WIP. Amitabh Chaudhry Still Has A Lot To Do At Axis Bank

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When Amitabh Chaudhry joined Axis Bank Ltd. a little more than three years ago, he was most commonly asked about asset quality.

The lender had seen a sharp spike in bad loans and the Reserve Bank of India had questioned a fourth three-year term for then chief executive Shikha Sharma. As Sharma exited and Chaudhry took over, cleaning up the stress on the book was top of the agenda.

Three years later, things are different.

In the last few analyst calls that Chaudhry hosted, he says the asset quality questions have come towards the end. That's not to say that Chaudhry doesn't have other questions to answer. Analysts are perturbed that Axis Bank has not managed to close the gap with larger peers — not just in terms of size but margins and costs.

This has reflected in the bank's stock price performance, which has fallen behind peers ICICI Bank Ltd. and HDFC Bank Ltd. The Axis Bank stock has risen 9.66% since Dec. 31, 2018, right before Chaudhry took over in January. During the same time, the ICICI Bank stock rose 108.37% and HDFC Bank rose 43.2%.

According to data available on Bloomberg, 45 analysts have a "buy" rating on Axis Bank, while eight recommend to "hold". In the case of ICICI Bank, all 52 analysts polled have a "buy recommendation. For HDFC Bank, 45 analysts have a "buy" rating, four recommend "hold" and one analyst has put a "sell" rating.

"The collective wisdom of analysts and investors are often driven by several technical and fundamental factors that may differ in time horizon from an organisation's perspective," Chaudhry said in an interview with BloombergQuint.

The investments the bank is making today will show up in valuations in the long term, but in the short to medium term there will be a disconnect in valuations, he said.

I think that the expectation on Axis built up based on performance of some of the others. So there was a run up before the results. I guess in their minds the NIM (net interest margin) and growth in some parts of the book were a disappointment.
Amitabh Chaudhry, MD & CEO, Axis Bank

What Is Ailing Margins?

One persistent concern around Axis Bank is its margins.

Axis Bank has seen its net interest margins remain between 3-3.5% for some time, much behind its larger peers where margins are in the range of 4-4.5%.

Suresh Ganapathy of Macquarie Research says that Axis Bank's net interest margins have trended in the current range since June 2017. This points to more structural problems within the bank's balance sheet.

"Management articulated that loan growth being weaker is hurting margins as excess liquidity is being carried. While indeed that could be the case for this quarter, we are unable to explain a four-year trend of margins being low," Ganapathy had said in a Oct. 26 report.

Chaudhry doesn't disagree.

There are three major structural factors affecting Axis Bank's margins, which the bank is trying to address, Chaudhry said.

  • Loan book mix

  • Cost of deposits

  • Higher reliance on rural infrastructure development fund bonds

Loan Book Mix

To improve the mix of its loan book, Axis Bank is pushing growth in segments such as retail and small business lending, where it can earn a higher yield.

"We have been holding back on some of the large corporates because we are not earning much interest there. It is not that we are not doing business but we are not going gangbusters there," Chaudhry said.

Currently, retail loans constitute about 56% of the bank's loan book. Small and medium enterprises account for about 10% and the rest comes from the corporate book.

Cost Of Deposits

To improve the quality of its liabilities profile, the bank is working on a "premierisation" strategy, Chaudhry said. This includes tapping a premium customer base through its offerings under wealth management platform Burgundy.

"As we deepen our liability relationships and acquire quality customers as part of our premierisation strategy, it will improve the share of our lower cost deposits," Chaudhry said.

As of Sept. 30, the bank's cost of deposits stood at 3.69%, down 68 basis points year-on-year.

Reliance On RIDF

The RIDF bonds are a way for banks to meet the Reserve Bank of India's minimum priority sector lending norms, without actually having to lend. Banks are required to direct at least 40% of their total credit to priority sector borrowers. If they are not able to meet this target, banks subscribe to RIDF bonds which are issued by the National Bank For Agriculture and Rural Development.

RIDF bonds constitute about 4% of Axis Bank's Rs 10.5 lakh crore balance sheet, Chaudhry said. These continue to be a drag on the bank's margins since the interest they earn is 200 basis points lower than what the market may give.

"Last year is the first time in a long time that Axis Bank met all the PSL targets. If that continues, the share of RIDF bonds will come down and that should also improve our NIMs," Chaudhry said.

