Axis Bank, India’s third-largest private sector lender, is poised to report robust net profit and net interest income (NII) growth for the first quarter of financial year 2024-25, driven by sustained credit demand across retail and corporate segments. However, industry analysts warn that a persistent rise in funding costs and intense competition for deposits will likely compress the bank’s net interest margins (NIM) during the April-June period.
The Backdrop of India’s Banking Sector
The Indian banking sector has experienced a prolonged credit boom over the past two years, buoyed by strong economic activity and resilient consumer spending. Despite multiple interest rate hikes by the Reserve Bank of India (RBI) to curb inflation, credit demand has remained high, outstripping deposit growth for several consecutive quarters.
This structural imbalance has forced commercial banks to aggressively compete for public deposits, raising interest rates on fixed deposits and short-term savings instruments. Axis Bank, which has aggressively expanded its retail footprint and integrated Citibank’s India consumer business, finds itself navigating this high-cost funding environment as it prepares to declare its Q1 financial results.
NII and Profitability Forecasts Remain Strong
Financial brokerages project a healthy double-digit growth in Axis Bank’s net profit for the June quarter, supported by low credit costs and steady fee income. Consensus estimates from major brokerages, including Motilal Oswal and Nuvama Institutional Equities, peg the lender’s year-on-year net profit growth between 12% and 15%.
Net Interest Income—the difference between interest earned on loans and interest paid on deposits—is expected to grow by approximately 11% to 13% compared to the same period last year. This growth is primarily supported by an estimated 14% to 16% expansion in the bank’s loan book, with retail and micro-finance segments leading the charge.
Analysts also expect the bank’s asset quality to remain stable, with gross non-performing assets (GNPA) and net NPAs hovering near multi-year lows. Slippages are anticipated to be well within manageable limits, allowing the bank to maintain lower provisioning requirements, which will directly boost the bottom-line profit.
The Margin Squeeze: Deposit Repricing Takes a Toll
Despite strong top-line numbers, the primary concern for investors remains the compression of Net Interest Margins. Brokerage reports indicate that Axis Bank’s NIM could contract by 5 to 10 basis points sequentially, driven by the delayed repricing of deposits and the high cost of competitive funding.
According to a pre-earnings note from Kotak Institutional Equities, the cost of funds for Indian banks has not yet peaked, as older, lower-rate deposits continue to mature and reprice at current, higher market rates. This lag effect, combined with the necessity of offering premium rates to attract fresh deposits, is actively squeezing the spread between lending yields and borrowing costs.
Furthermore, the Reserve Bank of India’s decision to increase risk weights on unsecured retail loans late last year has forced banks to reallocate capital toward safer, lower-yielding corporate loans. This regulatory shift has inadvertently put further downward pressure on overall yields, compounding the margin squeeze caused by deposit repricing.
Expert Perspectives on Strategic Execution
Market experts suggest that Axis Bank’s ability to offset margin pressures will depend heavily on its product mix and operational efficiency. Analysts at Jefferies note that a higher proportion of high-yielding retail loans, such as personal loans and credit cards, could help defend yields against rising deposit costs.
Additionally, the realization of synergies from the Citibank consumer business acquisition remains a critical monitorable factor. While the integration initially raised operating expenses, long-term cost efficiencies and cross-selling opportunities are expected to support profitability in the coming quarters.
Operating expenses will also be under scrutiny. The bank has been investing heavily in technology and digital banking platforms to improve customer acquisition and retention. While these investments are crucial for long-term competitiveness, they add to short-term cost pressures at a time when revenue growth is moderating.
What to Watch Next: Future Implications for Investors
The upcoming earnings release will serve as a crucial bellwether for the private banking space, revealing how mid-to-large-sized lenders are coping with systemic liquidity deficits. If Axis Bank manages to beat margin expectations through superior asset pricing, it could trigger a positive rerating of its stock, which has faced relative underperformance compared to broader market indices.
Investors should closely watch management’s guidance on deposit mobilization strategies and loan growth targets for the remainder of fiscal year 2025. Any indication of a slowdown in credit growth to preserve margins could signal a shift in strategy, prompting a reassessment of valuation multiples across the banking sector.
Ultimately, the trajectory of the Reserve Bank of India’s monetary policy will dictate the next phase of banking profitability. Until the central bank initiates a rate-cut cycle or injects significant liquidity into the banking system, Axis Bank and its peers will likely continue operating in a tight-margin, high-competition landscape.
