On one hand we are trying to understand the impact of COVID and on the other, we are trying to understand that how can one maximise in this low liquidity environment. In your last official communication to investors and the markets, you said that there is stress at the retail end of the book and it will continue for some time but recovery will also be equally sharp. Would like to change your guidance or you would like to stick to it?
The positive outcomes that we are seeing over the last couple of months are quite obvious and I think the market is talking about it as well. We think that if these trends continue the overall portfolio performance in terms of recovery efforts across the financial sector should be visible. And when we did out last earnings call, we said that June was way better than what we saw in May and April and July is trending better and so is August.
As far as outlook on pickup and capex cycle is concerned, there are reasonable indications that the private capex creation has started but is in select segments at this stage. We are certainly seeing lot more conversations around capex at this time than we have seen in the last couple of years. The private sector capex is robust in some segments like upstream refinery, steel, cement, chemical, pharma, renewable, storage systems.
The government has come out with a scheme asking for investments in electronics and industrial automation, logistics, export oriented industries. The government is also investing a lot in railways, roads and highways. There are other sectors which are still struggling a bit but one is hopeful that if we can contain the issues around COVID and it does not deteriorate from here, the economy will pick up.
The government and RBI are being very supportive, very accommodative, which is adding to the revival of the entire economy. The government’s monetisation plan will take time but I think the plan is to monetise and put it all back in the economy, so that should also help. Obviously, there are risks in the horizon which we all should be aware of. COVID has taught us a lot about risks and being prepared for them.
If we go back five quarters, Axis and other large banks came out with their numbers post-first wave. They surprised the market because retail delinquencies, which were expected to be high, were not that high. When the last quarter numbers came out post-second wave, the retail delinquencies were not supposed to be high but they were. What changed?
Let us not forget that there were lot of retail customers who were supported in the first COVID wave through two specific moratoriums and restructuring. In the second wave, there was no moratorium. There was some restructuring which has been permitted but there are certain rules under which that restructuring has been allowed.
A lot of customers who took shelter in the first-COVID wave remain stressed and the second-COVID wave has pushed them further.
Also, in the second wave the health cost for a lot of people shot up sharply. People also kept some money away or were forced to spend that money, the savings which they were planning to apply towards repaying loans. A lot of people became careful, sat on the money and postponed EMIs.
All of us are worried about a potential third COVID wave but the recovery is also quite solid and it was evident in the first quarter calls.
In our case a lot of the slippages on the retail side were coming from secured assets and the loan-to-value against secured assets were low. We were never worried that the money will not come. It is just an issue of time. When money is not being paid, it goes into slippage but over a period of time we will be able to recover the money either way. Either the customer will repay or we will be able to sell those assets. So in that sense demand is good. It is moving in the right direction. Recoveries have gained momentum.
The general view is that lot of big companies are suddenly cash rich. So while capex has started. do you think that a lot of corporates are funding their balance sheets on internal accruals. They may not tap banks and capex may start but historical credit growth rate may not come back?
You are absolutely right. I mean the credit offtake from the system remains moderate, non-food credit growth as of end of July was 6.2% year on year and has averaged only 6% for this fiscal. So in that sense, the credit offtake is not picking up.
As you rightly pointed out, it is because the extraordinary stimulus has led to system liquidity surplus, resulting in lower market borrowing rates, larger and higher rated corporates are sitting on huge piles of cash. They have repaid their borrowings in the market. So the credit growth of the industrial sector has been driven by mid corporates and some refinancing.
We believe that there are considerable credit opportunities as the economy starts reviving. As some capex starts, we will get decent opportunities to grow. Our advances growth in the first quarter was 12%, although the credit growth in the first quarter was 6%, the SME book grew by almost 18% despite a pivoting to a more conservative approach on lending.
Highly rated corporates have relied on either the bond markets or they are generating so much cash. They are not spending enough on capex while sitting on huge piles of cash. They are repaying the debt in the system so the credit growth is quite tepid at this point in time.
Will I be correct when I say that banks historically have been a proxy to corporate growth but this time it may not translate into historical trends?
