Axis Bank's ex-FCNR loan growth and improving asset quality underpin BUY thesis
Axis Bank Ltd.
BUY
₹1,290
₹1,214.05
₹1,600
24.03%
Investment View and Key Takeaways
Prabhudas Lilladher’s October 18, 2026 Q2 FY27 result update on Axis Bank retains a BUY recommendation and raises the target price to Rs 1,600 from Rs 1,550. The broker characterises the quarter as mixed: net interest income was in line with expectations and asset quality improved, but weaker fee income and higher operating expenses resulted in a core pre-provision operating profit miss.
Prabhudas Lilladher believes the bank’s core earnings quality remains weaker than peers because of a sharper net interest margin decline and one-off costs. Improving asset quality remains a key positive.
Q2 FY27 Financial Performance
| Metric | Q2 FY27 | Broker estimate | Observation |
|---|---|---|---|
| Net interest income | Rs 1,53,714 million | Rs 1,53,760 million | Up 11.8% year on year and broadly in line |
| Calculated NIM | 3.47% | 3.48% | Near expectations |
| Reported NIM | 3.36% | — | Down 10 basis points quarter on quarter |
| Other income | Rs 65,300 million | Rs 73,500 million | Missed estimate because of lower fees |
| Operating expenditure | Rs 1,08,200 million | — | 5.7% above expectations |
| Core PPoP | Rs 1,09,300 million | — | Around 6% below estimate |
| Provisions | Rs 16,900 million | Rs 22,700 million | Lower provisions partly offset operating pressures |
| Reported PAT | Rs 70,033 million | — | — |
| Core PAT | Rs 68,900 million | Rs 72,300 million | Below estimate |
Reported NIM declined because FCNR(B) caused an estimated temporary 11 basis point drag. Management expects this decline to reverse from Q3 FY27.
The cost overrun included a Rs 2,500 million one-time impact linked to the labour code and FCNR(B) mobilisation. Other operating expenditure was Rs 5,700 million, of which 60% related to volumes, 13% to technology investment and digital initiatives, and the balance to business-as-usual costs.
Building Wealth Through Established Businesses
Large-cap companies often form the foundation of a resilient portfolio. DSIJ's Large Rhino focuses on fundamentally strong businesses selected through detailed research for long-term investors.
Loan and Deposit Growth
Loan and deposit growth of 23.0% and 20.7% year on year, respectively, met Prabhudas Lilladher’s expectations. Credit growth was broad-based, led by corporate growth of 8.0% quarter on quarter, SME growth of 8.6% and retail growth of 9.5%. Excluding FCNR(B), loan growth was 5.3% quarter on quarter.
Retail book growth improved to 3% on strong disbursals, and Axis Bank is targeting a retail mix above 55%. FCNR(B) deposits of Rs 1,10,000 million, including a leveraged portion of Rs 43,800 million, remain partly undeployed and provide loan-growth runway. However, the loan-to-deposit ratio increased to 94.6% from 91.9% in Q1 FY27 and could constrain growth.
Asset Quality Improvement
Asset quality was the principal positive in the quarter. Gross NPA improved to 1.16% against the broker’s 1.25% estimate, supported by lower net slippages.
- Gross slippages were Rs 46,800 million versus the estimate of Rs 59,800 million.
- Recoveries were Rs 26,600 million.
- The annualised slippage ratio reduced to 1.54% in Q2 FY27.
Estimate Changes
Prabhudas Lilladher reduced its forward estimates as follows:
| Estimate | FY28E reduction | FY29E reduction |
|---|---|---|
| Net interest income | 1.7% | 1.1% |
| Operating profit | 4.8% | 4.1% |
| EPS | 3.8% | 4.0% |
Valuation and Key Sensitivities
The Rs 1,600 target price is based on a sum-of-the-parts valuation. The standalone bank is valued at 1.6 times September 2028E core adjusted book value, reduced from 1.7 times. Value is also assigned to Axis Finance, Axis AMC, Max Life, Axis Securities and Axis Capital.
The target price was raised from Rs 1,550 as the valuation rolls forward to September 2028 core adjusted book value. Key thesis sensitivities are:
- Expected Q3 FY27 NIM recovery.
- Deployment of FCNR(B) funds.
- Loan growth despite the elevated loan-to-deposit ratio.
- Operating-cost normalisation.
- Sustained asset-quality improvement.
Disclaimer: This is a summary of a research report published by the broker/research house identified above. The views, recommendations, target prices and estimates are those of the respective broker and do not represent DSIJ investment advice. The summary may be AI-assisted, hence please refer to the original report for complete details, disclosures and risks.
