© IE Online Media Services Pvt Ltd
Tags:
Journalism of Courage
The Indian banking space is dominated by two giants — SBI and HDFC Bank. Their strength lies in their asset quality and market outreach. In the last five years, two other banks — ICICI and Axis — have also been on a clean-up drive to improve their asset quality. This has led to an increase in their stock prices by 245% and 137%, respectively, outperforming the Nifty Bank Index which grew 135% during the same period.
In banking, the primary aspect to look for is book value. It stems from the quality of a bank’s assets — its loan portfolio — which comprises performing assets (borrowers paying on time) and non-performing assets (NPAs) (defaults). Current and Savings Accounts (CASA) are the cheapest source of funds, followed by term deposits. The Reserve Bank of India (RBI) closely monitors both sides to safeguard depositors’ money.
The 2015 NPA crisis
The banking sector’s structural weakness was exposed during the 2015-22 NPA crisis. This was the time when the IL&FS crisis and several scams unfolded as the RBI conducted the Asset Quality Review (AQR). Public sector banks and Yes Bank were the hardest hit, but private banks like ICICI and Axis were also affected.
During 2015-20, Axis and ICICI saw their average gross NPAs (GNPA) spike to 4.71% and 7.58%, respectively. The RBI found a divergence of Rs 9,480 crore in the NPA figures reported by Axis Bank and its own calculations, pushing Axis Bank’s GNPA from 1.71% in FY16 to 6.79% in FY18. Most NPAs came from corporate accounts, especially in infrastructure, power, and mining sectors.
Both banks made changes to the management in FY19 and underwent complete restructuring to reduce their NPAs and revive profits. That’s where the valuation turnaround of Axis Bank began.
Today, Axis Bank has a GNPA of 1.46%, close to HDFC’s 1.24% in Q2 FY26. ICICI Bank, meanwhile, has a GNPA of 3.57% and is still trading at a higher price-to-earnings (P/E) ratio (19.4x) than Axis (14.3x) as it is growing at a faster rate.
Axis Bank’s P/E ratio is the lowest among the above five private banks. Behind this low valuation is the credit-to-deposit ratio (C/D ratio) and the net interest margin (NIM). A healthy C/D ratio is below 90% as it gives the bank some buffer to manage liquidity and give more loans.
Axis Bank’s 92.79% C/D ratio has been a cause of concern for analysts. When HDFC Ltd merged with HDFC Bank, it had a C/D ratio of 110%. The bank slowed its loan growth in 2025 to reduce this ratio to 96% in Q2 FY26 and aims to reduce it to 87-90% in the medium term. Hence, HDFC Bank’s share price growth (62%) in the last five years underperformed peers.
Is it a good thing? While fast growth is a good sign, extreme growth without stringent credit risk management could be a warning sign. HDFC is balancing its credit risk and growth to bring them to a comfortable level where it can thrive.
It was the aggressive lending post-2008 that led to the NPA crisis. Conservative lending means the bank is sitting on idle deposits that are not earning enough interest. Aggressive lending means the bank is taking too much risk without having a sufficient buffer for defaults.
The banks that grew their lending at an accelerated pace collapsed after the RBI’s 2015 AQR found discrepancies in the reporting of NPAs. Since then, C/D ratios have been among a key metric that impacts a bank’s stock price. ICICI Bank maintains a 86.3% C/D ratio, which shows it is not too conservative nor too aggressive with lending.
Another concern for Axis Bank is its narrowing NIM. Both Axis and ICICI began restructuring in 2019. However, ICICI Bank outpaced Axis through technology adoption in investment and retail liabilities. Axis Bank’s heavy reliance on government deposits and a lower share of corporate salary deposits, combined with higher provisions, increased its cost of funds.
The RBI interest rate cuts helped Axis Bank reduce its cost of funds in the first two quarters of FY26. However, interest earned is also falling as 70% of its loan book is on floating interest rates, thereby reducing its NIM. If RBI pauses rate cuts, Axis Bank’s margins may bottom out in the next quarter, said chief financial officer Puneet Sharma in an analyst call post earnings.
However, Axis Bank is now focusing on increasing its CASA ratio to reduce the cost of deposits. It has been growing its retail and small and medium enterprise (SME) loans, which now account for 69% of the loan book in the first half of 2026. This is a positive sign given that the bank’s NPA peak was caused by loans to corporates for infrastructure projects. The bank is also reducing the share of its non-INR loans and low-yield bonds.
A well-diversified loan book reduces the credit risk from the fallout of a corporate or a particular sector.
Axis Bank’s provisions jumped from Rs 2,039 crore in Q1 FY25 to Rs 3,948 crore in Q1 FY26. In Q2 FY26, it reported a one-time standard asset provision of Rs 1,231 crore as the RBI discontinued two crop loan variants. Its cumulative provisions stood at Rs 13,262 crore at the end of the September quarter, which is 70% of GNPA.
Axis Bank’s one-time standard asset provision reduced its RoA by 23 basis points.
Many analysts have been bearish on Axis after the Q1 results. However, Motilal Oswal maintained a “neutral” rating, stating that the provisions are a part of Axis Bank’s exercise to clean up bad loans, which Q2 should complete. Even Morgan Stanley believes that the worst will be over by December 2025. This cleaning-up exercise could reduce Axis Bank’s NIM and RoA in the short term before recovery.
Until now, Axis Bank’s focus has been to preserve the value by getting rid of bad loans. The next chapter will focus on growth from scaling digital technology adoption. However, macroeconomic conditions will play a crucial role in the success of the growth strategy. Its non-banking financial service, Axis Finances, is growing rapidly. The bank has postponed its plan to launch an IPO for Axis Finance until there is regulatory clarity.
Axis Bank is eyeing acquisition financing, which has been dominated by foreign banks, non-banks, private credit funds, and the bond market. It is waiting for RBI guidelines that will open the Rs 3.5 lakh crore acquisition financing market to banks. Axis Bank’s MD and CEO, Amitabh Chaudhry, is confident that the bank can compete with foreign banks in this space. Any update around this could drive the stock up.
Another factor that could drive up Axis’s stock price is an improvement in RoA, which currently stands at 1.78%, compared to ICICI Bank’s 2.18%.
Axis Bank’s stock is nearing its 52-week high of Rs 1,276 after Q2 FY26 earnings did not report any further deterioration in asset quality or NPA provisioning. Is the worst over? It is difficult to say. However, brokerages have turned bullish on the bank as they see a recovery on the cards and attractive valuation.
Axis Bank’s 15x PE ratio and its 1.97x price-to-book (P/B) value are below its 10-year median of 16.8x and 2.2x, respectively. Its P/B ratio is also below that of its peers, ICICI Bank (3.09x) and HDFC Bank (2.87x). With credit cost falling and NIM improving, Axis Bank may be at an inflection point. It would be interesting to see how the bank unlocks value for investors with a focus on growth.
Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.
