UPDATE 2-India's Axis Bank sees progress on bad loans, smaller decline in profits

* Net profit 13.06 bln rupees vs 12.82 bln rupee estimate

* Bad loan ratio largely unchanged from previous quarter

* Sees provisioning costs falling sharply in 2018/19 (Adds comments from CFO, details)

MUMBAI, July 25 (Reuters) - India’s Axis Bank reported a smaller-than-expected 16 percent drop in quarterly profit on Tuesday and said it was making progress on containing bad loans.

The bank, India’s third-biggest non-state lender by assets, retained its provisioning cost guidance of 175 basis points to 225 basis points for the current financial year to March. However, finance chief Jairam Sridharan said the bank was hopeful of bringing it down in the next year to around the long-term average level of 94 basis points.

Net profit for the three months through June was 13.06 billion rupees ($203 million), the Mumbai-based lender said, beating analysts’ estimate of 12.82 billion rupees.

“I feel good about the turnaround gathering a lot of strength,” Sridharan told reporters on a conference call, referring to steeper profit falls in the past quarters.

Indian banks’ “stressed” loans hit a record $150 billion at the end of last year, prompting the government to change rules and give the central bank more power to push defaulting companies to bankruptcy.

The Reserve Bank of India has ordered banks to initiate bankruptcy proceedings against 12 of the country’s biggest defaulters that account for a quarter of the total non-performing loans.

Axis Bank, which has exposure to some of the troubled companies and sectors, said its gross non-performing loans ratio was little changed at 5.03 percent at end-June from 5.04 percent at end-March.

During the June quarter, the bank added 35.19 billion rupees of non-performing loans, less than 48.11 billion rupees in the previous quarter, taking its gross non-performing loans to 220.3 billion rupees at end-June.

It also said that outstanding loans on its “watch list”, or potential troubled loans that risk turning sour, fell 16 percent from the previous quarter to 79.41 billion rupees as of end-June.

Mumbai brokerage Reliance Securities said the bank’s performance on asset quality was “impressive” although it cautioned that earnings and return ratio would be “subdued” over the next 4-6 quarters due to higher provisioning costs.

Axis Bank also said a media report that its Chief Executive Shikha Sharma was leaving for a job at the Tata conglomerate was “untrue and unfounded”. ($1 = 64.3725 Indian rupees) (Reporting by Devidutta Tripathy and Tanvi Mehta; Editing by Alexander Smith and Susan Fenton)