India’s New Private Bank Chiefs Opt For The Safe Road To Growth
The clutch of once-aggressive private lenders in India are slowly pivoting towards safer businesses and improved profitability as they start to recover from a grueling bad loan cycle.
The three private lenders — ICICI Bank Ltd., Axis Bank Ltd. and Yes Bank Ltd. — which were the worst impacted by asset quality troubles have all seen leadership changes in the past 12 months and are now beginning to set strategy for a new lending cycle.
While the fine-print of each bank’s strategy may differ, the new managements at each of these lenders have suggested a more cautious approach to large corporate loans while focusing on lending to retail clients and small businesses.
The shift, analysts said, will be not be painless.
Yes Bank: Long Road To Recovery
Yes Bank, now headed by former Deutsche Bank veteran Ravneet Gill, is the latest to articulate its shift in priorities.
After reporting a surprise loss of Rs 1,506 crore for the quarter ended March, Gill said the bank will move away from risky corporate lending businesses like structured finance. Like other private lenders, Yes Bank will also shift its focus to relatively low risk retail and small business lending, along with working capital financing. The bank will increase investments on the steadily growing retail lending business with a key focus on analytics to improve cross-selling opportunities and fee income, Gill said.
The shift will mean slower growth, a period of higher credit costs and lower return on assets.
“Yes Bank now expects to attain 1 percent ROA in three years, post lower long-term growth of 20-22 percent, and incur credit costs of 125 basis points in FY20,” said BoB Capital in a report following the bank’s earnings.
Gill also flagged off the need to strengthen retail lending operations by pointing out that only 30 percent of the bank’s branches are profitable. He signaled a focus on improving governance and compliance after run-ins with the regulator for under-reporting of bad loans.
While Gill’s efforts may build a healthier franchise over the long term, analysts, a majority of whom had retained a ‘Buy’ rating on the stock have turned negative. Macquarie Research ‘double-downgraded’ the stock and cut earnings estimates for FY20 by 45 percent after the bank’s earnings for the fourth quarter of FY19 were released.
Axis Bank: Ahead Of Curve
If stock price and analyst views are to be believed, Axis Bank is ahead of the curve in turning the corner.
The lender’s outgoing Chief Executive Officer Shikha Sharma had spent her last few quarters at bank cleaning up the balance sheet. In January, soon after he took over, new CEO Amitabh Chaudhry said the bank would opt for a conservative growth strategy where process would take precedence over growth.
Chaudhry said the bank would focus on three key parameters to improve its medium-term performance. These parameters include reducing credit costs, improving the business mix with a focus on ‘risk-adjusted return on capital’ and improving the bank’s operational efficiency. In doing so, the bank may limit large corporate lending and focus on working capital financing along with retail and SME lending.
It is too early to judge the success of Chaudhury’s strategy. The bank, however, has seen improved performance in the March-ended quarter.
Axis bank reported a net profit of Rs 1,505 crore in the January-March 2019 period, as opposed to a loss of Rs 2,188 crore a year ago. The bank’s asset quality ratios improved considerably, with gross NPA ratio at around 5.3 percent in the fourth quarter, compared with 5.8 percent in the October-December period and a high of 6.8 percent a year ago.
The apparent confidence the market has in Axis Bank’s ability to turn around quickly is reflected in the increase in ‘Buy’ calls and the 12-month price target for the stock.
“The new management is making the right moves. The structural changes will strengthen the bank’s robust franchise,” analysts at Edelweiss Securities said in their report dated April 25.
ICICI Bank: One Step At A Time
For Sandeep Bakshi, who took over first as the chief operating office of ICICI Bank, the task is far more complex. Bakshi was appointed CEO in October after former chief Chanda Kochhar stepped down amid allegations of impropriety.
As such, Bakshi’s first task was to protect the bank from the allegations that engulfed its former chief executive. In January 2019, a panel appointed by the bank sacked Kochhar after she was found guilty of violations of the code of conduct. It also recommended a claw-back of bonus payments from previous years.
While trying to distance itself from the controversy, ICICI Bank has to still rebound from its bad loan troubles. ICICI Bank had gross non-performing advances of 8.54 percent of total advances as of December 2018. The bank, however, has stepped up provisions, which has helped bring down the net NPA ratio to 2.58 percent. Slippages also reduced to a 15-quarter low.
Bakshi is yet to publicly articulate the bank’s way forward but the lender has been working to reduce excessive exposure to large indebted corporates. In meetings with analysts, Bakshi, too, has suggested that ICICI Bank will now take a cautious approach to project loans, which led to the high bad loans.
Bakhshi is of the view that large infra lending/investment should be done by government or development finance institutions, and has guided that ICICI Bank, in future, will be very cautious in big-ticket greenfield projects.Macquarie Research (March 15)
Instead, the bank has been driving growth in retail loans, which make up nearly 60 percent of the bank’s book now. There is also increased focus on improving operating profits, and taking near-term return-on-equity to 15 percent by June 2020, Macquarie Research wrote in a note following a meeting with the management.
The Stock Market Verdict
Shares of both ICICI Bank and Axis Bank have rallied since September in the hope that the worst of the bad loan problems are behind these lenders. The change in management has also helped ease the overhang of regulatory concerns.
Yes Bank’s shares, however, have lagged with the clean-up and management transition just about beginning.