Davos WEF 2022 | Axis Bank CEO Says Rate Hikes To Build Stress But Not Cause Large NPAs
Some of the weaker institutions, NBFCs and banks may see more stress built up in the system, Axis Bank CEO Amitabh Chaudhry says.
There will be some stress built in the system as interest rates go up, but it won’t likely be prolonged, according to Axis Bank’s Amitabh Chaudhry.
“When you look at the larger banks and large institutions, they have beefed up their balance sheet in a very significant manner,” the managing director and chief executive officer at the private lender told BQ Prime’s Menaka Doshi on the sidelines of the World Economic Forum 2022 summit at Davos.
“A lot of us are sitting on very large provisions, apart from the fact that we have gone through one full cleanup exercise in terms of our NPL,” he said. “So, in that sense, I am not anticipating any large NPA problems. But some of the weaker institutions or the weaker NBFCs or the weaker banks could see more stress built up in the system.”
Chaudhry expects the Reserve Bank of India to take rates to the pre-pandemic levels by July-August as inflation continues to weigh. “Between 75 and 125 basis points is what the RBI needs to do,” he said, adding that the central bank wouldn’t shy away from it.
“As you increase interest rates, it will have an impact on borrowing costs and consumer sentiment. Obviously, people are predicting it will have an impact on the GDP growth rate, and we have to be prepared for this.”
Watch the full interview here:
Edited excerpts from the interview:
Davos is a great place to get a sense of what is going on in the global economy, especially the economic challenges that most countries are dealing with. What are you picking up here?
Amitabh Chaudhry: Well, we are seeing a scenario where inflation has picked up steam across the world. The central banks have announced a very clear policy to withdraw liquidity from the system, to increase interest rates in some cases on a very aggressive and proactive basis. It has changed the commentary from managing the Covid crisis, managing inflation to actually talking about a slowdown in economic growth, and in some cases, even a potential recession.
If you look at the reaction we have seen in, for example, some of the consumer goods stocks like Walmart or Target which sell to consumers, they have seen sharp drops. I think it just reflects the concern in the mind of investors in terms of what could span out over the next 18 months or so.
India's not obviously isolated. We are importing inflation, we have a clear issue with how the inflation has moved since the last 12 months or so. The prints on both consumer CPI and WPI have been higher than expected. Frankly, the story is not over as yet or RBI has obviously moved quite aggressively and proactively, but the expectation is that they will have to do more as we move forward.
I don't think the RBI is going to shy away from it. As you increase interest rates, it will have an impact on borrowing costs and consumer sentiment. Obviously, people are predicting it will have an impact on the GDP growth rate, and we have to be prepared for this. So, a lot of stuff is happening around us.
Just to refer to what the Reserve Bank Governor said a few hours ago, in an interview to CNBC TV18, where he pointed out that we should expect more rate hikes. It’s a no-brainer there, but he also spoke of what he called a coordinated action between the fiscal authorities and the monetary authorities, thanks to the excise cuts that we have seen and the cuts reining in prices of key commodities like metals.
How much further do you expect the RBI is going to have to act, and will it continue to need fiscal coordinated support as well in the months to come, or do you think we've started to see the peak of inflation?
Amitabh Chaudhry: I think we have to watch inflation quite closely. I don't think the war on inflation is over as yet, because the pressure on some of the supply side, pressure on commodities has not gone away. And there is enough liquidity still sloshing around in the system. I think the war on inflation will take some time.
Yes, as the Governor has rightly pointed out, there is a coordinated action being taken by the ministry and RBI. Already, the bond markets are pricing in a hike of anywhere between 75 to 125 basis points, it's already built to the price. Maybe the corporates are not seeing it, but they will soon. So, I do expect some movement in July from the RBI, another movement maybe in August. That's just speculation at this stage. But anywhere between 75-125 basis points is what RBI needs to do.
You have also seen some interviews by industry members who have talked about getting the real repo rate down to zero, and which means at least that much of a hike. So, we have to be watchful.
The good news is that over a period of time, RBI has ensured that the rates being charged to the consumers are moved to all floating rates. So, as and when these rate increases happen, they will get passed on, maybe with a little bit of lag,
But it will mean higher EMIs, it will mean the cost of borrowing will go up as the ministry has taken some action on some import duties to bring the prices down.
I would say hopefully it is temporary because at the end of the day, the private sector is taking investment decisions based on certain policy parameters. While you can tinker at the edges, I think the long-term policy should be stable so that some of those decisions, which they are taking in terms of large investments, the calculations don't go wrong because of some of these actions.
