Axis Bank sees NIM recovery as loan growth and asset quality strengthen

Investment View and Outlook

In its October 18, 2026 results update on Axis Bank, ICICI Securities maintained its BUY recommendation following Q2 FY27 performance. The broker views the bank's improving liability and asset mix, alongside potential benefits from the rate cycle, as drivers of a recovering net interest margin trajectory.

ICICI Securities raised its FY27E loan-growth estimate to around 20 per cent, while retaining its FY28E estimate at around 15 per cent because it awaits clearer evidence of a pickup in retail loan growth. The broker expects broadly unchanged return on assets of around 1.5 per cent and return on equity of around 14 per cent in FY27E and FY28E. A rise in stress remains a key risk.

Q2 FY27 Financial Performance

Axis Bank reported Q2 FY27 profit after tax of Rs 7,003 crore, around 5 per cent below ICICI Securities' estimate, with return on assets of 1.4 per cent. Net interest income increased 5 per cent quarter-on-quarter, a 1 per cent beat to the broker's estimate.

However, the result was affected by an 11 per cent quarter-on-quarter increase in operating expenditure and lower-than-expected fee income. Core fee income growth was modest at 6 per cent year-on-year and treasury gains were muted. Operating expenditure included a one-off Rs 250 crore impact from labour-code changes and FCNR-related expenses. Adjusted operating expenditure increased 6 per cent quarter-on-quarter.

Loan Growth, Deposits and Liability Mix

Loan growth was strong at 9 per cent quarter-on-quarter and 23 per cent year-on-year. FCNR loans contributed 3.5 percentage points of quarterly growth, while SME and wholesale loans each grew 8 to 9 per cent quarter-on-quarter.

The bank sanctioned Rs 12,000 crore under ECLGS, equivalent to Rs 10,700 crore of loans, of which around 80 per cent had been disbursed. Core retail growth excluding FCNR remained soft at 3 per cent quarter-on-quarter despite retail disbursements growing 22 per cent year-on-year.

Deposits rose 6 per cent quarter-on-quarter and 21 per cent year-on-year, led by FCNR mobilisation of around Rs 1 lakh crore. The CASA ratio declined by 1 percentage point quarter-on-quarter to 36 per cent, while term deposits increased 5 per cent quarter-on-quarter.

Net Interest Margin Outlook

Reported net interest margin declined 10 bps quarter-on-quarter to 3.36 per cent because FCNR was margin dilutive. Net interest margin excluding FCNR was stable at 3.47 per cent. Cost of deposits rose 5 bps quarter-on-quarter to 4.80 per cent, partly reflecting the lower CASA share.

ICICI Securities expects net interest margin to improve by 5 bps in FY27E and 15 bps in FY28E, supported by the projected mix improvement and rate-cycle tailwinds. The broker does not see material levers for fee income or operating expenditure in FY28E.

Asset Quality

Asset-quality trends improved. Gross slippages declined to 1.4 per cent of loans from 1.8 per cent in Q1 FY27 and 2.0 per cent in Q2 FY26, with retail slippages falling to a multi-quarter low of 2.3 per cent.

Net slippages improved to 0.7 per cent, while credit cost eased to 0.7 per cent from 0.9 per cent quarter-on-quarter. Net credit cost declined to 0.45 per cent from 0.60 per cent. Net non-performing assets moderated to 35 bps and provision coverage remained stable at 70 per cent. Management indicated improving trends across retail products.

Earnings Estimates and Valuation

ICICI Securities forecasts the following earnings for Axis Bank:

FY27E earnings estimates were unchanged, while FY28E earnings estimates increased by 1 per cent.

The Rs 1,620 target price is based on 1.7 times FY28E adjusted book value for the core bank, valued at Rs 1,472 per share, plus Rs 148 per share for subsidiaries after a 20 per cent holding-company discount. The subsidiary valuation includes Axis Finance, Axis AMC, Axis Securities, Axis Capital and Max Life.