 "Axis Bank's growth improving; NIMs to bottom in Q4FY26/Q1: Motilal Oswal")
Axis Bank’s medium-term return profile remains healthy, with management reaffirming a return on asset (RoA) target of 1.6–1.8 per cent and return on equity (RoE) of 16–18 per cent, even as near-term margins and asset quality face some cyclical pressure, according to Motilal Oswal Financial Services. The brokerage has reiterated its ‘Neutral’ rating on the stock with a target price of ₹1,300 after its interaction with the top management team of Axis Bank.
Following are the key takeaways from the discussion:
Loan growth rebuilding; focus on granular portfolios
Axis Bank’s loan growth is in a “repair phase”, with advances up 12 per cent year-on-year (Y-o-Y) and 5 per cent quarter-on-quarter (Q-o-Q) in Q2FY26, led by a pick-up in wholesale banking and improving traction in granular segments. The small business banking (SBB), SME and mid-corporate book now stands at about ₹2.66 trillion, forming 24 per cent of total advances, up roughly 740 basis points in four years, reflecting a deliberate tilt toward higher risk-adjusted return portfolios.
Retail growth had softened after the correction in unsecured lending, with vehicle loans and mortgages staying weak in line with industry trends and margin discipline. However, disbursements have started improving, implying better asset growth ahead. The card portfolio has stabilised, and personal loans are picking up with a lagged balance-sheet impact. Management aims to outpace system loan growth by around 300 basis points (bps) over the medium term, as execution gains traction through FY27. ALSO READ | Q3FY26 bank earnings to improve, but NIM concerns loom: Elara Securities
Deposits and liabilities remain key execution variables
Motilal Oswal flags the liability franchise as the most critical execution lever in the current cycle. In Q2FY26, deposits grew 11 per cent Y-o-Y, while quarterly average balances rose 10 per cent, indicating steady but “sub-optimal” traction in a fiercely competitive environment. With the system struggling to attract low-cost current account savings accounts (CASA), incremental flows have shifted towards wholesale deposits, pressuring funding consistency and mix.
Even so, early repricing actions have helped: the cost of funds declined 24 basis points quarter-on-quarter and 30 basis points year-on-year, while CASA has held broadly stable at 38–40 per cent. Liquidity is comfortable, with an average liquidity coverage ratio (LCR) of 119 per cent, and the bank has shifted its attention from loan-to-deposit ratio optimisation to LCR management. Motilal Oswal expects ongoing liability initiatives to gradually narrow Axis’ funding gap against peers.
Margins to bottom out by Q4FY26 / Q1FY27
Net interest margins (NIMs) contracted 7 bps Q-o-Q to 3.73 per cent in Q2FY26, as the bank absorbed the impact of repo-linked repricing and a deliberate moderation in unsecured retail. Management now expects NIMs to bottom out in Q4FY26 or Q1FY27, as the full effect of the 25-bp repo cut flows through and higher LCR outflow rates add some incremental pressure. Over the medium term, Axis remains confident of restoring “cycle-agnostic” NIMs to around 3.8 per cent within 15–18 months from the last repo rate cut, helped by a better asset mix, residual deposit repricing and the benefit of CRR cuts.
Asset quality: Seasonal blips, not structural stress
Core asset quality remains healthy, with management confident of better outcomes over the next year. In Q2FY26, the gross slippage ratio fell to 2.11 per cent, down 102 bps Q-o-Q, while net credit cost moderated to 0.73 per cent, down 65 bps Q-o-Q. Some technical slippages are expected to recur in Q3FY26, largely due to seasonality in agricultural KCC/overdraft accounts, but the magnitude should be lower than the spike seen in Q1FY26.
Importantly, the core retail unsecured portfolio has stabilised, with credit card metrics improving, personal loans holding steady, and recoveries/upgrades trending positively. Axis’ gross non-performing asset/ net non-performing asset (GNPA/NNPA) stood at 1.46 per cent / 0.44 per cent, backed by 147 per cent aggregate coverage, leading Motilal Oswal to characterise the recent volatility as seasonal rather than structural.
Strong capital and buffers support growth plans
Axis Bank’s diversified balance sheet offers a cushion against earnings and asset-quality swings. As of Q2FY26, CET-1 stood at 14.43 per cent, up 69 bps since March 2024 on the back of healthy internal accruals. The bank also carries around ₹6,200 crore of excess provisions (standard and contingency), equivalent to a 44 bps capital buffer, while coverage on stressed assets (PCR) is strong at about 70 per cent.
Capital allocation remains disciplined, with retained earnings ploughed back into the balance sheet and a stated intent to maintain a 4 per cent capital buffer over regulatory minimums. Incremental capital deployment will primarily support Axis Finance, and the bank remains open to raising its stake in Max Life, subject to regulatory approvals. Subsidiaries remain cash-surplus, with no dividends upstreamed in the last 3–4 years, preserving capital flexibility and avoiding near-term RWA pressure.
Outlook and valuation
Motilal Oswal expects FY27 to be a more “tailwinded” year for RoA, after the headwinds of FY26 tied to margin compression and seasonal slippages. Q3FY26 is likely to see further margin pressure and technical slippages, especially from the agri book, which may weigh on near-term performance. However, as asset-quality stress normalises and NIMs start to recover in FY27, the brokerage expects earnings progression to improve. With loan growth seen accelerating to mid-teens, credit costs dropping, and NIMs moving back towards 3.8 per cent, Axis is, in Motilal’s view, well-positioned for a gradual improvement in RoA to 1.6–1.8 per cent on a sustainable basis.
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