I think the government is smart. They know what they are doing. So hopefully, this is temporary, just to ensure that the impact on inflation can be monitored and measured, and it can be brought down to even levels in a more calibrated fashion.
Where do you expect rates to level out–both the benchmark and the lending rate?
Amitabh Chaudhry: I would say that (in) another July to August timeframe, it will go to pre-Covid levels. Maybe if inflation does not really come down to the extent RBI is required to do, because they have to maintain it within a band, maybe some more action will be required.
But I am hoping slightly over pre-Covid levels is where we will end up. This is assuming a lot of things from a geopolitical perspective. Things still remain quite unstable. The war between Russia and Ukraine is still on, commodity prices are still very high–some of the highest we have seen–inflation is very high across the world. So, we have to be watchful. I don't think the chapter is closed yet.
The fears were quite heightened that we would see another round of NPAs. We have somehow managed to escape the worst of that. Maybe smaller businesses and individuals have taken more of the brunt, but large corporations have seemed to have survived through this. But now that we are seeing rising interest rates cycles come on the back of the wars of the last two years, do you expect stress in the system to heighten over the next year or two?
Amitabh Chaudhry: Stress will go up. As interest rates go up, there will be some stress built in the system. But when you look at the larger banks and large institutions, people have beefed up their balance sheet in a very significant manner.
A lot of us are sitting on very large provisions, too, apart from the fact that we have gone through one full cleanup exercise in terms of our NPL. So, in that sense, I am not anticipating any large NPA problems. But yes, some of the weaker institutions or the weaker NBFCs or the weaker banks could see more stress built up in the system.
Will it be prolonged? Will it be a situation where suddenly you will be surprised by the extent of losses? I hope not, though, in some NBFCs we have seen some unexpected events happen, but I don't think given the cleanup that will happen in the system, that’s something to worry about.
So, the financial health of banks is good enough right now to weather the potential worst effects of this rising as we see today. But let me look at it from the other side as well. You have your ear to the ground. Where are you seeing demand start to dip? Is it companies who are saying ‘Hey, I am putting that project on hold, let's wait six months’ or they are saying ‘No, I can see demand picking up, so, I want to go ahead’. Is it individuals or is it the SME cluster that is hurting the most right now?
Amitabh Chaudhry: You are seeing demand pick up across all sectors because after Omicron, things have opened up. It's evident from everywhere in terms of the movement, the logistics movement, the truck demand. Everywhere you are hearing people say that ‘No, I'm actually running out of capacity’.
The next question is, do I want to invest in more capacity? With rising interest rates and also the inflationary pressures they are seeing, people will be cautious. But what Covid has done, and which will continue to happen, is in every sector you are seeing larger players are the ones which continue to take the bigger bets. The smaller ones do not have the capacity to take large bets or investments; the investment there is more incremental.
So, in every industry–and you can slice it whichever way you want—the five-six players are the ones who matter. They are the ones who have the capacity to invest and take large scale investments. And that’s what I think will continue to happen as we go forward.
Have the large players started making investments? Yes, on the commodity side. You are seeing demand come across some of the other sectors also,
But the credit flow from the wholesale side still seems weak because during the Covid crisis, even before to some extent, the large corporates have all deleverged themselves and the business operations are quite profitable now. So, they don't need large sums of credit to be able to invest.
If you look at from April-May onwards, the demand for credit has actually gone up. It has for the first time touched double digits. But most of it is still coming from retail.
The out-of-turn interest rate hike took some people by surprise–the timing and not the action. Are you seeing people pull back at this point? You are not seeing any softening of demand either among large corporates or small businesses or even the retail borrower?
Amitabh Chaudhry: The momentum continues. Actually, the credit growth has gone up in April -May, but we need to be watchful, because there are just too many factors at play here to just say that ‘Oh, because the credit growth has been great, it will continue to remain so’.
We know we are expecting interest rate hikes. We know that the commodity shock at some stage on this CPI and WPI will bite the customer. It is biting, it will start biting more. That's why the government has taken some action in terms of easing some of the prices. But at what stage it starts impacting customer sentiment, at what stage it starts lowering the demand growth, we have to watch. So right now, it’s all good.
A quick question that has to do with your SME book. I think your NPA ratio is the highest there. It’s not very alarming but it is the highest there. Do you see it level out anytime soon or will it get worse from here onwards, because small businesses have had demonetisation, GST, a slowing economy, then the pandemic and a huge working capital crunch, and now a rising interest rate cycle. That's making it very difficult for them to survive.
