Axis Bank’s rising costs, FCNR inflows squeeze Q2 margins

MUMBAI: Higher operating expenses and a squeeze on margins tempered Axis Bank’s earnings in the September quarter (Q2FY27), offsetting the benefit of lower provisions and steady growth in net interest income. The lender’s net profit rose 38% from a year earlier, but slipped from the June quarter as the influx of foreign currency non-resident (FCNR) deposits under a special Reserve Bank of India (RBI) window weighed on its net interest margin.

On Saturday, India's third-largest private sector lender reported a net profit of ₹7,003 crore for the quarter ended 30 September, up 38% year-on-year but down 2% sequentially. Operating expenses rose 9% from a year earlier and 11% from the previous quarter to ₹10,819 crore.

In its investor presentation, the bank attributed 24% of the operating expenses to business volumes and changes in rates, 32% to investments in IT infrastructure and digital journeys, and the remaining 44% to “business as usual”.

Quick answers to key questions

•5 QUESTIONS

1

What were Axis Bank’s Q2FY27 net profit and net interest income?⌵

Axis Bank reported net profit of ₹7,003 crore, up 38% year-on-year but down 2% from the June quarter. Net interest income rose 12% year-on-year to ₹15,371 crore.

2

Why did Axis Bank’s net interest margin fall in Q2FY27?⌵

NIM narrowed to 3.36% from 3.46% in the previous quarter, largely because FCNR deposit inflows and their deployment weighed on margins. The bank estimated the FCNR-related impact at about 11 basis points.

3

How is Axis Bank using its FCNR deposit inflows?⌵

Axis Bank said it is using the inflows primarily to replace some higher-cost bulk deposits and support lending growth. It received more than $10 billion in dollar deposits under the RBI’s special window.

4

Why did Axis Bank’s operating expenses increase in Q2FY27?⌵

Operating expenses rose 9% year-on-year to ₹10,819 crore. The bank attributed spending to business volumes and rate changes, investments in IT and digital channels, and routine business costs.

5

What did Axis Bank say about its loan growth outlook after Q2FY27?⌵

The bank did not give loan growth guidance, citing a high base and inflationary pressures. It said on-ground activity and its lending pipeline continued to indicate robust demand.

“As the business is growing, I think we do have certain sourcing costs and various other volume-linked costs have gone up. But primarily, consciously, the bank has invested in IT infrastructure and the digital channels and the journeys in terms of driving improved and increased digitalisation within the bank. That's where the investments have been going on,” chief financial officer Rajeev Mantri said on the earnings media call.

The call marked Mantri’s first earnings interaction with the bank since his appointment as chief financial officer (CFO), effective 28 September. He previously served as CFO of Bandhan Bank, replacing Puneet Sharma, who moved to HDFC Bank on 1 September as CFO-designate and is expected to take over as its CFO in December 2026.

Shares of Axis Bank ended at ₹1,290 Friday, up 0.2% from previous close, on the National Stock Exchange.

Net interest income, or the difference between interest earned and interest paid, rose 12% year-on-year and 5% sequentially to ₹15,371 crore. Provisions fell 52% from a year earlier and 24% from the previous quarter to ₹1,694 crore, providing further support to profitability.

But the bank’s net interest margin (NIM), a measure of lending profitability, narrowed to 3.36% in the September quarter from 3.46% in the previous quarter, largely because of the FCNR deposit inflows mobilised under the RBI special window.

“We have seen roughly around 11 basis points impact on the NIM which have come through because of the FCNR(B) funds coming through, and also because of the deployment of the FCNR which took some time,” Mantri said.

The bank is using the inflows primarily to replace some of its higher-cost bulk deposits and support lending growth, he said.

“We should be able to see some bit of an uplift on that basis. We are working towards improvement in the NIM,” Mantri said, adding that margins were broadly steady sequentially after excluding the impact of FCNR deposits.

Under the RBI scheme, Axis Bank received dollar deposit inflows exceeding $10 billion, equivalent to around ₹1 trillion. These included ₹43,800 crore backed by loans extended by the bank and another ₹44,900 crore backed by standby letters of credit.

Total deposits grew 20.7% year-on-year and 5.8% sequentially to ₹14.5 trillion. Total advances rose 23% year-on-year and 8.9% quarter-on-quarter to ₹13.7 trillion at the end of September.

Axis Bank remained non-committal on loan growth guidance, citing a high base from the previous year and inflationary pressures that could weigh on lending growth. However, the bank said on-ground activity and its lending pipeline continued to point to robust demand.

“Some of that moderation possibly might happen at the industry level, and then there is also associated possible downsides on inflation as well as rate hikes. But we don't know how that will pan out as we go forward,” one of the senior executives said.

On the commercial side, the bank is seeing broad-based growth across infrastructure, energy, metals, industrials and commercial real estate, driven by capital expenditure, project financing, working capital and refinancing requirements. Management expects this growth to sustain over the coming quarters.

Axis Bank’s subsidiary Freecharge received the RBI's approval for a payment aggregator licence, opening up potential opportunities in digital payments monetization, the lender said on Saturday.

Sameer Shetty, group head, Digital Business and Transformation & Strategic Programs at the bank, said Freecharge has been growing very strongly and that the bank has a “fairly aspirational growth trajectory” for it.

“There are a few potential opportunities where given that with Freecharge, we cover the payment aggregator side as well. There are some potential strategies that could be played to benefit from UPI MDR (merchant discount rate),” Shetty said.

Shetty said Axis Bank was also positioned to benefit from the introduction of merchant discount rates on UPI because it operates as an issuer bank, payment service provider and acquiring bank. The bank has a 38% market share by volume in the UPI payment service provider space and a 25.7% share of the merchant acquiring business.

“We are committed to grow the UPI ecosystem, grow the merchant ecosystem, and as and when the UPI MDR starts to get implemented, we will ensure that we continue to gain market share,” he said.

Driven by a passion for news and commitment to accurate and ethical reporting, Anshika Kayastha has been covering the full spectrum of BFSI—from banks and NBFCs to fintechs, insurance, payments, regulators, personal finance and money markets for the past 13 years. <br><br>Based in Mumbai, her work at Mint spans comprehensive and insightful stories on sectoral trends, regulatory and policy shifts, corporate strategies, governance, and innovation. With a particular interest in fintech, she keeps a close watch on emerging players, disruptive business models, and the evolving regulatory landscape. <br><br>Prior to joining Mint in July 2024, Anshika honed her craft at The Hindu BusinessLine and Informist Media, to deliver incisive, well-sourced reporting on the forces shaping India's financial services. She holds a degree in media and communication from Symbiosis University. <br><br>When she's not tracking the latest RBI circular or tenaciously pursuing the next story, Anshika is most at home in the mountains of Himachal Pradesh. Warm, social, and endlessly curious, she's a self-confessed credit card enthusiast, and brings that same energy to offbeat TV series, puzzles, beach vacations, and competitive game nights.

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