Holding More Capital Than Necessary Even In Severe Stress, Says Axis Bank’s Chaudhry
Want to be seen as a conservative institution and will provide more rather than less against restructured loans: Amitabh Chaudhry
Axis Bank Ltd., which raised Rs 10,000 crore via a qualified institutional placement, will see its capital adequacy ratio jump to near the highest levels on record. This, according to Chief Executive Officer Amitabh Chaudhry, will leave the private lender well placed to deal with any stress that emerges due to the Covid-19 crisis, while keeping an eye on growth opportunities.
“Even before this capital-raise, capital was enough for any severe scenario because of Covid. This additional capital just adds more confidence and gives us more cushion to manage to any crisis,” Chaudhry told BloombergQuint in an interview. The bank’s capital adequacy ratio will rise to over 19% after the fundraising.
The true extent of stress is likely to emerge at the end of the third quarter, when two rounds of moratorium permitted by the Reserve Bank of India play out, said Chaudhry. After that, lenders will have to decide on the extent of restructuring they will undertake following the recent dispensations provided by the central bank. Stress could also emerge from outside the moratorium book, he cautioned. “There are people who are seeing bounces which are outside the moratorium of the stage. So the moratorium is not the only problem.”
Axis Bank will take a cautious approach and provision more rather than less as it evaluates restructuring, Chaudhry said.
If the right borrowers come along and asks for restructuring, we will of course step up and provide the restructuring. It’s a different issue whether we take the benefit which the RBI has given to us in terms of classifying a loan and what kind of provisioning we take. We want to be seen as a conservative institution and we would lean towards continuing to provide for customers on a higher provisioning basis rather than a lower provisioning basis.Amitabh Chaudhury, MD & CEO, Axis Bank
Watch the full interview here and read edited excerpts below:
Did the fundraising go as you would have hoped?
I think it went off very satisfactorily. We were last off the block as far as I know, and we were the first ones to conclude it among a slew of financial institutions which are raising money or have raised money in the last 20-30 days. Our issue was subscribed 3-4 times so, from that perspective, it went off very well. We’ve got a great list of investors; we have concluded the whole exercise yesterday. The money will hit the bank maybe today or tomorrow.
As you are aware we have got approval from our board and shareholders to raise Rs 15,000 crore, we have raised Rs 10,000 crore. It leaves some room for us to use in the future if the right opportunity arises.
As of now, as we have stated again and again in all our quarterly calls and interaction with the media and analysts, our models show that the capital even before this capital raise was enough for any severe scenario because of Covid. This additional capital just adds more confidence and gives us more cushion to manage to any crisis.
Frankly, it also gives us a platform to grow if the right opportunities come our way once the economy slowly and gradually comes out of this Covid crisis. So, from that perspective, satisfactory outcome.
Did you stagger the fundraise out from the perspective of pricing. All bank stocks, including yours, are well below peak. Was that a consideration in staggering out the fund raise?
Yes, from our perspective, we wanted to raise enough to ensure that from a confidence capital perspective the amount is large enough. At the same time as you rightly pointed out our share price is subdued. So we don’t want to give too much away because we have to think of the existing shareholders who have supported us through this journey. So it had to be the right amount.
If at the right time, at the right price, if the opportunity comes our way we might look at raising the rest; not that we will look at it but we might look at it. Frankly, as a management team the onus is on us to keep exploring these opportunities because the times are very uncertain, the times are very volatile and we have still not seen the end of this crisis.
We are all hoping that with the vaccines coming in, sometime next year hopefully the crisis will be behind us but that’s a hope at this stage. Once, it turns into reality, then we will need growth capital and hopefully we’ll have the capital even for that scenario.
What’s the capital adequacy post this? Also, RBI had asked banks to conduct stress tests. Do you hold enough capital based on those tests?
Our capital ratio will move to 19.1%. On CET-1 basis, it will be 15.13% and that is one of the highest Axis Bank has ever seen in its history. So, from that perspective we are extremely well capitalised.
