Ask an Indian bank chief what his or her lending focus is these days and the answer isn’t tough to guess. Retail loans and lending to small businesses have become the go-to options as Indian banks try to recover from a bruising corporate bad loan cycle.
Axis Bank, under the new leadership of Amitabh Chaudhry, is not different in that regard. Chaudhry intends to push growth in both the retail and SME lending segments, which already account for 63 percent of the bank’s book. But that focus will not mean that Axis Bank will cede space in wholesale banking, Chaudhry told BloombergQuint in an interview.
In fact, Chaudhry hopes that Axis Bank will be among the top five wholesale banks once the industry consolidates.
We do believe strongly that on wholesale banking side, there will be five to eight players who will emerge and provide full suite of services on wholesale banking side in terms of not only loans but cash management, treasury, forex, custody, being able to do bond issues, liquidity, etc. We have the unique opportunity to be one of them.Amitabh Chaudhry, CEO, Axis Bank
That’s not to say that Axis Bank will not need to rejig its priorities at least in the wholesale lending segment. It has already started down this path.
- 95 percent of the bank’s fresh corporate loan sanctions are now rated A- or above.
- Only 18 percent of the total corporate loans are to companies rated below A as the lower-rated book is being slowly wound down. A year ago this number was at 23 percent.
- Concentration risk has also been reduced significantly with the top 20 accounts making up 112 percent of tier-1 capital compared to a peak of 287 percent in March 2011.
The transition to a safer and more sustainable lending book, which started in the last few quarters that Shikha Sharma was chief executive, is being taken to their logical conclusion under Chaudhry. And maybe a step further.
As the clean-up progresses, Chaudhry hopes to not just return to the long-run average for key metrics like credit costs but better them. He sees credit costs decline to below the long-term average of 100 basis points from 126 basis points now.
But to get there, the bank needs to deal with a legacy book, particularly of assets rated BB or below, which add up to Rs 7,480 crore.
Lot of these are legacy assets and we need to work our way through. We have taken some land in lieu of loans. We started providing it for last quarter. We have three quarters to go. We have taken security receipts which we need to work through. We are not seeing any signs of other issues in either wholesale or retail book, but we have to be ready if tomorrow crises happen.Amitabh Chaudhry, CEO, Axis Bank
The HDFC Bank Model
As Chaudhry, who spent nearly a decade at HDFC Life Insurance Company Ltd., has gone through investor meetings putting out this vision for the bank, some have drawn a comparison between his strategy and that of HDFC Bank.
“As is the case with most other private sector banks, they plan to leverage on their retail liability strength, use data and analytics as well as digital banking to scale up the franchise and target a medium-term RoE of 18 percent driven by improving margins, lower opex ratios and particularly falling credit costs,” wrote Macquarie analyst Suresh Ganapathy in a March 25 report titled ‘Axis Bank: Can It Be The Next HDFC Bank?’
Chaudhry said that the bank is not trying to emulate anyone. But he acknowledged that private banks in India are all starting to look very similar. They all want to do retail and SME lending. They are all chasing highly-rated corporates. But they are shunning both project lending and promoters who do not already come with top-notch pedigree.
Chaudhry agrees that this collective shift in priorities may not be the best thing for the economy. But it is unavoidable given that implementation risks in the economy remain high.
“It is just not possible to predict or put your arms around whether someone could go to court and stall the process, or some regulatory authority could take a different stand and bring the whole project infrastructure you created to a grinding halt as they have changed their mind. You cannot mitigate those risks,” Chaudhry said.
The new government, according to him, will need to tackle some of these issues before private lending to infrastructure resumes. In the interim, promoters will need to put in more capital upfront and accept lower returns. After crises, the pendulum usually swings, said Chaudhry.
Till this is resolved and banks are convinced that those risks are taken care of, I think no credit committee, including the board, will approve any transactions. It is very difficult. Please understand that we have shareholders, regulators who are questioning why we are taking those risks when there are no returns.Amitabh Chaudhry, CEO, Axis Bank
The Amitabh Chaudhry Years
For now, investors appear to like what they have heard from Chaudhry. Axis Bank shares are up 15 percent since his appointment and the number of ‘Buy’ calls on the stock have risen.
Along with reworking the hard business strategy of the bank, Chaudhry is tackling the softer aspects. Top among them is the perception that the bank has a poor compliance and risk culture.
The management structure has been rejigged. A president level official is managing compliance. A zero-tolerance message has gone out and any compliance breaches are resolved quickly.
“In next 12-18 months, we will be able to demonstrate to our regulator and hopefully the number of instances will come down where the investors and markets will appreciate that the level of compliance for Axis bank has improved dramatically,” Chaudhry said.
Once Chaudhry is through with all these changes, will Axis Bank enter its third phase, one which is different from the direction taken under PJ Nayak and then Shikha Sharma?
I feel that Axis Bank is adopting to my style, not that my style is dramatically different but there are some shades of difference. The reason I have certain style and I am pushing certain things is because I believe that’s what the bank needs at this stage. If we can execute well on some of the things which we are outline for ourselves, I am sure we can take the bank to a different level.Amitabh Chaudhry, CEO, Axis Bank
Watch the interview here
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