Axis Bank: 2 big concerns for lender as slippages, credit cost rise in Q1; target prices

Axis Bank shares are likely to come under pressure on Friday morning after the lender tweaked its classification of loan norms, which affected the slippages and credit cost in the June quarter. The private lender undershot on Q1FY26 net interest margin (NIM) and reported a big miss on asset quality.  While it intends to complete this exercise by September quarter, analysts warned it will keep near-term slippages and credit cost elevated. This triggered cuts to Axis Bank's FY26 and FY27 EPS estimates.

Axis Bank GDRs fell 4.88 per cent in overnight trading, and a similar move on Dalal Street is likely. 

"The residual loan re-pricing will also continue to put pressure on margins, though the bank has maintained its through-cycle margin guidance of 3.8 per cent. We cut our earnings estimates for FY26/27 by 8.6 per cent/5.7 per cent, factoring in higher credit cost and margin pressure. We estimate FY27E RoA/RoE of 1.6 per cent/14.6 per cent. Retain Neutral with a target of Rs 1,250," MOFSL said.

Banking analysts cited mainly two concerns for the bank. The first is high C/D ratio of 91.2 per cent can constrain growth unless deposit growth picks up significantly. The second is 70 per cent of Axis Bank's loan book is on floating  interest rates, which will put pressure on margins in a declining interest rate scenario. 

Nuvama said Axis Bank has been the slowest in passing rate cuts among peers. Loan growth in Q1FY26 was driven by corporate/SME while the retail growth was flat.

"We are downgrading Axis Bank to ‘Hold’ on repeated volatility in asset quality and growth. We are cutting FY26E/27E EPS by 5 per cent/6 per cent on an already below-consensus base, and slashing target to Rs 1,180/1.7x BV FY26E (from Rs 1,400/2x). Axis has more catch-up to do on rate cuts than peers; the stock’s discount to peers shall widen given volatility," Nuvama said.

Dolat Capital said slippage at 2.1 per cent (ex of technical slippage) also remains slightly elevated especially as the management commentary hinted at improving delinquencies from unsecured loans. It factored in lower NIM and higher credit cost, partly offset by lower opex assumptions for FY26/27, with 5-6 per cent downward revision in estimates. The brokerage suggested a target price of Rs 1,250 on the stock.

Nirmal Bang derived a target price of Rs 1,287 for Axis Bank against Rs 1,284 earlier, valuing it at 1.6 times June 2027E adjusted book value. Its target multiple is at a 15.1 per cent discount to the past 5-year average multiple of 1.88 times ABV. 

"We expect the bank to have an average RoA of 1.6 per cent and RoE of 13.8 per cent over FY25-FY27E on the assumption of 10.3 per cent loan CAGR, 20 bps compression in margins, stable cost ratios, and some upward normalization in credit costs," it said.