Amitabh Chaudhry, MD & CEO, .
The positive news is that NIMS have improved and shown quite a bit of expansion – 36 bps this quarter. Do you think this is sustainable going forward?
Let me just start by saying that over several years, we have been systematically strengthening our balance sheet, improving the mix, redefining our risk appetite and obviously working on some of the P&L parameters which we thought were slightly off in comparison to some of the peers we compete with and want to be compared with.
As far as NIMs are concerned, in January of this year, we set up a team of senior management people and decided that we need to get to our target of 3.8%, which has been guiding the market for sometime, as quickly as possible. So we looked at every possible factor like asset mix, pricing in the market, the mix and kind of deposits we are going after etc. I am glad to say that the translation of what we want to do which is to get to the NIM of 3.8% and the outcome. I think the gap is coming down or let us say the correlation is improving and in that sense Axis Bank is gradually becoming much more consistent and much more reliable in terms of its performance.
Everything which we are trying to do in Axis Bank is for the long term, for driving sustainability in the businesses and for ensuring that once we achieve something, we stay there. I think we demonstrate that with asset quality and you should expect the same with them also. While there are issues with repricing of both deposits and assets which is happening with a bit of a mismatch and with all the volatility which is there, it is not easy to predict NIMs quarter on quarter.
Our intention has been that once we have got into the zone, we remain in the zone, NIMs could go up and down a little bit but they are not going to go back to where we were for a long period of time. So yes, we do believe they are sustainable with some movement up and down but not substantially for people to say that we are no longer in the same zone. It is based on sustained effort made by Axis and we intend to keep it there.
Let us not talk about quarter on quarter. What is the vision going forward? Where do you see Axis Bank say three to five years from now? How big could it grow?
That will be a bit of a guidance but let me just make a couple of points here. One, when I joined Axis Bank, I had said at that time that it is a great franchise, great set of people, great products, great revolution in the marketplace and there is no reason why we should be placed where we are, which is number three in terms of our size, number four in terms of market cap. We should move up and my intention as a CEO would be to try to move Axis Bank up in terms of its ranking and that is exactly what one has been trying to attempt over the last three and a half years.
Covid came in the way and took us off track for sometime because the priority had to change but I am quite happy and delighted with the fact that whatever we had decided to do to drive that change in our ranking through GPS strategy. We are ticking more and more boxes and as we do that, you will see the market share grow in many businesses, our ranking move up and hopefully it will get reflected in the size of our balance sheet and the size of our business. It will also get reflected in our market cap over a period of time.
Now rest is all speculation but our desire and ambition definitely is not to stay where we are but continue to move up. India is a growing economy. It has huge and positive prospects going forward so the Indian economy and the market is also supportive of very good growth going forward in the future. So rather than speculate where Axis would be five years down the line and start giving numbers, I am trying to give you a sense of what we want to achieve in terms of our overall ranking.
There are two issues with Axis for the last couple of years and you started by answering that you have tried to repair the balance sheet, prepared it for growth. One is opex, one is NIMs. You talked to us about the NIMs. Opex also came down this quarter. Will going ahead, opex increase from here on? What is the sense that you get in terms of opex?
We have been guiding the market on opex that our cost to revenue will come down below 2%. We did achieve that last year. We allowed our expenses to run a little bit ahead because we thought there were opportunities in the market place to invest and we should not let go of those opportunities because somehow we were committed to a number.
We started invested in a big way and some of the very specific areas like credit cards and merchant acquisition and in our retail asset business – Bharat banking, we are going after a very large project on customer obsession, technology analytics and number of areas where we decided to invest as our cost to revenue ratio did go up but we remain committed to bring it down to below 2% in the medium term and that commitment remains.
Our cost to revenue has to move down and as we continue to work on cost to revenue, the cost to assets also needs to move down. Some of the best ratios in the marketplace are below 40% and ultimately if we have to compete with all the players out there in the long run, we need to get to a similar zone. I am not giving any indication here. I am not even giving you time in which we will achieve this but ultimately if we have to be amongst the best, our ratios across key business matrix will also have to be amongst the best and that is what we are committed to.
One more thing is you compared Axis Bank to some of the other top tier banks even though their loan book may be 2-3 lakh crore higher than what you are currently. The size of their other businesses is also higher whether we talk about insurance, mutual funds or any other businesses. The economy is supportive of banking growth. When it gives you leverage on the downside, what sort of leverage does only a pure banking play give you on the upside?
We were slightly late to set up subsidiaries which were involved in the insurance, mutual funds and securities business. So we were slightly late to the party. My predecessor Shikha led the way in terms of setting up a lot of these subsidiaries. One of the key elements of the GPS strategy was to scale up our subsidiaries and I am delighted to note that over the last couple of years, the scale up has been happening.
