The stock, currently trading at ₹1,169, has delivered muted returns of just 0.91% over the past year, significantly underperforming its private banking peers who collectively declined 9.70% during the same period. However, the bank's valuation remains elevated at 13.96 times trailing twelve-month earnings, raising questions about whether the premium is justified given the recent profit trajectory.
The quarterly performance reveals a concerning pattern of profit erosion despite relatively stable top-line growth. Interest earned stood at ₹32,309.77 crores in Q2 FY26, representing a modest 2.24% increase year-on-year but a marginal 0.12% decline quarter-on-quarter. This stagnation in core banking income, coupled with rising interest expenses of ₹17,971.47 crores, compressed net interest income to ₹14,338.30 crores—a sequential increase of just 1.62% from Q1 FY26.
Financial Performance: Margin Pressure and Declining Profitability
The bank's financial performance in Q2 FY26 reflects mounting pressure on both revenue generation and cost management. Operating profit before provisions reached ₹11,138.49 crores, down 8.80% from the previous quarter's ₹12,213.89 crores, signalling operational headwinds. More concerning is the 26.71% quarter-on-quarter decline in profit before tax to ₹7,495.94 crores from ₹8,179.70 crores in Q1 FY26.
| Metric | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Interest Earned | ₹32,309.77 Cr | ₹32,348.31 Cr | ₹32,452.32 Cr | ₹32,162.20 Cr | ₹31,601.05 Cr |
| Net Profit | ₹5,557.51 Cr | ₹6,260.17 Cr | ₹7,489.71 Cr | ₹6,763.10 Cr | ₹7,408.90 Cr |
| QoQ Change (%) | -11.24% | -16.42% | +10.74% | -8.71% | +19.29% |
| YoY Change (%) | -24.98% | -2.94% | -1.63% | +8.91% | +26.82% |
| Net Interest Income | ₹14,338.30 Cr | ₹14,109.62 Cr | ₹14,331.61 Cr | ₹14,122.52 Cr | ₹13,986.13 Cr |
The bank's net profit margin stood at 17.11% in Q2 FY26, whilst the operating profit margin (excluding other income) reached 55.73%. However, these margins have been under pressure due to elevated interest expenses, which consumed ₹17,971.47 crores during the quarter—up 2.03% year-on-year. The tax burden of ₹1,938.43 crores, representing 25.87% of profit before tax, remained relatively stable compared to previous quarters.
Balance Sheet Strength: Asset Growth Amidst Capital Adequacy
Axis Bank's balance sheet continues to reflect robust growth in core lending operations, with advances reaching ₹10,81,229.47 crores as of March 2025, representing an 8.20% year-on-year increase from ₹9,99,333.48 crores in March 2024. The loan book expansion has been accompanied by a corresponding rise in deposits to ₹11,70,920.89 crores, up 9.73% year-on-year, demonstrating the bank's continued ability to mobilise retail and corporate deposits.
The bank's return on equity of 14.15% in Q2 FY26 indicates efficient capital deployment, though this represents a decline from the stronger ROE levels witnessed in previous quarters. Higher ROE typically signals better capital efficiency and profitability, and whilst Axis Bank's current ROE remains respectable, the declining trend warrants close monitoring. The bank's return on assets stood at 1.70%, positioning it competitively within the private banking sector.
⚠️ Key Monitoring Point: Profitability Under Pressure
The sequential decline in net profit over the past two quarters, coupled with stagnating interest income growth, raises concerns about the bank's ability to maintain its earnings momentum. Operating profit before provisions fell 8.80% quarter-on-quarter to ₹11,138.49 crores, suggesting that operational efficiency may be deteriorating. Investors should closely monitor the bank's asset quality metrics and provision requirements in upcoming quarters, as these could further impact profitability if credit costs rise.
Institutional Confidence: Strong Backing Despite Performance Concerns
Despite the recent profit decline, institutional investors have maintained their faith in Axis Bank, with total institutional holdings standing at 84.99% as of September 2025. Mutual fund holdings increased notably to 33.97% from 32.54% in the previous quarter, representing a significant 143 basis point increase. This accumulation by domestic mutual funds suggests confidence in the bank's long-term prospects, even as near-term performance remains challenged.
| Investor Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter Holding | 8.16% | 8.17% | 8.18% | -0.01% |
| FII Holding | 41.89% | 43.81% | 43.94% | -1.92% |
| Mutual Fund Holding | 33.97% | 32.54% | 32.02% | +1.43% |
| Insurance Holdings | 4.99% | 5.00% | 5.22% | -0.01% |
| Other DII Holdings | 3.92% | 3.68% | 3.64% | +0.24% |
However, foreign institutional investors reduced their stake to 41.89% from 43.81%, marking a 192 basis point decline quarter-on-quarter. The FII exodus continued a trend that began in December 2024, when their holdings stood at 47.32%. This divergence between domestic and foreign institutional behaviour suggests differing views on the bank's near-term prospects, with foreign investors potentially concerned about the profit trajectory whilst domestic funds see value in the current correction.
