Mumbai: Axis Bank may bring a strategic investor for Axis Finance or even consider a public listing of the non-banking subsidiary, a top executive said.
The decision was prompted by the banking regulator's discomfort with banks operating subsidiaries in similar lines of business, managing director and CEO Amitabh Chaudhry said, even though rules do not prohibit lenders from having non-banking finance companies (NBFCs) as subsidiaries.
"It is part of our strategy, and perhaps we may do it earlier than planned. A clear indication from the regulator is that if you can do a particular business in the bank, you should not be doing the business in a subsidiary. If you want to do that, then there should be a complete arm's length relationship," Chaudhry said in an interview.
Chaudhry also acknowledged that continual capital injections into non-banking subsidiaries may not be viable in the long term. "At some stage in future, if it has to grow, it will have to raise external capital. We don’t necessarily have to list; we can even look at strategic partners to join us," he added.
Banks operating fully-owned NBFC subsidiaries are still a rarity - Federal Bank has already listed its NBFC unit Fedbank Financial Services (Fed Fina), while HDFC Bank is preparing for an initial public offering of HDB Financial Services. That leaves Axis Finance as the only 100% NBFC subsidiary to be operated by a large bank.
Axis Finance reported a 26% year-on-year jump in net profit to ₹154 crore in the June quarter. At the end of June, its assets under management stood at ₹34,104 crore, as against HDB Financial's loan book of ₹95,600 crore.
Chaudhry's vision is to propel Axis Bank from its current No. 3 position to the top, though he has not set a specific timeline. He emphasized that Axis Bank already leads in several business segments and is focusing on three areas: improving customer service, expanding its rural loan portfolio, and driving digital innovation.
The bank has launched ‘Sparsh’, an initiative to drive customer satisfaction, where bank officials listen to recorded calls of customers at their branches and understand their concerns.
"We have reached a certain point. We have delivered a lot of things that we decided on and come a long way. When I came in, I had made a statement that I had not come here just to remain as a number three player. We need to start looking at how we can get to number one and number two in various businesses," said Chaudhry, who will complete five years at the helm of Axis Bank in December. The bank's board has already given him approval to continue until 2027, and an approval from the Reserve Bank of India is awaited.
"There are many businesses where we have changed our ranking from being number three or four to around number one and two, but there are still enough businesses where our ranking remains number three and number four. And again, I don't mean just in terms of size, I mean in terms of profitability, brand image, impact in the marketplace, perception of customers, and so on," he added.
Chaudhry was, however, quick to clarify that he is not looking to leapfrog into the No. 1 spot by going the inorganic route. The bank concluded the integration of Citibank's retail arm in India with itself in July this year.
He is not convinced about acquiring a microfinance company to grow the rural loan book either, owing to the cost structure. Two years ago, the bank had explored talks with Spandana Sphoorty Financial for a takeover, but the talks fell over valuation issues.
“Many of these institutions are driven by founders or a set of people who have brought the business from almost nothing to where it is today. They have their own culture, which might not necessarily match that of Axis," he said.
"Secondly, how do you keep the management of the founder incentivized to continue to run it, add value to it, look at a growth path for the next decade and plan beyond? And third, under what structure do you acquire it? Because you can look at some of the private sector banks, I think over a period, they had to bring a lot of the stuff from the MFI into the bank. So, the cost structure has changed. In that case, you might as well create an MFI business internally," he explained.
Chaudhry is also not keen on listing the bank's other subsidiaries – Axis Mutual Fund or Axis Securities – as he believes it wouldn't have much impact on the bank's capital base.
Axis Bank is also not looking to increase its stake in Max Life from the existing 20% to 51%. The bank's core equity capital stood lower at 14.06% at the end of June compared to ICICI Bank's Tier 1 capital of 15.6% and HDFC Bank's capital of 16.8%.
That said, Axis Bank has managed to achieve an 18% return on assets (ROE) over the last five years, a target Chaudhry had set at the time of joining. Analysts were sceptical at the time about how it could increase from 2.5% in 2019 to 18%.
For comparison, ICICI Bank's ROE is 19.39%, while HDFC Bank's is 22.6%.
"18% is a good benchmark. So, we will stick to it for some time. Because if we aim for more, then maybe we will stop investing back in the business. We've been telling our shareholders that if we are meeting the 18% target, and let's say, even if our cost to revenue is slightly higher, I'm investing for the future, and that’s very important in a growth market like India," he said.
Axis Bank shares have gained 83% over the last five years, and its market cap has surged 121%. On Tuesday, shares of Axis Bank closed at ₹1,165.50 on the NSE, up 1.06% from their previous close.
Like other banks, Axis Bank also faces three big challenges going forward - rising credit cost or the amount of provisions banks have to make for loan losses, sluggish deposit growth and rising attrition.
Axis Bank had seen its credit cost increase to 1.19% in the first quarter from 0.68% in the fourth quarter, partly due to rising slippages in the unsecured loan book.
"See, the credit cycle was at its lowest a couple of quarters back. It is in nature of things that it will rise. Some of it is very clearly showing up in numbers. If you look at the numbers, there is an increase in credit costs across the system, especially coming from the unsecured side. Will it go back to the historical average very soon, and will it play out over a long period of time? I suspect not. Most of the large banks have built better controls and more granular lending businesses, so I think we will see a rise in credit cost, but it will settle at a lower average than before," he said.
While analysts acknowledge the performance of Chaudhry in turning around the bank over the last five years, they remain sceptical of whether it will break into the big league very soon.
"Since taking the helm, Chaudhry has delivered an impressive 18% ROE, bringing much-needed stability to the bank. However, the road to becoming the No. 1 player presents a more formidable challenge," said Asutosh Mishra, head of institutional research, Ashika Stock Broking.
“With his successful track record at Axis Bank, all eyes are on how he will steer this journey. The competitive landscape has evolved, especially with the HDFC Bank merger, ICICI Bank’s strengthened position, and PSU banks emerging as more formidable contenders.”
