Whalesbook
Axis Bank Outlook: Motilal Oswal Maintains Neutral Stance with ₹1,300 Target
Motilal Oswal Financial Services has reaffirmed its 'Neutral' rating on Axis Bank, setting a target price of ₹1,300. This outlook follows a detailed interaction with the bank's top management, highlighting a healthy medium-term return profile despite near-term cyclical pressures on margins and asset quality. The brokerage anticipates that Net Interest Margins (NIMs) will reach their lowest point in the fourth quarter of fiscal year 2026 (Q4FY26) or the first quarter of fiscal year 2027 (Q1FY27).
Loan Growth Rebuilding Focus
Axis Bank's loan growth is described as being in a 'repair phase.' In Q2FY26, advances grew by 12% year-on-year and 5% quarter-on-quarter. This growth is driven by a recovery in wholesale banking and increased traction in granular segments. The bank has strategically increased its focus on small business banking, SME, and mid-corporate books, which now constitute 24% of total advances, reflecting a shift towards higher risk-adjusted return portfolios.
Retail growth experienced a slowdown after adjustments in unsecured lending, with vehicle loans and mortgages showing weakness consistent with industry trends. However, disbursements are showing signs of improvement, suggesting better asset growth in the near future. The management aims to outpace system loan growth by approximately 300 basis points over the medium term, expecting execution gains by FY27.
Deposits and Liability Management
The liability franchise, particularly deposit mobilisation, is identified as a critical factor for execution in the current financial cycle. In Q2FY26, deposits grew by 11% year-on-year, with quarterly average balances rising 10%. While this indicates steady progress, it is considered 'sub-optimal' in a competitive landscape where attracting low-cost Current Account Savings Accounts (CASA) remains challenging. Incremental flows have shifted towards wholesale deposits, impacting funding consistency.
Despite these challenges, early repricing actions have helped. The cost of funds declined by 24 basis points quarter-on-quarter and 30 basis points year-on-year, while CASA levels remained stable between 38% and 40%. Liquidity is comfortable, with an average Liquidity Coverage Ratio (LCR) of 119%. Motilal Oswal expects ongoing initiatives to gradually narrow Axis Bank's funding gap compared to its peers.
Margin Outlook
Net interest margins (NIMs) saw a contraction of 7 basis points quarter-on-quarter, settling at 3.73% in Q2FY26. This was influenced by the bank absorbing the impact of repo-linked repricing and a deliberate moderation in unsecured retail lending. Management projects that NIMs will bottom out in Q4FY26 or Q1FY27, influenced by the full effect of repo rate cuts and increased LCR outflow rates.
Over the medium term, Axis Bank is confident of restoring NIMs to around 3.8%, a level considered 'cycle-agnostic'. This is expected to be achieved within 15 to 18 months following the last repo rate cut, supported by an improved asset mix, residual deposit repricing, and the benefits of Cash Reserve Ratio (CRR) cuts.
Asset Quality Assessment
Core asset quality is reported to be healthy, with management expressing confidence in improved outcomes over the next year. In Q2FY26, the gross slippage ratio decreased significantly to 2.11%, a reduction of 102 basis points quarter-on-quarter. Similarly, the net credit cost moderated to 0.73%, down 65 basis points. Some technical slippages are anticipated in Q3FY26, mainly due to seasonality in agricultural accounts, but these are expected to be less pronounced than in Q1FY26.
The core retail unsecured portfolio has stabilised, with credit card metrics improving and personal loans holding steady. Recoveries and upgrades are trending positively. Axis Bank's Gross Non-Performing Asset (GNPA) ratio stood at 1.46%, and the Net Non-Performing Asset (NNPA) ratio was 0.44%, supported by robust aggregate coverage of 147%. Motilal Oswal characterises the recent asset quality volatility as seasonal rather than structural.
Strong Capital Position
Axis Bank's strong capital position provides a cushion against earnings and asset-quality fluctuations. As of Q2FY26, the Common Equity Tier 1 (CET-1) ratio was 14.43%, an increase of 69 basis points since March 2024, attributed to healthy internal accruals. The bank also holds approximately ₹6,200 crore in excess provisions, equivalent to a 44 basis points capital buffer. Coverage on stressed assets (Provision Coverage Ratio) is strong at about 70%.
Capital allocation remains disciplined, with retained earnings reinvested into the balance sheet. The bank intends to maintain a 4% capital buffer above regulatory minimums. Future capital deployment will primarily support Axis Finance, and the bank is open to increasing its stake in Max Life, subject to regulatory approvals. Subsidiaries remain cash-surplus, with no dividends upstreamed recently, preserving capital flexibility.
Outlook and Valuation
Motilal Oswal anticipates FY27 to be a more favourable year for Return on Assets (RoA), following the headwinds of FY26 related to margin compression and seasonal slippages. While Q3FY26 may see further margin pressure and technical slippages, the brokerage expects earnings progression to improve in FY27 as asset quality stress normalises and NIMs begin to recover. With loan growth projected to accelerate to mid-teens, credit costs declining, and NIMs moving back towards 3.8%, Axis Bank is viewed as well-positioned for a gradual and sustainable improvement in RoA to the 1.6%–1.8% range.
Impact Rating: 7/10
Difficult Terms Explained
- Return on Asset (RoA): A profitability ratio measuring how efficiently a company uses its assets to generate earnings. It's calculated by dividing net income by average total assets.
- Return on Equity (RoE): A profitability ratio measuring how effectively a company uses shareholder equity to generate profits. It's calculated by dividing net income by average shareholder equity.
- Net Interest Margin (NIM): A measure of a bank's profitability that compares the net interest income (interest earned on loans minus interest paid on deposits) to the amount of interest-earning assets. It indicates how effectively a bank is managing its assets and liabilities.
- Granular Portfolios: Refers to a loan portfolio diversified across a large number of small borrowers, reducing concentration risk.
- Unsecured Lending: Loans granted without any collateral or security, such as personal loans or credit card advances. These typically carry higher interest rates due to increased risk.
- CASA (Current Account Savings Account): Low-cost deposits that banks attract from customers. CASA deposits are a crucial source of funding for banks.
- Liquidity Coverage Ratio (LCR): A regulatory banking liquidity ratio that ensures banks have enough high-quality liquid assets (HQLA) to cover their total net cash outflows over a 30-day stress period.
- Repo-linked Assets: Loans where the interest rate is linked to the Reserve Bank of India's (RBI) repo rate, allowing for automatic adjustments based on monetary policy changes.
- Gross Slippage Ratio: The ratio of new non-performing assets (NPAs) to total gross advances during a reporting period. It indicates the rate at which performing loans are becoming NPAs.
- Net Credit Cost: The cost incurred by a bank in managing its loan portfolio, often expressed as a percentage of average loans. It includes provisions for bad loans and recovery expenses.
- Gross Non-Performing Asset (GNPA): Loans where the principal or interest payment is overdue for 90 days or more.
- Net Non-Performing Asset (NNPA): Gross NPAs minus the provisions made for these NPAs. It represents the unreconciled bad loans.
- Provision Coverage Ratio (PCR): The ratio of the accumulated loan loss provisions to the gross non-performing assets. It indicates the extent to which a bank has covered its potential loan losses.
- CET-1 (Common Equity Tier 1): The highest quality form of regulatory capital for banks, comprising common stock, retained earnings, and other comprehensive income, minus goodwill and intangible assets.
- RWA (Risk-Weighted Assets): Assets weighted according to their perceived riskiness. Banks are required to hold capital against these assets.