Peer Comparison: Valuation Premium Difficult to Justify
When compared to its private sector banking peers, Axis Bank's current valuation appears stretched relative to its operational performance. Trading at a price-to-book value of 1.98x, the bank commands a discount to ICICI Bank's 3.25x and Kotak Mahindra Bank's 3.65x, but trades at a premium to Yes Bank's 1.50x and IDBI Bank's 1.58x. The valuation gap becomes more pronounced when considering profitability metrics.
| Bank | P/BV Ratio | ROA (%) | Dividend Yield | Net NPA (%) | Gross NPA (%) |
|---|---|---|---|---|---|
| Axis Bank | 1.98x | 1.63% | 0.08% | 0.45% | 1.57% |
| ICICI Bank | 3.25x | 2.30% | 0.79% | 0.41% | 1.67% |
| Kotak Mahindra Bank | 3.65x | 1.94% | 0.12% | 0.34% | 1.48% |
| IDBI Bank | 1.58x | 1.94% | 2.29% | 0.21% | 2.93% |
| Yes Bank | 1.50x | 0.66% | 0.00% | 0.30% | 1.60% |
Axis Bank's return on assets of 1.63% trails ICICI Bank's industry-leading 2.30% and matches Kotak Mahindra Bank's 1.94%, whilst the bank's net NPA ratio of 0.45% remains higher than Kotak's 0.34% and ICICI's 0.41%. The gross NPA ratio of 1.57% suggests adequate asset quality, though not best-in-class. The minimal dividend yield of 0.08%, based on a ₹1 per share dividend, provides little income support for investors, particularly when compared to IDBI Bank's attractive 2.29% yield.
"With a PEG ratio of 3.74x and declining profit momentum, Axis Bank's valuation premium appears increasingly difficult to justify, particularly as peer banks demonstrate stronger operational metrics and more attractive risk-reward profiles."
Valuation Analysis: Expensive Territory Amidst Profit Concerns
Axis Bank's current valuation of ₹1,169 per share translates to a P/E ratio of 13.96 times trailing twelve-month earnings, positioning the stock in "expensive" territory according to proprietary valuation models. The bank's valuation grade shifted from "Fair" to "Expensive" on 16 September 2025 when the stock traded at ₹1,121.20, and has remained elevated since. The price-to-book value ratio of 1.98x, whilst below larger peers, appears rich given the recent profit trajectory and return on equity of 14.15%.
The PEG ratio of 3.74x raises particular concerns, suggesting that investors are paying a significant premium relative to the bank's earnings growth potential. This elevated multiple becomes more problematic when considering the sequential profit declines witnessed over the past two quarters. The stock's 52-week range of ₹934 to ₹1,247 indicates significant volatility, with the current price sitting approximately 6.26% below the 52-week high but 25.16% above the 52-week low.
Stock Performance: Underperformance Despite Sectoral Weakness
Axis Bank's stock has delivered lacklustre returns across most timeframes, with particularly weak performance over the past year. The stock generated a mere 0.91% return over twelve months, essentially flat compared to the Sensex's 0.96% gain during the same period. This represents a significant underperformance relative to the broader market and highlights investor concerns about the bank's profit trajectory.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -0.97% | +1.02% | -1.99% |
| 1 Month | +5.86% | +1.00% | +4.86% |
| 3 Months | +0.29% | +0.04% | +0.25% |
| 6 Months | +4.93% | +7.65% | -2.72% |
| Year-to-Date | +9.41% | +5.72% | +3.69% |
| 1 Year | +0.91% | +0.96% | -0.05% |
| 3 Years | +46.06% | +42.62% | +3.44% |
| 5 Years | +152.62% | +107.93% | +44.69% |
The longer-term picture provides more encouragement, with the stock delivering 46.06% returns over three years and an impressive 152.62% over five years, significantly outperforming the Sensex's 42.62% and 107.93% gains respectively. However, these historical returns offer little comfort to investors concerned about near-term performance, particularly as the stock has generated negative alpha over the past week, six months, and one year.
Technical indicators present a mixed picture, with the stock currently in a "mildly bullish" trend as of 15 October 2025. The stock trades above its 20-day, 50-day, 100-day, and 200-day moving averages, suggesting underlying technical support. However, the recent trend change from "sideways" to "mildly bullish" on 15 October indicates uncertainty, whilst delivery volumes declined 19.61% compared to the five-day average, suggesting reduced conviction amongst investors.
