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Axis Bank shares surge nearly 3% after Q2 results: What's next for investors

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  Published in Stocks and Investing on Saturday, October 25th 2025 at 21:26 GMT by The Financial Express

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What went wrong in Q2?

The bank’s quarterly report highlighted three main areas of weakness: higher provisions for bad loans, a fall in net interest margin (NIM), and a decline in gross margin. While the bank’s net interest income (NII) rose 11.2% YoY, the rise was outpaced by a 12.8% increase in interest expense. The bank’s NIM was 3.18%, down from 3.32% in Q1 2024, largely attributed to the spread erosion in the retail segment and the increased cost of funding. The bank’s provisions for non-performing assets (NPAs) rose to 7.3% of total assets from 6.9% in the previous quarter, reflecting the continued strain on the retail and small‑business loan portfolio in a tightening credit environment.

Axis Bank’s gross margin fell to 31.2% from 32.1% in the previous quarter. The decline was driven by a rise in operating expenses (OpEx) which grew 9.5% YoY, compared to an 8.2% increase in revenue. While the bank’s revenue grew 6.6% YoY, the higher cost base led to a flattening of profitability. The bank’s management has attributed the decline to rising non‑core expenses, a larger workforce, and higher technology costs, which the bank has been investing in to expand its digital footprint.

The bank’s net profit of ₹23.8 billion was down from ₹32.6 billion a year earlier, a decline of 26.5%. This fell short of Wall Street expectations of ₹28.2 billion and the market’s 1% growth expectation for the quarter. Analysts noted that the drop in earnings was not fully offset by the rise in credit volumes, as the bank’s asset quality remained under scrutiny.

Investor reaction and market sentiment

Investors were quick to sell off shares following the earnings release, with the share price dropping 2.5% in the early session. The sell‑off was amplified by the fact that Axis Bank’s valuation had been on a steady rise over the past year, with the stock trading at a P/E ratio of 10.7, above the average of 8.3 for the Indian banking sector. With the decline in earnings, analysts expected a correction in the valuation multiple.

The bank’s management also noted that the RBI’s policy environment had changed since the last quarter. In a statement following the earnings release, the bank’s chief executive officer (CEO) highlighted that the RBI had increased the repo rate from 4.00% to 4.25%, making borrowing more expensive for consumers and small businesses. The higher interest rates were expected to put pressure on loan growth and profitability, especially for banks that rely heavily on retail and SME segments.

Looking ahead – next quarter expectations

Analysts and investors are now focusing on the bank’s upcoming earnings announcement in Q3. Axis Bank’s management has provided guidance that the bank expects a 5–6% growth in net interest income in Q3, based on an expected increase in loan disbursement volume, particularly in the corporate segment. The bank also anticipates that NPA levels may stay stable or improve, as the RBI has introduced new guidelines for recovery of stressed assets and the bank has taken a more aggressive approach to asset quality monitoring.

While the bank’s guidance is optimistic, analysts are cautious. The prevailing macroeconomic environment, with inflationary pressures and higher rates, may dampen loan growth and increase the risk of default. The bank’s focus on digital transformation, while a long‑term growth driver, also increases its operating costs. Analysts predict that Axis Bank’s profitability will gradually improve, but it may take a full year to regain the level of earnings growth seen in 2023.

Broader implications for the Indian banking sector

Axis Bank’s weak earnings highlight the challenges faced by Indian banks as the RBI tightens its monetary policy. The bank’s decline in NIM is a warning sign for the sector as a whole, as many banks have been facing similar pressure due to rising rates and a slowdown in credit growth. The RBI’s decision to hike rates in September 2024 was aimed at bringing inflation under control, but it has also increased the cost of borrowing for banks and their customers. In response, many banks have begun tightening their credit policies, reducing exposure to high‑risk sectors, and boosting their provisioning levels.

The rise in NPAs, especially in the retail and SME segment, reflects the broader health of the economy. Many small businesses are struggling to service their debt due to a slowdown in the manufacturing and construction sectors, which are also affected by higher input costs and rising production costs. The bank’s focus on asset quality and risk management will likely become an even more important factor for investors as the sector continues to navigate a more restrictive regulatory environment.

Key takeaways

1. Axis Bank’s Q2 earnings showed a 26.5% decline in net profit due to higher provisioning, a drop in NIM, and an increase in operating costs.
2. Investors reacted negatively, causing the share price to drop 2.5% in early trading, and analysts expect a correction in valuation multiples.
3. The RBI’s rate hike has increased the cost of borrowing and pressured loan growth, especially in the retail and SME segments.
4. The bank’s guidance for Q3 is optimistic, with expectations of 5–6% growth in NII and stable NPAs, but analysts remain cautious given the macroeconomic backdrop.
5. The broader banking sector faces similar headwinds, with higher NIM compression and rising NPAs signaling the need for tighter risk management.

Axis Bank’s performance serves as a bellwether for the Indian private banking industry. Investors and analysts alike will be watching closely as the bank navigates the next few quarters, evaluating how well it can adjust its cost structure, improve asset quality, and leverage its digital transformation initiatives to achieve sustainable growth in a more restrictive monetary environment.