It is possible. The only hope is that as the large corporates start spending on capex and as that money flows to mid corporates and SMEs, we will see credit growth come back in some of those sectors. But yes, if they keep relying on the cash they are generating or some of other avenues which are non-banking, like equity, the corporate bond market or do foreign borrowings, then you might not see a direct correlation of that spend coming in through credit growth of the banking sector.
If I have to put the economic environment based on your market commentary and ROE of 15-15.5% you shared, will that be achievable in FY22 or could that get pushed?
If you look at our last year’s fourth quarter number, if you remove one off items, we had reached 15% number ROE. Because of Covid’s second wave, the impact on the retail portfolio has got pushed out in this financial year. I do not want to comment on quarter three or quarter four but we believe that if you take off the extraordinary items, which are coming through because of market situation, the bank is already operating in the zone of 15-16% ROE. Our ambition is to take it to 18% and getting to 18% from 15-16% is a tough battle.
How can we be best in class in terms of customer experience and how can we be best in class in terms of rigour and rhythm we bring to the system. It is a long journey and it will take us a couple of years for us.
The relative comparison for a shareholder would be ICICI Bank which is taking their subsidiaries public, State Bank of India is planning to take their subsidiaries public, you are now the promoter of Max, how are you planning to increase the importance of subsidiaries? The last quarter was a great quarter for you but how will you differentiate when other banks are ramping up their subsidiary businesses?
When I had joined the bank in 2018, I had said that one of the important pillars of our strategy would be to further focus on scaling of the subsidiaries so that they can gain higher market share in their respective businesses. If you analyse the quarter one earnings of our subsidiaries, it would be touching nearly Rs 1000 crore which is an important milestone for us.
We believe that it is very important for us to scale the subsidiaries further over the next couple of years. We will ask ourselves the benefit of listing these subsidiaries or should we continue to adopt the model we have now?
We want investors to look at Axis Bank as a group, which has the bank and various subsidiaries. We have a shareholder in Axis AMC, and today it is the seventh largest AMC. It is the largest player in the equity side of the investments which people are making, and the money people are putting in mutual funds, its AUM grew 55% year-on-year, PAT grew 90% year-on-year. Axis Capital continues to maintain its leadership position in the ECM League Table. if you look at Axis Finance, even though it was a wholesale NBFC, its asset quality is one of the best in the industry and their foray into retail is also working quite well.
If you look at Axis Securities, its profit went up 7 times last year. So in that sense, I think the subsidiaries are tracking well. We want them to focus on scaling up those subsidiaries. The people who work in those subsidiaries are getting stock options in Axis Bank. I think it is in the interest of everyone working throughout Axis Group.
A couple of years later we will see whether we need to reassess the strategy and decide whether we want to list or we want to continue with what we are doing at this point in time. Right now we will keep at it, we do not intent to list any subsidiaries at this time.
In Covid times we have enjoyed banking experiences sitting at home, there is a new fintech world which is getting created. Korea has got a bank which is a branchless bank, what happens in three to five years, how will you keep up pace, how will you transform from being a branch based bank to a bank which is digital/financial tech ready?
So with banking or any other industry that one can think of, be it auto or retail or even media, some of the so called old economy sectors, you cannot think of a world in the next three to five years where technology will not play an important role. Over the past five years, the acceleration towards embracing technology with rapid emergence of fintech and Covid has only hastened the space.
So whoever is unwilling to adopt these new ways of working, what technology is bringing in, will only fall by wayside and banking cannot be kept away from it. So from our perspective, we recognised a couple of years back, we have to scale up our investments in technology in a big way. For example, Axis technology spend has gone up by 78% in the last two years. We have setup a separate digital bank where we have 800 people working and we believe that we have to disrupt ourselves to ensure that we can compete with what is going to happen in the market and the fintechs which are going to come up.
Whoever brings convenience to customers is more than welcome because fintechs and payment companies have done a wonderful job over the years and that is why we made the acquisition FreeCharge in 2017. There is no doubt that they will continue to disrupt the market going forward and if we do not keep pace with them, if we do not partner with them, if we do not embrace what they are doing and their ways of working, we will suffer.
