Axis Bank Q3 Preview: PAT could decline 8% YoY as margins come under pressure; credit growth is recovering

Private lender Axis Bank is expected to report mixed performance for the December quarter, with steady balance sheet growth offset by pressure on margins and profitability. On average, five brokers expect net interest income (NII) to rise by around 4% year-on-year, while profit after tax (PAT) will fall by around 8% from a year earlier.

Credit growth is recovering, deposits remain strong

Brokers expect Axis Bank’s loan growth to remain healthy in the third quarter, marking a clear recovery from previous quarters. Kotak Equities estimates credit growth at around 14% year-on-year, or around 4% quarter-on-quarter (QoQ), driven by continued momentum across segments. Deposit growth is also expected to remain robust at around 15% annualized, higher than the sector average, which will support continued balance sheet expansion.

YES Securities, meanwhile, expects sequential credit growth of around 3%, noting that Axis Bank continues to follow an idiosyncratic growth path compared to peers. Overall, business momentum is considered stable even as the bank tightens its portfolio mix.

NIMs are likely to soften sequentially

Despite healthy lending growth, margins are expected to come under pressure this quarter. Kotak Equities expects a sequential decline in net interest margin (NIM) of around 5 basis points to around 3.5%, due to changes in credit mix. YES Securities also expects net interest income (NII) growth to lag loan growth as yields on advances fall faster than the cost of deposits.

Motilal Oswal is a bit more cautious, predicting a sharper NIM decline of around 9 basis points in the third quarter. Emkay echoes this view, noting that softer margins, combined with higher operating costs, could limit pre-provision operating profit growth.

Asset quality: seasonal shifts in focus

Asset quality will be critical for Axis Bank in the third quarter. Kotak Equities expects a decline of around Rs 6,300 crore, or around 2.2% of loans, largely driven by the retail segment. It also estimates provisioning for credit losses at around 70 basis points, noting that there tends to be greater slippage from the priority sector loan portfolio in the first and third quarters.

Emkay also expects that seasonally higher slippages in agriculture will keep overall slippages high, even though facilities are likely to decline gradually. YES Securities, meanwhile, expects both slippages and provisions to decline quarter-on-quarter, which will provide some support to profitability.

Compensation, operating expenses and profitability prospects

In terms of fee income, YES Securities expects sequential growth to outpace loan growth, aided by seasonality. Operating expense growth is likely to remain lower than business growth, although Motilal Oswal warns that expense ratios may remain high throughout the quarter.

Overall profitability is expected to remain under pressure. While lower provisions may provide some cushion, weaker margins and stable operating costs are likely to weigh on profits. As a result, brokers expect Axis Bank’s PAT to decline by around 8% year-on-year in the third quarter, even as underlying activity shows signs of stability.

Most important things to look at

Investors will closely monitor management’s commentary on margin trajectory, asset quality trends, particularly in the unsecured and priority sector portfolios, and the sustainability of credit growth.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times)