Investment Thesis: Quality Meets Near-Term Headwinds
Axis Bank's investment case rests on a foundation of institutional quality and market positioning, tempered by concerning near-term financial trends. The bank maintains a "Good" quality grade, reflecting consistent profitability over more than a decade and strong institutional backing of 84.99%. The bank's position as India's third-largest private sector lender provides competitive advantages in terms of scale, distribution network, and product offerings.
However, the financial trend turned "Negative" in June 2025 and has remained subdued since, with key concerns including the 24.98% year-on-year decline in Q2 FY26 net profit and sequential profit erosion over two consecutive quarters. The bank's proprietary Mojo score of 51 out of 100 places it firmly in "HOLD" territory, reflecting the balance between long-term quality and near-term performance concerns. The valuation assessment of "Expensive" at current levels further limits upside potential until operational metrics improve.
✓ Key Strengths
- Strong Institutional Backing: 84.99% institutional holdings with increasing mutual fund participation (33.97%, up 143 bps QoQ)
- Robust Balance Sheet: Advances of ₹10.81 lakh crores growing at 8.20% YoY with deposit base of ₹11.71 lakh crores
- Healthy ROE: 14.15% return on equity indicates efficient capital deployment, though declining from previous quarters
- Market Position: Third-largest private sector bank with extensive distribution network and product suite
- Asset Quality: Net NPA of 0.45% and gross NPA of 1.57% remain manageable compared to historical levels
- Long-term Track Record: Five-year returns of 152.62% demonstrate wealth creation ability over extended periods
- Quality Grade: Maintained "Good" quality rating for four consecutive quarters since September 2024
⚠ Key Concerns
- Profit Decline: Net profit down 24.98% YoY and 11.24% QoQ to ₹5,557.51 crores in Q2 FY26
- Stagnant Revenue: Interest earned declined 0.12% QoQ despite 2.24% YoY growth, signalling top-line pressure
- Operating Efficiency: Operating profit before provisions fell 8.80% QoQ to ₹11,138.49 crores
- Expensive Valuation: P/E of 13.96x with PEG ratio of 3.74x appears rich given profit trajectory
- FII Exodus: Foreign institutional investors reduced stake by 192 bps QoQ to 41.89%
- Negative Financial Trend: Mojo financial trend assessment turned "Negative" in June 2025
- Weak Near-term Returns: One-year return of just 0.91% with negative alpha versus Sensex
Outlook: Critical Monitoring Points for Recovery
The path forward for Axis Bank hinges on its ability to reverse the recent profit decline whilst maintaining asset quality and competitive positioning. Investors should closely monitor several critical factors that will determine whether the bank can justify its current valuation and regain earnings momentum. The upcoming quarters will be crucial in establishing whether Q2 FY26's weak performance represents a temporary blip or the beginning of a more sustained period of margin compression and profitability pressure.
Positive Catalysts
- Loan Growth Acceleration: Recovery in credit demand could drive interest income growth above current 2% levels
- Cost Optimisation: Operating leverage improvements could expand margins if expense growth moderates
- Asset Quality Stability: Maintained NPA levels would reduce provision requirements and support profitability
- Domestic Institutional Support: Continued mutual fund accumulation could provide price support and stability
Red Flags to Watch
- Further Profit Erosion: Another quarter of declining profits would confirm negative trend and pressure valuation
- Margin Compression: Sustained pressure on net interest margins could impact long-term profitability
- Rising Provisions: Increased credit costs or asset quality deterioration would compound profit pressures
- Continued FII Selling: Further foreign institutional selling could create technical weakness in the stock
The Verdict: Hold With Caution
Score: 51/100
For Fresh Investors: Avoid initiating positions at current levels. The combination of declining profits, expensive valuation (P/E 13.96x, PEG 3.74x), and negative financial trend makes fresh entry unattractive. Wait for clearer signs of profit stabilisation and margin improvement, or a meaningful valuation correction towards ₹1,050-1,080 levels before considering entry.
For Existing Holders: Continue holding but remain vigilant. The strong institutional backing (84.99%) and "Good" quality grade provide downside support, whilst the long-term track record justifies patience. However, set a stop-loss around ₹1,080-1,100 (200-day moving average support) and closely monitor Q3 FY26 results. Exit if profits decline for a third consecutive quarter or if FII holdings drop below 40%.
Fair Value Estimate: ₹1,050-1,080 (10-12% downside from current levels) based on normalised earnings and peer comparison. Current valuation builds in optimism that recent performance does not support.
⚠️ Investment Disclaimer: This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
