One-time jump in slippages hurts Axis Bank Q1 results; should you sell?

Business Standard

18-07-2025

Axis Bank share price: Frequent negative surprises on the earnings front, also seen during the June quarter of the current financial year, has forced analysts to cut Axis Bank's earnings forecast for the coming years. In some cases, analysts have even downgraded the stock to factor-in the weakness in earnings.
Those at Nuvama Institutional Equities, for instance, have downgraded Axis Bank stock to 'Hold' on repeated volatility in asset quality and earnings growth.
"We cut earnings by 5.4 per cent for FY26 and 6.3 per cent for FY27on an already below consensus base. We also trim our share price target to ₹1,180, from ₹1,400, valuing the stock at 1.7x book value, based on FY26 earnings estimates. Since Axis Bank has more catch up to do on rate cuts compared to peers, we expect the stock's discount to peers to widen given repeated volatility," the brokerage said in its report. On the bourses, Axis Bank share price crashed 7.4 per cent intraday to hit a low of ₹1,073.95 per share on the BSE. By comparison, the BSE Sensex index was down 164 points (0.2 per cent) at 9:33 AM.
Axis Bank Q1 slippages
On July 17, Axis Bank said its Q1FY26 net profit slipped 4 per cent year-on-year (Y-o-Y) to ₹5,806 crore, weighed by a "technical" slippages and one-time bump in provisions.
"Prudent application of technical parameters for recognising slippages, and consequent upgrades impacted asset quality, including provisions, in Q1FY26. Technical impact is largely restricted to cash credit and overdraft products, and one-time settled (OTS) accounts," Axis Bank said.
The "technical slippage" affected the bank's net profit by ₹614 crore, return on assets (RoA) by 15 basis points (bps), and return on equity (RoE) by 1.4 per cent, it added.
The bank's total slippages stood at ₹8,200 crore at the end of Q1, including slippages worth ₹2,709 crore due to the "technical impact". Total slippages were, thus, 71 per cent higher on a Y-o-Y and quarter-on-quarter (Q-o-Q) basis.
Further, while the bank's loan loss provisions shot up to ₹3,900 crore, up 2.85 times Q-o-Q and 1.52 times Y-o-Y, its total provisions and contingencies were ₹3,948 crore in Q1FY26. By comparison, the same was ₹1,359 crore in Q4FY25 and ₹2,039 crore in Q1FY25. Of the total provisions, ₹821 crore was attributable to the "technical impact".
This also led to the gross non-performing asset (GNPA) ratio and net NPA ratio worsening by 29bp and 12bp Q-o-Q, respectively, to 1.57 per cent and 0.45 per cent.
"Though the management had earlier given guidance for this policy change to ensure industry-best prudency, the extent of NPA formation is higher than expected. The management indicated that Q1FY26 bore the impact of the stock plus flow, and so slippages during 9MFY26 should be relatively moderate (albeit elevated), as also the credit cost," noted analysts at Emkay Global Financial Services.
The management's decision to move from Days Past Due (DPD)-based NPA recognition to qualitative judgement-based recognition, and to not upgrade an account till the last installment is received in full in case of OTS, analysts at Emkay added, would, therefore, lead to elevated NPA flow in the near term, albeit largely even-out in the long term.
Slow growth hurts Axis Bank margins
Apart from asset quality issue, Axis Bank's Q1 earnings also bore the impact of slow loan growth and rate cut cycle.
The bank's total deposits slipped 1 per cent Q-o-Q, but rose 9.3 per cent Y-o-Y, to ₹11.61 trillion. Its total loans, meanwhile, grew 1.8 per cent Q-o-Q and 8 per cent Y-o-Y to ₹10.59 trillion, driven by corporate segment. This led to an increase in loan-to-deposit ratio (LDR) to 91.2 per cent.
Net interest income (NII) was broadly flat Y-o-Y, but down 2 per cent Q-o-Q, at ₹13,560 crore with net interest margin (NIM) contracting 17bps Q-o-Q to 3.80 per cent.
Notably, Axis' NIM contraction came even when the bank has been the slowest among peers in cutting rates. The bank, they said, follows the T+90 repricing method, which is slower than peers.
"We cut FY26, FY27, and FY28 earnings estimates by 7 per cent, 3 per cent, and 1 per cent, respectively. We expect the RoA to dip to 1.6 per cent in FY26E and gradually recover to 1.7 per cent," said Emkay Global.
It has maintained its 'Buy' rating on the stock with an unchanged share price target of ₹1,400 as the stock trades cheap at 1.4x FY27E adjusted book value.
Motilal Oswal Financial Services, meanwhile, has maintained its 'Neutral' rating on the stock with a target of ₹1,250 as it sees higher slippages and credit costs in the near-term.
"The residual loan re-pricing will also continue to put pressure on margins, though the bank has maintained its through-cycle margin guidance of ~3.8 per cent. We cut our earnings estimates for FY26 and FY27 by 8.6 per cent and 5.7 per cent, respectively," it said.