQ to INR55.7b amid an agri-related seasonality impact in 1Q. Net slippages stood at INR10.4b, while GNPA/NNPA ratio increased 5bp/2bp QoQ to 1.28%/0.39%. PCR declined 54bp QoQ to 69.7%. Provisions declined 44% YoY/declined 37% QoQ to INR22.2b.

* We cut our FY27/28E earnings by ~2% each and estimate FY28E RoA/RoE at 1.6%/15.3%. Reiterate Neutral with a TP of INR1,500 (based on 1.7x FY28E ABV)

Through-cycle NIM guidance retained at 3.8%

* AXSB’s 1Q PAT was INR71.1b (flat QoQ; 7% beat). NII grew 1.3% QoQ (up 8% YoY) to INR146.5b (2% miss). NIM contracted sharply by 16bp QoQ to 3.46% (vs. MOFSLe: 3.57%), of which 3bp was due to an interest reversal, 4bp was due to the B/S mix change, and 9bp was due to loan repricing.

* Other income grew 12% QoQ to INR67.4b (in line), as fee income declined 6% QoQ, offset by better treasury income. Thus, total revenue grew 4.4% QoQ to INR213.8b (up 2.7% YoY).

* Opex grew 4.5% YoY (down 7.1% QoQ, 7% lower than MOFSLe) amid a oneoff 1Q charge-back reversal. PPoP grew 1% YoY/grew 16% QoQ to INR116.6b (3% beat, driven by lower opex). As a result, C/I declined to 45.5% (down 563bp QoQ/up 79bp YoY).

* Loan book growth was steady at 19% YoY/2.3% QoQ, driven by the corporate segment (up 5.2% QoQ), while the retail segment stood flat QoQ and SME grew 25% YoY/3% QoQ.

* Deposits grew 18% YoY/3% QoQ, driven by TD of 23% YoY/5.5% QoQ, while CASA deposits declined 1.4% QoQ (up 11.4% YoY). As a result, CASA ratio declined to 38% (down 200bp YoY and 200bp QoQ).

* Fresh slippages inched up by 19% QoQ to INR55.7b (down 32% YoY) amid agri seasonality in 1Q. Net slippages stood at INR10.4b, while GNPA/NNPA ratio increased 5bp/2bp QoQ to 1.28%/0.39%. PCR declined 54bp QoQ to 69.7%.

* Management maintained its through-cycle NIM of 3.8% amid improvement in retail disbursements and B/S mix improvement.

* The CAR/CET-1 stood at 16.67%/14.64%. The average LCR was 119%. The increase in RWA was lower than the loan growth in 1QFY27.

Valuation and view

AXSB reported a weak quarter, with NIM witnessing a sharp contraction of 16bp QoQ to 3.46% (vs. MOFSLe of 3.57%), while PAT surpassed estimates, supported by lower operating expenses and provisions. The bank reiterated its through-cycle NIM aspiration of ~3.8%, driven by an improving balance sheet mix. Credit costs edged up marginally due to seasonally higher slippages, which also resulted in elevated interest reversals. Business growth remained modest, with corporate lending driving overall loan growth, while retail growth continued to be relatively subdued. Deposit growth was primarily led by term deposits, keeping the CD ratio broadly stable at ~92%. The bank also reiterated its medium-term guidance of growing advances ~300bp faster than the industry. Asset quality witnessed a slight deterioration, with both GNPA and NNPA ratios inching up sequentially. The bank continues to maintain a healthy cumulative provision buffer of INR156b (1.2% of loans), comprising standard asset and additional non-NPA provisions, which is expected to facilitate a smooth transition to the ECL framework from FY28 onwards. We cut our FY27/28E earnings by ~2% each and estimate FY28E RoA/RoE at 1.6%/15.3%. Reiterate Neutral with a TP of INR1,500 (based on 1.7x FY28E ABV).

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