Axis Bank Share Price Drop 6%: Q1 Asset Quality Declines, Credit Costs Rise

Axis Bank shares plummeted by 6% on July 25, following the release of its April-June earnings, which highlighted deteriorating asset quality and dampened investor sentiment.

The bank reported a significant increase in net profit, reaching ₹6,035 crore for Q1 FY25, up from ₹3,452 crore in the same period last year. Despite exceeding the Street's estimate of ₹5,797 crore, the rise in non-performing assets concerned investors.

Hampered by declining asset quality and rising credit costs, Axis Bank share price traded at ₹1,168.45 on the NSE at 09:44 am IST, marking the largest decline on the Nifty 50 list.

The report pointed to stress in the unsecured loan segment and low recovery rates, leading to increased credit costs. Despite stable margins and satisfactory top-line performance, the disappointing results prompted analysts to lower their earnings estimates for the bank by 5-6%.

The stock hit a low of ₹1,156 on the BSE, a 6.75% drop. YES Securities commented that while the quarterly performance was weak, the long-term outlook for the bank remains unchanged, setting a revised target price of ₹1,550.

PhillipCapital noted that the stress in unsecured loans appears isolated but emphasized the importance of monitoring the portfolio's credit behavior amid industry-wide trends. They suggested a target price of ₹1,460 for Axis Bank.

Nuvama Institutional Equities observed that Axis Bank's Q1 profit met expectations, but core income fell short. Key issues included a rising loan-to-deposit ratio and a sharp increase in credit costs.

Prabhudas Lilladher raised its credit cost estimates for FY25 and FY26 by 12 basis points each, to 55 basis points. They reduced their target price for Axis Bank to ₹1,425 from ₹1,450, citing the unlikelihood of NIM expansion given the current loan-to-deposit ratio of 92%, up 194 basis points quarter-on-quarter.

Antique Stock Broking reported that Axis Bank's profit after tax (PAT) fell short of expectations due to higher credit costs linked to agricultural slippages and lower recoveries from the wholesale book. Nonetheless, they find Axis Bank's valuations reasonable, setting a target price of ₹1,375. HDFC Institutional Equities has a lower target price of ₹1,260.

Motilal Oswal cut its earnings estimates by 5.6% for FY25 and 7.8% for FY26, citing moderated growth assumptions and higher credit costs. Their target price is ₹1,175.

Sequentially, the lender's gross non-performing assets rose 11 basis points to 1.54% in Q1, while net non-performing assets increased by 3 basis points to 0.34%.

Puneet Sharma, the Chief Financial Officer, stated in a post-results press call that the pressure on asset quality was due to seasonality in the retail agri business in the first quarter.

Meanwhile, the bank's net credit cost stood at 0.97% in Q1FY25, up 47 basis points year-on-year (YoY). Credit costs refer to expenses incurred by a lender due to default or potential default on loans. They reported that net interest income (NII), excluding tax refunds, grew by just 1% quarter-on-quarter. Although the net interest margin (NIM) adjusted for tax refunds was 3.99%, up from the reported 4.05%, credit costs rose to 1% from 0.5% year-on-year.

The management indicated that about 55% of the increase in credit costs was due to lower recoveries and upgrades in the corporate loan portfolio. They expect these recoveries to occur eventually, though the timing may shift by one or two quarters.

"Seasonality played a role in the sequential rise in non-performing assets (NPAs), and we anticipate higher credit costs amid a slower pace of recoveries," Axis Bank stated during its earnings conference call.