Axis Bank strengthens balance sheet, but funding quality weakens

Axis Bank is expected to sustain healthy earnings and balance sheet growth over the next two years, supported by improving corporate asset quality, a stronger deposit franchise and prudent provisioning, although pressure from weakening funding quality, rising commercial real estate exposure and emerging stress in parts of its retail portfolio could remain key monitorables.

Axis Bank's balance sheet quality has strengthened as the lender continued to improve corporate underwriting standards while reducing concentration risks, according to a JM Financial report. The share of A+ rated corporate sanctions increased to 91% in FY26, while exposure to its top 20 borrowers declined further. The bank also sharply reduced its non-SLR investment portfolio and maintained stable exposure to unsecured lending and capital market-linked loans, it said.

The brokerage expects these measures to support asset quality and capital efficiency going forward, particularly as the bank continues to expand its corporate and SME lending franchise without materially increasing overall portfolio risk.

However, it flagged rising exposure to commercial real estate and overseas advances as areas that warrant close monitoring, particularly if macroeconomic conditions weaken or sector-specific stress emerges.

On the liabilities side, JM Financial expects Axis Bank to continue benefiting from steady deposit mobilisation after gaining market share in term deposits and current accounts during FY26. The brokerage believes the bank's improving deposit franchise should support future loan growth, although it cautioned that the quality of funding has weakened as reliance on wholesale deposits remains elevated and the proportion of stable deposits has declined.

Liquidity buffers also moderated during FY26, with both the Liquidity Coverage Ratio and Net Stable Funding Ratio easing, although depositor concentration improved as dependence on large depositors reduced.

Asset quality mixed

Asset quality trends are likely to remain mixed in the near term, according to the brokerage. While gross non-performing assets improved across corporate and services portfolios, stress increased in agriculture and retail lending, particularly in vehicle finance and, to a lesser extent, housing loans.

JM Financial also highlighted the rising share of sub-standard and D1 assets within the bank's NPA pool, suggesting that a younger pool of stressed assets could translate into higher ageing-related provisioning requirements over the coming quarters.

The brokerage expects profitability to remain supported by core banking operations but noted that non-interest income could continue to face headwinds following weak treasury gains and moderating fee income growth. Higher purchases of Priority Sector Lending Certificates (PSLCs) also weighed on pre-provision operating profit during FY26, although they helped reduce the bank's exposure to Rural Infrastructure Development Fund (RIDF) investments.

Despite these near-term challenges, JM Financial believes Axis Bank remains well positioned to deliver consistent earnings growth, backed by improving asset quality, a stronger deposit franchise, disciplined underwriting and continued momentum in SME and wholesale banking.

The brokerage retained its 'Buy' rating on the lender with a target price of Rs 1,575, estimating the bank to deliver an average return on assets (RoA) of 1.6% and return on equity (RoE) of 14% over FY27 and FY28.