As I said, our models showed that our capital even before this raise was sufficient for us to manage to any crisis; this just adds to that cushion. Yes, RBI has done its own models and it has encouraged us to do our scenarios, which we have done and we continue to refine it on a continuing basis and share with our board and our risk committee. We’ll continue to do that as we go through this crisis because it is important that we keep testing our models and keep looking at what the downside scenario could be and prepare ourselves for it.
Through this crisis, the first and the most important thing is to protect ourselves and our depositors. Then yes, obviously if the growth opportunities come along, to capitalise the same and we are trying to do both at the same time.
How will you deploy this capital because it’s sub-optimal to sit on this much capital as well. So you will be looking at opportunities? Is the market evolving to a point where some focus on growth can come back?
If you look at the expanse of our business, on the wholesale side we are seeing opportunities with some of the corporates. As you know we have pivoted to higher rated corporates. There are a lot of refinance opportunities which are coming up and as the economy also gradually and slowly limps back to normalcy, we will see people going back to expanding capacity and investing for the future.
As far as SME is concerned, there are opportunities. The government has come out with a guarantee scheme and SMEs are the lubricant which keeps the economy going. So, SMEs also hopefully will come back into business.
On the retail side, opportunities are opening up across asset classes and we want to be out there. We have seen the activity in July being much better than June and the activity in August is slightly better than that of July. Let’s see how the pace continues but there will be only that many lenders in the market who will be trying to satisfy whatever demand that exists today. We will be one of them. So we obviously want to be at the forefront and capitalise on those opportunities that come our way.
I do see slowly, gradually in some asset classes the pickup in demand in terms of loans coming to pre-Covid levels. Now, these asset classes might be small in the overall scheme of things but you do see that the pre-Covid levels have been achieved or we’re coming close to those numbers in the month of July.
Any clarity not in numbers but in direction on the asset quality impact as it is evolving between moratorium one, moratorium two and now we’re coming to the close of those.
Enough analysis is happening by the research analysts and the media on this.
What I’d like to say is that moratorium two numbers have comedown significantly in comparison to moratorium one across the financial system, which is good news. Secondly, yes, there is a range of moratorium numbers across the banks and the financial institutions and the difference is quite large. It ranges anywhere from 9-10% to going to almost 70%. So, the fact that people have such large portions of their book in moratorium is worrisome.
Third, please do understand and don’t underestimate the fact that there are people who are seeing bounces which are outside the moratorium of the stage. So the moratorium is not the only problem. There are people who are outside the moratorium also who are displaying behaviour where the bounce rates are higher than what you’ve seen in the past. With moratorium coming off under the latest guidelines of RBI, and restructuring beginning, I think we will see what the reality is in the next couple of months especially from September onwards.
Yes, a lot of borrowers who are in trouble would like their loans to be restructured. Let’s see how many get restructured because that data will also get reported. So, you will have institutions who will show higher NPLs, you will have institutions who will show a decent part or a large part of their book as restructures assets and you will have institutions which will have both the categories’ numbers being very manageable.
So I think this coming quarter will give you some idea in terms of how the NPL numbers will be looking but the real clarity will come only in the third quarter because, by that time, clarity will emerge on what has been restructured, how much has been restructured, what kind of restructuring has happened, etc.
I do believe the NPLs will rise because the economy has got a severe shock and it applies across the corporates and the retail sector. We’ve been saying that for a long period of time. It is important to be cautious, it is important to protect your balance sheet but at the same time, we are an important part of what the Indian economy is all about, and the onus is on us to ensure that we support people who are going through real crises.
So, if the right borrowers come along and do ask for restructuring, we will of course step up and provide the restructuring. It’s a different issue whether we take the benefit which RBI has given to us in terms of classifying a loan; how do we classify the loan and what kind of provisioning we take. We want to be seen as a conservative institution and we would lean towards continuing to provide for customers on a higher provisioning basis rather than a lower provisioning basis.
So you are saying you will provide more than the 10% for restructured assets? I presume you will still classify them as restructured standard?
