At the end of the day, it was a choice made by a moderator, at his discretion. Typically, names that sound offensive but have alternate spellings/meanings, are still made to be offensive. Whether it was made to troll, harass, spam, or even just legitimately play the game, it was as judgement call that I don't think was wrong, but could've been done in a different way as well. I say typically, because it is the typical case. A user makes a bad name to get a reaction, and if that reaction isn't enough he will continue with trolling, flaming, spamming, etc.
Arctic is correct about context, but what can also be said is mutual context(understanding). Chances are if something is "obviously _____" to you, it's obvious as to why with others too. I'm in agreement with arctic about context, yet in a different manner as well. If you have to sit down and physically think about why something is bad, chances are it's fine. Same can be said looking at the opposite. If you need to think about how something not okay could be okay, chances are it's still probably not okay.
Popular example, especially on twitch.tv: Someone donates some money to a streamer, knowing they have text-to-speech enabled when someone donates. An example message could consist of, "Hey, I love your stream... Can you give a shoutout to my brother Nick Gurs. Thanks man, I appreciate it much.". You can see the similarities with "Nick Gurs" and the slur I don't even need to say, because this proves what I'm trying to say. Is what the person said a 100% slur? No. Is there a double-meaning behind? Almost always.
This isn't to defend the actions taken regarding if it was correct or incorrect to place the ban, rather to show you how things can be. Moderation can sometimes be a gray area. I don't like it, we try not to have it like that, but sometimes it's the way it is. Lastly, the moderation team also make mistakes, we want to learn from our mistakes and hear the feedback of the people. Getting feedback from other staff members and community members is the first step in minimizing mistakes.
Regardless of everything said, the user can absolutely show up and appeal his ban. After looking at what he might say, restoration of the account could be discussed.