The profitability of the subsidiaries when I joined was close to Rs 380 crore. Last year, we reached close to Rs 1,100 crore, the scale up continues and in that sense we will do whatever it takes to ensure that some of the subsidiaries continue to improve their ranking and market positioning as the time goes on. Please also understand and appreciate that the investment on Max was a step in that direction. I also said that while the Indian economy is doing so well, India needs large banks which can support the growth of this economy. We are very well placed as Axis Bank and Axis Group not only supports this growth in the economy but also gets the benefit of being a large player in this growing economy and we obviously are trying very hard to build a platform which allows us to capitalise on the opportunity which will come the way of every financial institution.
We just wanted to create the right platform so that the growth which we get is obviously higher than what the industry is delivering and that is precisely the effort that has been made over the last couple of years.
The entire banking space seems to have hit a purple patch and with credit growth now coming back to ten-year high levels of 18%, so far the bulk of the growth is coming from the retail side of it. What is your view of credit growth going forward? When do you see a pickup in corporate loans as well?
You captured it in your question itself that yes most of the growth which is coming and the loan side is driven by retail rather than the wholesale side of things. Whatever growth people are seeing on the wholesale side, is more coming through refinancing and obviously supporting some of the investments which are happening through the government entities or government companies.
Let us go back to the macro. The macro globally is volatile. We are seeing recessionary conditions and because it is volatile and because of all the action that is being taken by federal banks across the world, we might see a situation where recessionary conditions might continue for some more time and ultimately India cannot be isolated from all this.
On one side, the macro seems to indicate that the overall recessionary conditions will bite India to some extent. Secondly, inflation rates are high and so RBI is also increasing its interest rates. We expect a couple of more hikes to come in the next six to nine months which could potentially dampen capex or loan growth.
But on the flip side, the Indian economy is doing quite well. It is resilient. The government and RBI has been ahead of the curve and they have been taking all the right steps to ensure that we deliver a growth rate which is much better than the world economies and in that sense while I remain optimistic, at the same time as a typical banker, we have to be cautious about what could play out suddenly because of global factors.
My view is that this loan growth looks sustainable over the next couple of quarters but we need to be watchful and be aware that this could get impacted very closely. Also let us not forget the fact that deposit growth cannot lag loan growth. If deposit growth does not pick up, at some stage, it will have an impact on the loan growth also.
So it is fair to infer from what you are saying that 15% to 20% credit growth rate might not be sustainable in the medium term, say after a couple of quarters?
I am saying that what I see today definitely looks feasible for the next couple of quarters. Beyond that, it is very difficult to predict. I am not saying it will come down, I am just saying there are too many factors at play, they are too unpredictable to be able to say with any level of surety that this will continue.
Talk to us a little bit about the factors as of now, given that we are living in such a fast changing, ever so dynamic world. As of now, given where things are right, what factors do you think could impact this kind of growth that you just highlighted?
Let me give you a slightly more detailed answer. For example, we expect the US Fed to hike rates by another 150 basis points or more during the next few months. This is the fastest rate hiking cycle from the Fed in last three decades. The mortgage rates for example in the US have doubled over the last 90 to 120 days. Similar hikes are expected by ECB and BOE in the near future.
Now the full impact of this globally synchronised monetary tightening cycle remains to be seen as monetary policy does work with a bit of lag and given that the size and the quantum of Fed’s rate hikes obviously has increased global market volatility. There are three spillovers of this – financial, commodities and trade.
India has already been impacted. We have already faced the brunt of the first two and trade is forecast to be severely impacted particularly in 2023. While RBI’s monetary response has been on controlling domestic inflation, it has been complicated by external factors. They have had to intervene in the foreign exchange market, orderly movement of the rupee and that has resulted in draining the system of liquidity which has led to increase in money market rates thereby increasing the cost of funds and so on and so forth.
I am just giving you one example of how something has played out very quickly where everything cannot necessarily be controlled by India. That is where my little bit of conservatism creeps in that there are too many global factors at play and for us to say that nothing will impact India will be wrong.
We need to be mentally prepared that this global volatility can come and hit India anytime and it could impact our growth rates quite quickly or it could impact our inflation quickly or it could impact our interest rates quickly and any of these factors will have an impact on loan growth rates. They could also impact the asset quality because if the interest rates go up too quickly, the EMIs go up and some of the customers might not be able to manage their EMIs over a period of time. So all of that needs to be watched.
I do not want to sound pessimistic. I do remain extremely optimistic about how India is placed, how the government and regulators are managing it and I do see that India has a great story ahead but I am only just saying that we need to be watchful.
Let us now talk about the Citi acquisition. While of course the opportunities are for everyone to understand, do you continue to see challenges around customer retention or is that a smooth process?
