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Strong margin/loan growth delivery

* Positives in 2Q were strong loan growth & a much better-than-expected margin delivery. Negatives were a one-time standard asset provision and PSLC costs.

* Key beneficiary of improving system volume growth & moderating credit costs which will aid its profitability further. Cheap at 1.3x Sep 2027F BV for 15% RoE.

* We increase our target price to Rs1,500 (28% upside) as we roll forward our valuation by six months and cut risk-free rate, partly offset by a cut in estimates.

PAT miss on RBI-led costs on crop loans; adjusted PBT beat by 7%

Axis Bank’s 2QFY26 PAT at Rs51bn (1.2% annualized RoA) missed our estimate owing to a one-time standard asset provisioning (8bp of avg. assets pre-tax) and related PSLC costs (6bp). Adjusted for these, PBT beat our estimate by 7%, mainly led by core PPoP (8% YoY; 6% above our estimate) while credit costs were higher than expected, although benign at 85bp vs. an estimated 73bp. Core PPoP beat was driven by NII (2% YoY; 4% above our estimate) & lower opex (flat YoY; 2% below our estimate) while core fee growth was subdued (10% YoY; 5% QoQ). Margin delivery surprised positively (at 3.73% vs. an estimate of 3.65%) led by a higher-than-expected fall in funding costs (down 24bp QoQ).

Loan growth surprises positively; expect retail growth to pick up

Loan growth was strong at 5% QoQ (12% YoY), mainly driven by SME (9% QoQ, 19% YoY) and corporate segments (11% QoQ, 20% YoY). Retail loan growth was relatively subdued at 2% QoQ (6% YoY) while within retail, growth was strong in credit cards (8% QoQ) owing to e-commerce sales around the festive season. Management sounded confident of retail growth recovering, as it sees a pick-up in disbursements across products. Over the medium term, the bank gave guidance of posting loan growth of ~300bp, higher than system growth. Average deposit growth was 10% YoY (3% QoQ). Retail deposits (per LCR) grew by 8% YoY (3% QoQ). Deposit growth (on period-end basis) was 11% YoY (4% QoQ) and LDR stood at 93%. Management stated that it remains comfortable to operate in the LDR range of 90-94%, while the focus remains on garnering quality deposits.

Reiterate ADD rating; valuation remains attractive versus peers

We believe Axis Bank remains a key beneficiary of improving system volume growth and more so, moderation in credit costs over the medium term will aid its profitability. The valuation is cheap (at 1.3x Sep 2027F BV for ~14-15% RoE in FY27F-28F) and could outperform large peers over the medium term. Axis Bank’s steep discount to ICICI Bank’s core P/BV valuation is likely to narrow as system growth improves. Based on 2QFY26 results, we revisit our estimates and cut EPS/BV by 5-6%/1-2%, respectively, for FY26FFY28 to factor in higher opex and credit costs. We increase our target price to Rs1,500 (Rs1,430 earlier) as we roll forward the valuation by six months to Sep 2027F and reduce the cost of equity (risk-free rate now at 6.5%). We have assigned a sum-of-the-parts (SOTP) value of Rs120/share for subsidiaries. Downside risks: Lower-than-expected volume growth & further deterioration in asset quality.

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