Axis Bank loan and deposit growth support RoE recovery as margins bottom

Investment View and Recommendation

In its July 19, 2026 result update, Anand Rathi Research maintained its BUY rating on Axis Bank. The broker views Axis Bank as its preferred large-cap banking pick, citing loan growth ahead of the industry, deposit market-share gains, improving cost efficiency, an anticipated recovery in margins and a valuation discount to ICICI Bank, HDFC Bank and Kotak Mahindra Bank.

Loan and Deposit Growth

Axis Bank's Q1 FY27 credit growth accelerated to 19.0 per cent year-on-year from 18.5 per cent in Q4 FY26. This outpaced the system and selected peers, supported by 31 per cent year-on-year growth in corporate loans and 25 per cent growth in SME loans. Retail-loan growth, however, remained in single digits for the sixth consecutive quarter.

Deposits grew 18.0 per cent year-on-year, the highest among the compared peers, while CASA deposits increased 11.2 per cent. The CASA ratio declined to 38 per cent because term deposits grew faster. Anand Rathi expects the FCNR(B) scheme to provide an additional boost to deposit mobilisation, strengthen liquidity, support loan growth and lower funding costs.

Q1 FY27 Financial Performance

Net interest margin declined 16 basis points quarter-on-quarter to 3.46 per cent, primarily due to 9 basis points from loan repricing, 4 basis points from the balance-sheet mix and 3 basis points from interest reversals. Management believes margins have largely bottomed. It expects lower funding costs, continued deposit repricing, an improving retail mix and FCNR(B) inflows to drive a gradual margin recovery.

Operating efficiency improved materially, with the operating-expense-to-assets ratio falling 26 basis points quarter-on-quarter to 2.04 per cent, or 20 basis points excluding one-offs.

Asset Quality and Provisioning

Asset quality held up despite a seasonally weak quarter. Gross and net slippages increased to 180 basis points and 112 basis points respectively from 161 basis points and 69 basis points in Q4 FY26, owing to seasonally higher agricultural slippages. However, they remained substantially below 315 basis points and 233 basis points respectively in Q1 FY26.

Axis Bank retained Rs 20 bn of precautionary provisions, taking additional provisioning buffers to Rs 156 bn, or about 1.2 per cent of loans. Management expects only a marginal impact from the upcoming expected credit loss transition.

Earnings Outlook and Valuation

Anand Rathi expects Axis Bank's loan growth to remain about 100 to 150 basis points above industry growth. Its FY27E and FY28E forecasts assume margin normalisation, operating leverage and moderating credit costs, with return on equity rising to about 15 per cent in FY28E from about 12.7 per cent in FY26.

The broker increased FY27E and FY28E PAT estimates by 2.1 per cent and 5.0 per cent respectively, to Rs 307 bn and Rs 383 bn. The Rs 1,622 target price is based on a sum-of-the-parts valuation, assigning 1.7 times FY28E core price-to-adjusted-book value to the bank and Rs 147 per share to subsidiaries.

Key Risks

• Slower credit growth.
• Higher slippages from the corporate book.