Axis Bank Stock Surges on UBS 'Buy' Upgrade, Price Target Raised to ₹1,500

International brokerage house UBS has upgraded Axis Bank to a 'Buy' rating, significantly increasing its price target to ₹1,500 from ₹1,300, suggesting a potential upside of 17% for the stock. UBS cited several positive developments for the bank, including easing liability pressure, stabilising asset quality concerns, and supportive sector liquidity, which they believe are resetting the risk-reward in favour of Axis Bank's stock.

Despite its recent strong performance relative to the Nifty, Axis Bank's stock has seen muted gains over the past year, lagging behind the Bank Nifty. This range-bound movement was attributed to moderation in loan growth and higher-than-peer slippages, leading to a wider valuation gap compared to peers like ICICI Bank, HDFC Bank, and Kotak Mahindra Bank. Axis Bank currently trades at 1.5 times its FY27 estimated book value, which is significantly below its five-year average and at a considerable discount to its peers. UBS believes this valuation gap is excessive given the improving macroeconomic outlook. They anticipate a potential stock re-rating as quarterly metrics demonstrate steady recovery in loan growth, deposit mix, credit costs, and return ratios.

UBS expects loan growth to accelerate, projecting an annual expansion of 14-15% for FY26-FY28. This optimism is based on stabilising stress in retail credit cards and personal loans, with similar trends observed in SME overdue indicators at large private banks. Improved liquidity conditions are expected to further support this expansion. The bank's retail deposit share has improved to 54%, and its Liquidity Coverage Ratio (LCR) remains steady at around 120%, providing a strong balance sheet to capture credit demand once deposit repricing aligns with softer interest rate environments.

Margins are projected to improve by FY27. While near-term margins might be subdued due to anticipated rate cuts, gradual deposit repricing and Cash Reserve Ratio (CRR) cuts are expected to boost the Net Interest Margin (NIM) to approximately 3.8% by FY27, up from an estimated 3.3% in FY26. Net Interest Income is forecast to rise to ₹65,593 crore in FY27 from ₹56,964 crore in FY26.

Credit costs are anticipated to decline as the worst is considered behind the bank. UBS estimates credit costs to fall to around 80 basis points in FY27-FY28, down from an estimated 1.1% in FY26. This improvement will be supported by stronger recoveries and stabilising delinquency trends in unsecured retail loans across the industry.

Operating leverage is expected to return as costs ease. UBS forecasts a decline in the cost-to-income ratio from 45.9% in FY26 to 43.2% by FY28, contributing to a nearly 15% Compound Annual Growth Rate (CAGR) in pre-provision operating profit growth over FY26-FY28.

Return ratios are also expected to improve, with UBS forecasting Return on Assets (ROA) to reach 1.7% and Return on Equity (ROE) to near 15% by FY28, up from FY26 estimates of 1.5% ROA and 13.3% ROE.

UBS has raised its earnings estimates for Axis Bank for FY26-FY28 by 1-4%, projecting FY27 net profit of ₹32,206 crore and FY28 profit to reach ₹37,818 crore, driven by stronger fee income, slightly higher margins, and a more moderate credit cost trajectory.

Key risks highlighted by UBS include a slower-than-expected pick-up in loan growth, deterioration in retail asset quality, and sharper declines in lending rates that could further compress margins. However, UBS views these risks as manageable given the substantial re-rating opportunity.

Impact: This upgrade by a major international brokerage is highly positive for Axis Bank's stock, likely boosting investor confidence and potentially driving the share price higher towards the new price target. It signals strong conviction from analysts about the bank's recovery prospects.
Rating: 8/10

Difficult Terms:

Liability Pressure: The cost or difficulty a bank faces in attracting and retaining deposits or other sources of funding. Easing liability pressure means it's becoming cheaper or easier for the bank to get funds.
Asset Quality: Refers to the quality of a bank's loans and other assets. Stabilising asset quality means the risk of loans turning into non-performing assets (NPAs) is decreasing.
Sector Liquidity: The availability of funds or credit within the banking sector. Supportive liquidity means there is ample money available for banks to lend.
Risk-Reward: The potential return on an investment relative to the risk taken. A favourable risk-reward means the potential gains are attractive compared to the potential losses.
Valuation Discount: When a stock trades at a lower price relative to its intrinsic value or its peers, often due to perceived risks or past underperformance.
Standard Deviations: A statistical measure of the amount of variation or dispersion of a set of values. Trading at two standard deviations below its five-year average implies the stock is historically cheap.
Re-rating: The process where the market perception of a stock improves, leading to its valuation multiple expanding and the stock price increasing.
Loan Growth: The increase in the total amount of loans a bank has issued over a period.
Retail Credit Card and Personal Loan Stress: Refers to the increasing likelihood of defaults or delays in payments from individuals on their credit card bills and personal loans.
SME Overdue Indicators: Metrics that track the percentage of Small and Medium-sized Enterprises (SMEs) that are late in repaying their loans or other obligations.
Private Banks: Banks that are not owned by the government.
Balance Sheet: A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.
Credit Demand: The desire of individuals and businesses to borrow money.
Deposit Repricing: The process of adjusting the interest rates offered on bank deposits in response to changes in market interest rates.
Rate Environment: The prevailing level of interest rates in the economy.
Net Interest Margin (NIM): A key profitability metric for banks, representing the difference between the interest income generated by the bank and the interest it pays out to fund its investments, expressed as a percentage of its interest-earning assets.
Cash Reserve Ratio (CRR): The fraction of a bank's total deposits that it must hold in reserve with the central bank. A CRR cut frees up liquidity for banks.
Net Interest Income (NII): The difference between interest earned on assets and interest paid on liabilities.
Slippages: The amount of loans that were classified as standard assets but later became non-performing assets (NPAs) during a reporting period.
Credit Costs: The expenses a bank incurs due to loan losses, including provisions for bad debts and write-offs.
Unsecured Retail Loans: Loans given to individuals that are not backed by any collateral.
Delinquency Trends: The pattern of borrowers failing to make timely payments on their loans.
Operating Leverage: A measure of how sensitive a company's operating income is to changes in revenue. Positive operating leverage means revenues grow faster than operating costs.
Operating Expenditure (OpEx): The costs incurred by a business in its normal day-to-day operations.
Cost-to-Income Ratio: A measure of a bank's efficiency, calculated by dividing operating expenses by operating income. A lower ratio indicates better efficiency.
Pre-Provision Operating Profit (PPOP): Profit generated from a bank's core operations before accounting for provisions for bad loans and taxes.
Compound Annual Growth Rate (CAGR): The mean annual growth rate of an investment over a specified period longer than one year.
Return on Assets (ROA): A profitability ratio that measures how efficiently a company uses its assets to generate profits.
Return on Equity (ROE): A profitability ratio that measures how effectively a company uses shareholder investments to generate profits.
Fee Income: Revenue earned by a bank from services other than interest, such as account fees, ATM fees, and advisory services.
Credit Cost Trajectory: The projected path or trend of a bank's expenses related to loan losses and provisions over time.