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Analyst Lifts Axis Bank Target Amid Mixed Results
Prabhudas Lilladher has raised its price target for Axis Bank to INR 1,600, up from INR 1,500, while maintaining a 'BUY' rating. This optimistic view comes despite a recent financial quarter showing mixed results. The bank improved fee income and asset quality metrics, but its Net Interest Income (NII) missed expectations and operational expenses rose. Axis Bank shares traded up about 0.5% around INR 1,150 in early trading following the update.
Loan Growth Targets Face Deposit Challenge
The analyst firm's increased optimism stems from revised loan growth forecasts. Projections for fiscal years 2027 and 2028 have been increased by one percentage point each, now expecting 13% loan expansion annually. This ambitious target comes after a quarter where NII grew only 1.2% quarter-on-quarter, significantly slower than the 6.4% loan growth, partly due to corporate loan timing. Axis Bank maintains a strong capital position with a CET-1 ratio around 15%, a Loan-to-Deposit Ratio (LDR) of 92%, and a Liquidity Coverage Ratio (LCR) of 117%. However, the report highlights that achieving the projected loan growth requires consistent increases in customer deposits. Indian banks generally face a need to match deposit growth with loan expansion to ensure sufficient liquidity.
Valuation Snapshot and Margin Outlook
Prabhudas Lilladher has lowered its Net Interest Margin (NIM) forecasts for FY27 and FY28 by an average of 0.10 percentage points. However, the firm expects this decrease to be offset by growth in loans, fees, and managed operating expenses. Core Profit After Tax (PAT) estimates were reduced by about 2% on average. The valuation multiple remains at 1.7 times Price-to-Book Value, with the new target price based on the FY28 core Book Value Per Share (ABV). Axis Bank's current trailing twelve-month P/E ratio is approximately 22x, comparable to ICICI Bank (23x) and HDFC Bank (25x), but higher than State Bank of India (18x). Most other analysts hold a neutral rating with average price targets near INR 1,550, indicating Prabhudas Lilladher is more optimistic. The bank set aside INR 20 billion in buffer provisions, along with a INR 21.9 billion tax benefit, signals a cautious outlook on credit risks.
Risks: Deposit Challenges and Funding Costs
Even with the higher target, significant risks remain. The forecast for 13% loan growth puts considerable pressure on the bank's ability to gather deposits. In a competitive banking market, securing low-cost deposits is difficult and could increase Axis Bank's funding expenses. If deposit growth slows, the bank might have to use more costly funding sources, which could squeeze profit margins more than predicted and hinder loan expansion. The INR 20 billion set aside for provisions, while a buffer, might also suggest anticipation of future credit quality issues or a decision to hold capital instead of investing it for higher returns. This comes as the banking sector faces potential liquidity constraints and a cautious regulatory approach from the Reserve Bank of India. The INR 1,600 target price may not fully account for the difficulty of raising deposits quickly in a challenging credit market.
Outlook: Deposit Focus and Analyst Views
Axis Bank's management has stated that increasing deposits is a key strategic goal. While Prabhudas Lilladher is optimistic, other analysts are more cautious, seeing the bank's short-term outlook and the wider economy differently. The bank's success will depend on its capability to manage the competitive funding environment and use its strong capital base to achieve steady, profitable loan growth through FY27 and FY28. The banking sector overall is projected for moderate growth, with regulators closely monitoring credit expansion and asset quality.