So we don’t really want to take advantage because in our minds it is just kicking the can down the road. So, we would lean towards making more provisions than less provisions and that is what I’m saying. It’s not that we have decided because we need to see the quantum of what that number is before we start making those calls but we will tend to lean towards being more conservative.
The RBI has very clearly stated that people who have suffered in the Covid crisis and can demonstrate that, should be given restructuring packages. So we have to obviously see what rules we apply to check and assure ourselves that these people have actually suffered because of Covid crisis. One of the rules obviously could be that people who have taken moratorium are the ones who are suffering but that does not mean that people who did not take the moratorium will also not suffer. So I would expect, if not all, a majority of the people who go through restructuring, would have taken moratorium of some form and shape. It’s not that people do not take moratorium, they would not get restructuring. I’m just saying that would be an important rule and an important input into what could be the restructured loans.
Only time will tell, because there could be some borrowers who could manage maybe in the first two moratoriums but can’t manage now because their business activity has not picked up. So let’s see and wait and watch. I mean you will see requests for restructuring on the wholesale side, you will also see a lot of individuals who might come to us and say that we want some kind of restructuring to be done. But please understand and appreciate that even in pre-Covid times; let’s say an individual was to come to us and ask for some kind of leeway in terms of repayment; we would in the normal course give them some flexibility, would run our provisioning formulas in the way we would normally. We would give them some leeway in terms of how to repay us and then take the NPL losses or whatever is required to be taken as per our accounting policy. If the borrower pays over a period of time, whatever you’ve written off will be written back into your books. So, it was not different before. It is just a question of at what pace you make provision for those loans.
Are you comfortable with the restructuring process? Some concerns that seeking consortium approval, seeking approval of an external committee will be too long draw out...
RBI has worked very hard to ensure that they bring discipline to the banking system on restructuring and they don’t want restructuring to be given that easily. Now if they’ve given some leeway they do want to ensure that we go through a detailed process to establish the fact that these people or these borrowers needed the restructuring.
I think it might be a slightly complicated process with the committee also being involved but I think if it is the right borrower which needs a restructuring, I think going through that is fine, we don’t have a problem. Yes, if people have a large number of borrowers that have to go through it, they might see it as a pain and might see this whole process as cumbersome.
If some borrowers need the restructuring I think that’s the least they can do. They need to establish to not only the banks but a group of banks and then the committee that yes, they desperately need restructuring. So, I am fully supportive of the way the RBI has restructured this whole package.
The RBI has changed the rules on current account. Some banks concerned that this will make it tougher for them to get deposits. What do you think? And how will it impact your bank?
It is a big change and we give full credit to the RBI. The have been talking to the IBA about this change for some period of time and the reason this change is being driven is because if you look at all the frauds that have happened, one of the primary ways in which the fraud has been done is where the borrowers have gone and opened current account with other banks and used those accounts to actually divert the funds onto the other companies or wherever they have diverted it.
So this is RBI’s solution on ensuring that the people who are lending are the ones who get to see the money coming in. Yes, it will have an impact both for the companies themselves because they might have to rejig the way they do their collections and how their cash flows in the system because they’ve got a certain way of working, and there’s simply a new way they have to work in now.
There is a possibility that some banks who do not lend enough could get impacted. Too early to talk about it. I think from a practical perspective, the banks and IBA have approached RBI and some things do need to be clarified. We in Axis Bank, we are a very large lender in the wholesale space, we have supported companies through their journey for a long period of time and we do believe that on one side, there is a possibility that we might lose some accounts but on the other side there are opportunities that will arise where we will gain some accounts. It’s a question of what we can bring to our borrowers, what solutions we can provide to them and in some cases how much exposure we have to those borrowers. So, we are looking at this more as an opportunity rather than a problem though it will require a lot of hard work on part of the entire banking system to meet the deadlines which RBI has imposed. We fully understand and appreciate where the RBI is coming from, though the process and the way they wanted it could become a little bit cumbersome for some.