Axis Bank’s Q3FY26 performance marks a return to earnings normalcy, free of one-off distortions, even as margin pressures persist in a shifting rate environment. The private lender delivered steady profit growth, led by strong corporate and SME loan traction, resilient deposit momentum, and continued asset quality improvement. While retail growth remains subdued, management’s through-cycle guidance on margins remains intact, supported by balance-sheet optimization and repricing tailwinds ahead. With credit costs stabilizing and profitability metrics improving, ICICI Direct Research maintains a BUY rating, valuing Axis Bank at Rs 1,520, implying 17% upside over the next 12 months

Axis Bank’s Strategic Positioning: Scale With Selectivity

Axis Bank remains India’s third-largest private sector lender, commanding a balance sheet of approximately Rs 17.5 lakh crore. The bank’s long-term strategy continues to prioritize risk-adjusted growth, with a calibrated tilt toward retail, SME, and mid-corporate lending. Currently, retail and SME loans together constitute nearly 69% of the total loan book, reinforcing management’s emphasis on diversification and granular credit exposure.

The strategy has paid dividends in recent years, translating into visible improvement in return on assets (RoA) and return on equity (RoE), even amid macro volatility.

Q3FY26 Financial Performance: Growth With Margin Headwinds

Axis Bank reported healthy business momentum in Q3FY26, though profitability reflected continued margin compression from rate transmission. Advances rose 14% year-on-year and 4% quarter-on-quarter, driven primarily by robust traction in SME and mid-corporate segments. Retail growth remained modest in single digits, reflecting softer demand in housing, auto, and rural portfolios.

Deposits expanded 15% YoY and 5% QoQ, supported by steady CASA inflows. The CASA ratio held firm at 39%, underscoring deposit franchise resilience. Net interest margin declined 9 basis points QoQ to 3.64%, largely due to the lagged impact of rate cuts and asset-mix shifts.

Profit after tax stood at Rs 6,490 crore, aided by lower provisioning and improving asset quality.

Corporate and SME Lending Power the Balance Sheet

Corporate-led credit expansion emerged as the defining theme of the quarter. Corporate advances surged 27% YoY, reflecting selective, relationship-based lending rather than broad-based risk taking. SME loans grew 22% YoY, with the combined SME and mid-corporate portfolio now accounting for nearly one-fourth of total loans.

Retail credit, by contrast, grew only 6% YoY, with unsecured personal loans and credit cards rising a muted 4.5% YoY. Management expects retail momentum to improve gradually as macro confidence strengthens and rate transmission stabilizes.

Over FY26–FY28E, ICICI Direct projects credit growth CAGR of ~13.5%.

Margins Under Pressure, But Through-Cycle Guidance Holds

Margin compression remains the near-term challenge. The decline in NIM was attributed to three structural factors: a higher share of lower-yielding wholesale loans, tighter loan-to-deposit ratios, and ongoing rate-cut transmission.

Despite this, management reaffirmed its through-cycle NIM guidance of ~3.8%, emphasizing that margin normalization will be driven by deposit repricing benefits, retail mix recovery, and balance-sheet efficiency levers. Importantly, the guidance is described as rate-cycle agnostic, reinforcing confidence in medium-term profitability.

Asset Quality: Credit Costs Ease, Stability Improves

Asset quality trends continued to improve sequentially. Gross NPAs declined to 1.40%, while net NPAs eased to 0.42%, reflecting disciplined underwriting and better recoveries. Net credit cost moderated to 76 basis points, while provisioning fell sharply quarter-on-quarter due to the absence of one-off charges seen earlier.

Management clarified that recent technical slippages were procedural and not indicative of underlying stress. Retail portfolios, including credit cards, showed year-on-year improvement across slippages and credit costs.

Operating Efficiency and Capital Strength Reinforce Outlook

Cost discipline emerged as a quiet positive. Staff costs declined 7% YoY, driven by lower headcount and reversal of excess accruals. Fee income rose 12% YoY, with granular fees accounting for over 90% of total fee income, improving earnings quality.

Axis Bank’s CET-1 ratio stood at 14.5%, including nine-month FY26 profits, providing adequate headroom for growth without near-term equity dilution. Management indicated that even potential inorganic opportunities would not necessitate fresh capital immediately.

Valuation, Target Price, and Investor Takeaway

ICICI Direct Research maintains a BUY rating on Axis Bank, revising the target price to Rs 1,520, based on a valuation of ~1.6x FY28E book value, with an additional Rs 120 attributed to subsidiaries.

The investment thesis rests on sustained corporate-led balance-sheet expansion, gradual retail recovery, stable asset quality, and easing credit costs. While margin volatility remains a near-term risk, earnings visibility has improved materially.

Key Risks to Monitor

Investors should remain mindful of two primary risks:

Competitive pressure on liabilities, potentially impacting deposit costs

Any unexpected uptick in credit costs due to macro or sector-specific stress