Amitabh Chaudhry: As far as the SME book is concerned, we have had perhaps the best period over the last 12 quarters, in terms of the quality of our SME book. So, actually it is doing quite well.
We have pivoted over the last three years to a much better quality book, and it is reflected in our NPAs. Everyone does not disclose the data exactly the same way. So, maybe apple-to-apple comparison is not possible.
When you and I look at the SME book, frankly, we are trying to grow it as fast as possible. It grew 25% last year. We are trying to register a similar growth rate in our SME book, because we do believe the opportunity is huge. It extends to the mid-corporate book on the wholesale side. It extends to small business banking on the other side.
So, from our perspective, if I was to look at any business, which is a couple of crores of business, going up to more than Rs 1,000 crore, these are all huge growth areas for us because we believe we know how to run that business.
We believe that's where the growth is going to come from. That's where the capacity utilisation has not peaked, and people will start investing more. So, looking forward to the growth coming from there.
One of the reasons the markets were tepid to your quarterly earnings was a rise in your operating expenditure. What are you investing in? Can you take us through the details?
Amitabh Chaudhry: I think we had told the street that we will get our overall cost asset ratio down to 2% by the end of financial year 2023. The only change which we made was that we are seeing a huge amount of momentum in our various businesses.
For example, in the month of February and March, we were the largest issuers of cards in the business, and we were higher by a margin. We have 31% incremental share in the merchant acquisition business. We are seeing great traction on the digital side.
So, the question we were asking ourselves in the last quarter, which has just passed by, was should we try to meet that guidance which we have given on the 2% cost to assets or should we allow it–because the business growth initially will require us to spend a little bit, the income will come a little bit later, keep this business momentum going and obviously reap rewards in the long run.
We have not moved away from our aspirational 18% ROE number. We have not moved away from our commitment to bring this down to 2% cost to assets. But yes, the street somewhere says, ‘No you changed your mind’.
But you have not changed your mind?
Amitabh Chaudhry: We just pushed it out a little bit and we said look at our data. Somewhere in FY24, we will get it down. By the way, we have not given up. We have not said that because we have given this statement suddenly the focus on costs has gone away. It remains very much so.
I know that analysts tend to look at many of these numbers minutely. What are you investing in? That’s where my interest lies actually.
Amitabh Chaudhry: We are investing across all our businesses–on the retail side, credit cards, merchant acquisition, retail assets. Bharat Banking is a big initiative for us. We hired a very senior resource. I told you about the SME side which we are investing in. We are investing in mid-corporate.
In technology, our spend has gone up, it has doubled over the last three years. So, the spend, the demands on expenses given the opportunity out there is huge. It's a question of what you parcel out and where you focus on. So, in that sense, it is all about growth, it is all about technology and scaling of our infrastructure, it is all about digital banking. But the revenue and the profitability impact of it will take some more time to come, and that's all there is to it.
We do believe our platform is great, it is moving in the right direction. More than 60% of our spend is revenue-linked. The balance of it is obviously technology where we are scaling our infrastructure as we are growing.
It is also partly linked to collections because during the Covid crisis, we ended up spending much more on collections than what we had anticipated. So, our collection costs have gone up.
Given some of the conservative policies which we have imposed on ourselves, sometimes the recovery which you are getting from a customer, you are not getting it through the net interest line, you are getting it through the provision line.
It is just a question of how you are stating some of the numbers. It is what it is. Frankly, if you look at last quarter numbers, which a lot of people have missed out on, if you take out the one-off items on a consolidated basis, our return on equity for the bank was 18% plus which was higher than a lot of other peer banks. So, we have touched 18%.
I know last quarter is the best part of the financial year. But we have demonstrated to the market that we can get there. So, we are on the right track, headed in the right direction. Execution remains the key and this is what we are focused on.
Ordinarily, when a business is investing that speaks of the confidence the business has in the growth environment or it speaks of the desire to capture market share in a volatile environment. Which one are you focusing on?
Amitabh Chaudhry: Both. In this volatile environment, a lot of people will not be able to invest, and we would obviously want to invest and capture market share. Some of the public sector banks or the smaller banks obviously have to make some choices. So, there is that opportunity there.
Frankly, given the platform we have, we do need to win our rightful share in the marketplace. So, forget about the market opportunity, Axis Bank should be playing at a certain level, and we should keep investing and keep trying very hard to play that level, and that level is not where we are.
