Axis Bank Charts A Path To Conservative Growth Under New CEO

Amitabh Chaudhry, the new chief executive officer at Axis Bank Ltd., kicked off his tenure on a good note. The bank, while announcing its third quarter earnings, reported stronger-than-expected profits and steady asset quality. With quarters of a painful clean-up behind it, the lender will slowly move to chart a new path for itself under a new leader.

Chaudhry, in his first interaction with the media, seemed to make it clear that this path would be conservative, where, the search for scale would go along with better profitability.

During predecessor Shikha Sharma’s tenure, Axis Bank chose a path of aggressive growth by stepping up lending to corporates, particularly in the infrastructure sector. The growth did not pay off and the bank found itself dealing with a surge in bad loans and a divergence in bad loan reporting. That eventually cost Sharma her job, with the regulator refusing her another term. She handed over to Chaudhry in December.

While noting that the bank had grown 4 to 5 times on most major metrics in the last 10 years, Chaudhry acknowledged that the lender has faced headwinds in recent year. “The bank’s financial performance too has moderated and corporate loans have grown below our long term growth rates,” said Chaudhry. “An increase in our operational risks has not helped the cause either.”

But with much of the clean up now behind the bank, Chaudhry is setting his sights on the next leg of growth.

Reduce Credit Costs; Increase Return On Equity

Among the key priorities for Chaudhry will be to improve return on equity, which fell during the period of the bad loan clean-up.

In a medium term strategy document presented, the bank said it’s medium term goal is to move back to a return on equity of 18 percent compared with 7.3 percent in the first nine months of FY19. Between FY11 and FY15, the bank had a return of equity of 19.7 percent.

The path to achieving this comprises:

• Reducing credit costs to below long run average. Credit costs have surged due to rise in bad loans and provisions against these loans.
• Picking the best mix of business based on the risk-adjusted return on capital.
• Improving operational efficiency by reducing the cost-to-asset ratio to 2 percent.

Growth: Putting Liabilities First

A veteran of the HDFC group, Chaudhry appears to be taking a leaf out of the HDFC Bank playbook—focus first on growing the liability base by speeding up deposit growth and then look to use that deposit base to fund your loan book growth.

“Our focus over the next three years on the growth vector would be to improve deposit growth materially to fund our strong loan growth aspirations...,” said Chaudhry. At present, the bank has a 4 percent market share on deposits and a 4.7 percent share of loans. There is enough scope to growth this share, he said.

The bank currently has a deposit base of Rs 5.14 lakh crore. Current account and savings account deposits make up 46 percent of this deposit base. That, together with retail fixed deposits, comprise 80 percent of all deposits.

Should the bank be successful in pushing up deposit growth, loan growth will be easier to fund. This growth will come from both a pick-up in wholesale lending and retail lending. As the bank has reoriented its risk profile, the share of retail lending has risen to nearly half the loan book.

As far as asset quality is concerned, Chaudhry believes that the bank has already done enough. After taking over as the managing director & chief executive officer, he began a review of the corporate loan portfolio of the bank after which he said the bank appears to have rated all problematic assets as BB or below. To cover for these, the bank has also made a contingent provision of Rs 600 crore, which will help in avoiding any negative surprises, he said.

Sustainability: Strengthening The Compliance Culture

To strengthen the private bank’s chances at sustaining a strong growth run, Chaudhry is allocating funds to strengthen its risk management architecture, technology platforms and analytics.

But more importantly, Chaudhry is changing the organisational structure in the bank to make the management more lean and efficiency oriented.

As part of the new structure, eight business heads will report directly to the CEO. In the retail and wholesale businesses of the bank, the new structure will ensure a separation of underwriting and product management functions.

As far as its overall operations are concerned, Axis Bank will set up a centralised operations team, independent of business lines. A single bank-wide head for customer service and a dedicated resource for service quality and customer experience will also be appointed.