Axis Bank Q3 Profit Surge Delights Investors Amid Margin Concerns
Axis Bank's investors are celebrating a robust performance in the December quarter (Q3FY26), as the private sector lender delivered a strong profit beat that exceeded market expectations. This comes as a welcome relief after several quarters marred by one-off provisions and operational disappointments. The bank's net profit rose 3% year-on-year to ₹6,490 crore, sharply surpassing estimates that had anticipated a decline. The stock surged over 5% on Tuesday, hitting a fresh 52-week high of ₹1,333.20 during trading hours, reflecting renewed investor confidence.
Strong Operational Performance Drives Profit Growth
The impressive profit scorecard was underpinned by a higher-than-expected acceleration in net interest income (NII), which rose 5% year-on-year to ₹14,286 crore. Core pre-provision operating profit grew 7%, aided by strategic headcount reductions and reversals of accruals that effectively offset higher employee costs under the new labour codes. Sequentially, profits jumped 28%, benefiting from the absence of one-offs that had weighed on Q2 results. In the September quarter, the bank had set aside ₹1,231 crore in additional provisions mandated by the Reserve Bank of India (RBI) over misclassified priority sector loans.
Deposit Growth Outpaces Credit in Competitive Environment
Axis Bank was among the few lenders where deposit growth outpaced credit growth, a notable achievement in a fiercely competitive deposit environment. Advances rose 14% year-on-year, while deposits grew 15%, driven largely by institutional inflows. This is particularly striking given the longstanding industry challenge of attracting deposits, as highlighted by Axis Bank's managing director and chief executive officer Amitabh Chadhury while speaking on the sidelines at Davos 2026. Credit growth at the private sector lender was largely driven by the corporate segment, which makes up less than a third of the loan book, as the bank maintained a cautious approach to retail lending amid stress in credit cards and personal loans.
Asset Quality Improves Despite Seasonal Slippages
Despite seasonally high slippages in agricultural lending in Q3, asset quality continued to show improvement. Gross and net non-performing assets fell six and two basis points (bps) to 1.40% and 0.42%, respectively, while credit costs declined 51 bps to 0.8%. This demonstrates the bank's effective risk management strategies and resilience in a challenging economic landscape.
Net Interest Margin Pressures Persist
However, margin pressures have persisted, with net interest margin (NIM) coming in at 3.64%, falling 9 bps sequentially. This decline was along expected lines, given an unfavourable loan mix. With floating-rate loans comprising 73% of the bank's loan book, deposit repricing has lagged through the monetary easing cycle. The recent tilt towards low-yielding wholesale loans has also weighed on margins. A possible delay in margin-recovery has been a concern for investors, with the stock correcting 5% after the management on 16 December pushed out the timeline to as far as Q1FY27, from the previously guided Q3FY26.
Future Outlook and Strategic Goals
The 25-bp rate cut in December has yet to flow through and could pressure Q4FY26 NIM, even as rates on non-retail term deposits inch higher in a competitive environment. Still, the bank maintains a through-cycle NIM target of 3.8% over the next 15-18 months. Profits are also expected to get a boost as and when the writebacks of RBI-mandated provisions play out. Axis Bank wrote back about ₹130 crore of standard-asset provisions in Q3FY26. Moreover, with ₹430 crore now held in provisions towards the new labour codes, operational efficiency should also hold up well.
The management remains bullish on industry growth, supported by combined efforts of monetary easing and fiscal stimulus. As its unsecured retail lending portfolio stabilizes, Axis Bank aims to grow about 300 bps faster than the industry over the next three to five years. Against this backdrop, the valuation at 1.74x the FY27 book-value estimates, based on Bloomberg data, offers comfort to long-term investors.