However, each of these problems will be solved over time, which the bank is aiming to do.

According to Chaudhry, it will be a couple of years before the margins for Axis Bank are comparable to its larger peers.

The Cost Problem

Costs are a problem for Axis Bank too.

The bank's cost to income ratio stood at 49% for the July-September quarter, while peers reported a cost to income ratio of under 40%.

"Historically, Axis Bank has seen higher cost ratios than its peers. This is primarily because of their technology spends," said Asutosh Mishra of Ashika Stock Broking. Moreover, the bank has been conservative in bad loan recognition, which have pushed up overall costs, he said.

According to Chaudhry, the cost ratios have also been trending higher as the bank has been dealing with asset quality issues of the past. This pushes up credit cost, which shows up in the overall cost matrix for the bank, Chaudhry said. However, the situation is improving.

At the end of the March 2018 quarter, the bank's gross non-performing asset ratio was at 6.77%. This has now dropped to 3.53%. However, the bank continues to hold large provisions against potential bad loans.

"At the end of financial year 2018, our cost-to-assets was at 2.17%, which we have brought down to 1.96%. So we have shown to the market that we can do that," Chaudhry said. The bank's cost-to-assets ratio stood at 1.96% as of March 2021, but rose to 2.12% by Sept. 30.

The bank has also seen some short-term cost escalation because it has been investing in upgrading its digital infrastructure, new business initiatives and hiring fresh staff, which will benefit the bank in the long run, he said.

According to Mishra of Ashika Broking, as the asset growth returns over the next few quarters, the cost ratios should rationalise for Axis Bank.

"We are investing heavily ahead of the curve. As we see the light at the end of the tunnel, we are telling the market that these cost ratios will be back at normalcy by next year," Chaudhry said.

For Axis Bank, another issue cropping up over the last few years is the rate of attrition among employees, which also adds to the overall cost.

Axis Bank is seeing attrition because of its transformation strategy, the CEO said. The bank expects its people to perform at a different level and the bank is monitoring their performance more closely. In certain cases where the performance is not meeting basic standards, the bank is being tough with the employees, Chaudhry said.

When you go through a transformation of this nature, which has been going on for the last three years, you will see churn. Some underperformers will be asked to go, some will leave on their own, some others may not even like the kind of new process brought about.
Amitabh Chaudhry, MD & CEO, Axis Bank

Where Will Business Growth Come From?

Beyond the things that need to be fixed, Chaudhry, like his peers, now needs to start thinking about where the next leg of growth will come from.

Axis Bank continues to focus on retail, small business, mid-corporate and multinational companies to drive credit growth for the bank, Chaudhry said.

Axis Bank is also preparing for a push in its rural bank foray through its Bharat Banking initiative. While microfinance is a key part of this strategy, the bank is yet to decide if it wants to grow this business through an acquisition of an existing microfinance company, he said.

Where we want to grow, where the risk-adjusted return on capital is good, our growth is as good or even better than peers.
Amitabh Chaudhry, MD & CEO, Axis Bank

Axis Bank's loan book rose 10% year-on-year, with growth pulled down due to prepayments in its corporate portfolio. Larger peers like HDFC Bank and ICICI Bank are also growing in areas such as large corporates, where Axis Bank is not currently pushing for expansion.

According to Chaudhry, this is deliberate because pricing in these segments is not appropriate. Gradually, as private sector investment comes back over the next nine to 12 months, there will be enough large corporate customers to lend to, he added.

Closing The Gap With #1 And #2

Axis Bank has for long remained a distant third in the private banking pecking order.

Since Chaudhry's term started in the January-March quarter of 2019 till Sept. 30, Axis Bank's total assets have risen by about 31% to Rs 10.5 lakh crore. In the same period, ICICI Bank saw its total assets rise by 66.3% to over Rs 16 lakh crore, while HDFC Bank saw its total assets rise 40% to Rs 17.5 lakh crore.

This has only widened the gap. Can Chaudhry bridge it?

"We are ahead of the curve when providing for things, before others have done. We are investing for the future," Chaudhry, who will head the bank till at least 2024, said. Every metric you look at, you will see a steady calibrated growth, he said.

The idea is to execute better than what we have done in the past. We know what we need to do, we know the outcomes if we execute well. Now, the focus will be on better and better execution.
Amitabh Chaudhry, MD & CEO, Axis Bank

Watch the full conversation below:

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