What do you expect will be the competitive landscape scenario once the HDFC-HDFC Bank merger goes through, because it suddenly catapults the size of private banks to a much larger book? Are some of these investments, or your promise of bringing down opex, partly driven by the fact that maybe in two years you will be competing against a giant and this is the time to fortify yourself?
Amitabh Chaudhry: We already have a giant in the marketplace, SBI, which is quite an aggressive giant. Another one gets added to it and we cannot be ignorant, and we cannot ignore something that is going to become real very soon. They are aggressive institutions and they will remain aggressive institutions.
They have a problem to solve on the deposit side and they will obviously be aggressive about it.
I will give you two kinds of answers. One is if you look at our market share in deposits or advances, it's still quite small in comparison to what the overall opportunity is.
So, at one level, as I keep telling people internally, obviously, the competitive intensity will increase. It was always there, it will always be there. But let's focus on what we have and what we should have, and that distance is not too far.
Second, yes, they might be doing something to the environment which will force us to react. So, use the opportunity till they get merged to obviously get as much traction as possible so that you have the momentum behind you. I do believe that there are a number of great banking platforms which are there in the country who can compete head on, it doesn't matter what the size is, in the individual businesses all of us have, and that's exactly what we will do.
They are investing in technology, we are investing in technology, or there are at least three-four banks, which will have a digital platform, a technology platform, which will be one of the best out there. Then, it's a question of who reaches the customer first and is able to connect with the customer in a particular way. It is basic day-to-day blocking and tackling in the marketplace.
So, your decision to continue investing even in this environment was not necessarily driven directly by the HDFC announcement or reinforced by that announcement? Your Citi acquisition timing is fortuitous, because it will help beef up your size in anticipation of where this market is headed.
Amitabh Chaudhry: One of the core parts of GPS strategy, which we announced in 2019, was premiumisation of our franchise and Citibank speaks to that premiumisation in a beautiful way. They have been in this country for 120 years, the kind of customers they have, the quality of customers they have, especially the wealth management size, just upgrades Axis Bank in many ways. We become the third largest wealth management player, third largest credit card player, we get 1,500 corporate salary accounts which has been a weak area for us, a great set of employees, etc.
That's why you paid more than any competitor for it. There are concerns right now. Nobody is questioning the acquisition. What you get in the acquisition is great, it's what you paid for it and when it'll pay for itself is the question. I want to know when you think that this might start becoming financially accretive?
Amitabh Chaudhry: So, it will become accretive pretty quickly. The moment we take over, we have already told the media and the analysts, that we have to write off the goodwill and post that, it becomes accretive automatically. That's how the math works.
But more importantly, forget about the write-offs, it will add to our NIM, it will add to our ROE based on the numbers which we have.
Let me quote the analyst report who has talked about valuation, and one analyst report said that if you look at comparative players, let's say just in the credit card market, the value which they're paying for just the credit card business should justify what they are paying for it.
So, when you individually add the pieces, I think the valuation is good for us. I don't know whether we were the highest bidder. Sometimes these things don't happen that way. It is also about the ability to close the deal in what time frame, under what conditions.
We believe we have paid a fair price. We quoted a price, we stuck to that price and that's how the deal got consummated.
How will you judge whether this acquisition has delivered what you sought for it to deliver? Give me those metrics that we can hold you accountable by. I know retention of clients is a big challenge here.
Amitabh Chaudhry: We will obviously tell the market. We haven’t announced to the market what those numbers are. We will do it in the right forum.
It will be around customer retention, staff retention, it will be around technology transfer and what it is adding to our overall franchise. We have some data of Citi. We will start getting detailed data off the franchise only once the CCI approval is in place.
We have the handle on the macro level. We will come around some matrices on four things–customers, staff, technology and processing.
So, you want to be able to retain customers. But you might want to reduce staff?
Amitabh Chaudhry: Axis Bank has 86,000 employees. Citi has 3,500 employees. We are not seeing it in terms of reduction of employees. We can absorb them without a problem.
What can you tell us about how you are going to make sure that Axis provides the same kind of premium service that Citi used to?
Amitabh Chaudhry: If we don’t do that, this kind of acquisition would have been a waste.
We are trying to upgrade ourselves in terms of not only providing that service to Citibank customers but take it to a lot of other customers too.
So, you are saying watch what I do, not what I say?
Amitabh Chaudhry: Absolutely, it's a given that I must do that. By the way, Axis Bank has successfully created a burgundy private franchise, and we are now Rs 87,000 crore of assets under management. Among the top three-four banks, we are the only ones who did that during Covid. So, we have proved to the market we can do it. Now, this allows us to build on that.