Since you asked me about the Citi acquisition, a little update, CCI approval is in place, we expect to close the transaction by end of the fourth quarter of fiscal 2022-23 which is the legal closure date. The integration management office with the steering committee is in place working across 17 work streams, around people with technology and business operations. The progress on customer communication, operational readiness and performance of existing Citibank consumer business is trending in line with the expectations.
The reason why I am saying that is because there is the speculation in the market that oh, they are seeing a lot of attrition. First, when we did our evaluation and when we priced the deal, we obviously took some attrition into account. The current attrition which we have seen is in line with that valuation model. Secondly, we had a backstop that below a certain level of attrition or below a certain level of fall in business, there will be a change in valuation but right now given where the numbers are we are nowhere close to that backstop. I think things are moving in the right direction.
In some businesses we are seeing some growth come through and so in that sense, some attrition happens in every business for every bank, it is not unique. In their case, they saw a little bit of spike but now it has stabilised and our view is that the acquisition should happen as planned either by the end of this fiscal 2023. If tomorrow, there is a little bit of a spill over and we hit the year end maybe a month or month and a half later. So, broadly things are on track.
Red flags are being raised when it comes to the deal with Max Group as well. Could you clear that air for us? Is there any kind of overhang on that particular deal?
First let me start by saying that we are very committed to the Max partnership and our equity investment in Max. As we had envisaged in the original agreement, we would ideally like to increase our stake to close to 20% as and when we are permitted. When we did that particular transaction, it took a long time to consummate it. There were two separate agreements; one agreement finished, another agreement started, we consulted the regulator and shared all the agreements with them through the process.
We believe we have done everything by the book. The regulator after a certain period of time, has taken a different view of those transactions and some of that is reflected in the order they have passed. We have a very long term view of the insurance industry and our investment in Max. We would like to work with the regulator to find the right solution. We are working with the regulator and we are hoping that the right solution can be found.
I do not want to speculate on what that solution would be but our view is we did nothing wrong. We did everything by the book, the regulator has taken a view, we would like to work with the regulator and ensure that we move and look forward rather than keep looking in the history and say what went wrong and what potentially could have been done better.
You also flagged off how the deposit rate has to go up and it is meaningfully lower versus the loan growth. What is your expectation of what deposit growth can be going forward and what kind of momentum are you seeing there?
It is very difficult to predict deposit growth picking up very quickly because we are seeing a complete withdrawal of the excess liquidity from the system. At peak, it used to be close to almost Rs 8 lakh crore. It is now down to less than Rs 50,000 crore. In that sense, with this withdrawal of liquidity, obviously the deposit growth has been impacted. My view is that this will continue for the next couple of quarters so every bank is scrambling for deposits.
We started the transformation journey on the Axis Bank deposit franchise a couple of years back with vigour, rhythm, going after more premium deposits, going after the right set of customers, going after the right set of deposits also where the outflow is lower. Our deposit growth has been higher than the industry growth rate for the last couple of years.
We believe we can deliver on that going forward. There is enough opportunity within the Axis framework to continue to become more efficient and hit the right customers at the right time. So, from my perspective, while the industry is seeing a deposit growth rate that is lower and which might continue, we have enough things to do as Axis Bank and that is what we are focussed on.
In the long run, the deposit growth rate has to be higher than the loan growth rate. So either the deposit growth picks up or the loan growth rate comes down. Hopefully, it will balance out, this is temporary where the loan growth is racing ahead of the deposit growth rate. Over a period of time it will hopefully settle down.
You are sounding like one of the IT CEOs cautiously optimistic?
I am optimistic but a bit cautious. I am always an optimistic person. But yes, we are in the risk taking business so we should also always be thinking of risk all the time. But yes, our numbers show that even though we are cautious there is enough which is available in the marketplace to deliver on and that is exactly what we are trying to do in Axis to build a more sustainable, granular franchise which can deliver in the long run on a consistent basis. Hopefully, the numbers of the last quarter demonstrated what this franchise is capable of delivering. We are hoping to continue this performance going forward in the future.
So is that the message to your happy shareholders as well? The market has been rewarding your stock of late and is there something more that you would want to add?
We obviously talk to the investors all the time. We have been giving them this constant message over the last three years that we are building a granular franchise which means that all the decisions we are taking are for the long term. It might mean a little bit of short term pain but in the long run, it will be great for Axis.
We showed that with cleaning up of our balance sheet, strengthening of our balance sheet and improving our asset quality which is now best in class. Now we are creating a P&L where the matrices are coming close to best in class. We obviously need to get our deposit rates even higher than where they are. Our deposit growth rates are higher than where they are and once we are able to do that, it will be one of the best in class franchises in the banking system. That is exactly what we are trying to create.