What is going on at Axis Mutual fund? Why has it happened?
Amitabh Chaudhry: We don't have anything to hide here. Based on some market reports we had got, we initiated an investigation.
You did not disclose that you were initiating it?
Amitabh Chaudhry: You don’t do that. You don’t upfront come and say, ‘By the way, I'm doing an investigation’. Something has to be established before you go and start doing this. So we heard some market chatter.
How did you hear market chatter? It came from a whistleblower’s letter?
Amitabh Chaudhry: It was not a whistleblower letter. It was just that some people in the market said that we believe something is happening there, please check.
Someone picked up the phone and called you and said Mr Chaudhry, we think one of your fund managers is front-running?
Amitabh Chaudhry: No, (they said) there are some people, you should investigate it. We ordered an investigation, and we proactively did it.
If you are in the market, people do talk to you. When you hear this from people, it is important that you react to it. You can’t just sit on it. We did that. We ordered an investigation. We hired a legal firm to do it the right way, who in turn hired a forensic expert–well-known names in the market. We gave them carte blanche to investigate.
As a mutual fund, we have limited data, because we see only one side of the trades. The moment we saw something which was a transaction we suspected, we suspended them. It is important to suspend them and not terminate them because first, you want an explanation for what has happened. Secondly, you want their cooperation. Once we crossed the bridge, we terminated the two employees. In one case, it looks like as of today that what they have done is more serious. In the other case, there is a violation of mutual fund rules.
What do you mean by serious?
Amitabh Chaudry: Looks like there is some transaction, so let's see.
But you are still not disclosing exactly what has gone wrong because mutual fund subscribers need to know.
Amitabh Chaudhry: See, we are seeing only a part of it because I don't know what people did on the other side. I don't see those traits. We have taken action. We have not stopped there. We are investigating and looking at everything out there just to ensure that it is restricted to some individuals, or it is something which cuts across the mutual fund space.
Till now whatever we have found, based on that action has been taken proactively, and we have not shied away from taking tough action. We will not shy away from taking tough action.
Obviously, we are working with SEBI and we are keeping them updated. They can see much more. They have the regulatory powers to investigate things the way we cannot. We will fully cooperate with SEBI if anything happens.
Does it go beyond just two people in the organisation?
Amitabh Chaudhry: Right now, no, there is just two. By the way, we are looking at all the relevant people involved in our investigations, and right now, we have found something against two people and we have taken action. By the way, this investigation has been going on since February.
So, what failed that this incident happened?
Amitabh Chaudhry: These people have been in the market for a long period of time. If I have to disclose it, we will disclose at the right stage.
I know about the broad term and meaning of front running, but what exactly did they do wrong? You owe an explanation to the mutual funds unit holders.
Amitabh Chaudhry: Whatever has been found is so small in comparison to what the media has been reporting, that it's not worth comparing. Whatever has been found, whatever little has been found. Wherever we found even an iota of rules being broken, we have taken action.
Third, we will continue to investigate and if we find anything, we will take even more action necessary.
Fourth, given how this market works, as an institution, we are limited in terms of what we can investigate and what we can bring forward.
Fifth, if I find anything, I have to give a chance to the individual on the other side to explain what exactly happened in that particular case. All that is being done. The board is actively looking to close this as quickly as we can.
We have taken invariably the tougher stance, rather than the lenient stance. We have kept the regulator updated. Please appreciate, we on our own volition did it.
During this period, our mutual funds have done extremely well in terms of performance. I am not saying that it's a justification but whatever has been found, the number is meaningless.
It is not like a police investigation; we are hoping in the next six to eight weeks, we can get this closed.
This conversation has been full of confidence from your end for the economy, broadly speaking, despite the uncertainties, and specifically for the opportunity for Axis Bank, despite what one might call some headwinds. What challenges do you foresee in the next six months to a year or maybe even two years, that we should be aware of, that could shake this confidence a little bit?
Amitabh Chaudhry: If you're talking at the economy level, then the volatility is just too high. The events are happening too quickly.
As far as Axis is concerned, we just have to focus on execution. Therefore, we have to get the execution right. We know what our destination is. We know how to get there. We have various pieces and parts of it in play. If we get the execution right, the market is large enough and the opportunity is large enough.
I think the right kind of management team is in place to be able to execute on it and get to the destination we are looking for, which is our aspirational number of 18% ROE over a period of time.