The entire strategy of Axis on the digital front is around changing ourselves, making significantly more investments than what we have done in the past and also at the same time work in partnership with these fintechs or these new ways of working to ensure that we not only benefit in terms of what they are doing but in some cases, we can provide the pipes or solutions which they never intended to invest in.
A partnership will become more effective in the marketplace and you will see Axis partnering with more fintechs going forwards in the future. So it is just us trying to ensure that we have enough things happening at the same time, that we do not miss any opportunity and at the same time we are disrupting ourselves so that we can compete head on with them and actually give them a tough time in the marketplace and get our fair share.
So what is the next growth frontier? If you look at banks between 2000 and 2020, retail was a growth frontier, financial inclusion started, everybody was able to get more fee based income which in a sense has been the differentiating factor. For next couple of years, what is the next growth frontier for you?
At a very simplistic level, if you look at our deposit market share it is only 4.5%, if you look at our advances market share, it is 5.7%, if you look at our RTGS, NEFT market share, it has been improving but it is still slightly below 10%. If you look at our share in UPI, it is close to 15%, if you look at our share in credit cards, it is 11%.
If you look at the deposit advances and where we are in terms of the highest market share, we still are a small part of the market. So even for a moment if I was to assume that the overall market growth will be limited, our opportunity to grow within this market or itself is huge and so as a bank as we transform ourselves and every business of ours.
There is are huge growth opportunities for the next five to seven years, which is not reliant on the market growing. The market itself is getting disrupted and we as a large bank with a strong balance sheet have only increased the pace of change.
We are laying the foundation for the future where we can capitalise business opportunities in almost every segment. You asked me retail was a way to go but what about the future? My view is that retail will continue to grow, we are one of the few banks which can support a corporate across its requirements on lending, borrowing, trade finance, cash management and everything.
SME is a business which Axis has always been strong in. I told you about our UPI market share, on the merchant acquisition side we are big, in the credit card market, we are a number four player, so we have an opportunity, the wherewithal, the management and the talent to be able to go across these businesses.
We are pressing the accelerator, keeping our risk framework intact, keeping conservative business intact, we believe enough opportunities exist across all our businesses.
How do markets value banks price to book, asset minus liability? Do you think the differentiation now will be not growth and balance sheet but growth and profitability?
If you look at the price to book as a measure, I think the market has been quite savvy in terms of differentiating across various banks based on the kind of growth they have delivered, the kind of asset quality they have had and so on so forth. I think yes, over the period of last couple of years, a couple of banks are moving into the kind of same zone, their balance sheet, their asset quality, their growth strategies at least in terms of output tends to look similar but India is large enough to be able to take in a number of banks which will do very well.
We are the third largest private bank in terms of asset size, we have crossed Rs 10 lakh crore in terms of our asset size, in terms of market cap, we are slightly behind and obviously our view is that we need to just keep doing the right things the right way and keep executing better than what we have done in the past and finally if the market recognises that there is more predictability about how we are going about things, it will get reflected in the price.
I also mentioned to you earlier that there is a clear move where these bigger banks have benefited at the cost of the smaller institutions and in a crisis like this that tends to happen even more or more pronounced. Let us see how this plays out but my view is that the bigger banks have the wherewithal, the balance sheet, the strength, the ability to invest in the future and the will continue to benefit from an Indian economy which should start seeing growth all over again. I think the Indian story remains intact. I not only believe Indian story remains intact there is a huge growth opportunity ahead of this Indian story and hopefully we will be able to capitalise on it.
You know this more than anyone else that when growth comes back, it surprises everybody positively. Barring the risk of a third wave, do you see any other risk on the horizon or do you think if there is no third wave, then we are in for a growth surprise?
Ultimately we are in the risk taking business. We have to be aware of the risks that exist out there and in that sense, we have to be cognisant of the third wave and be very watchful about that. Keeping that side, you know India has not seen capex to the extent given the size of the economy over the last couple of years. We have to be watchful as to when the economy really starts reviving so that is the second risk which we would be aware of.
Third, while all of us are talking about technology, digitisation and you know providing a seamless experience to the customers, we have to be aware of the risk in terms of cyber security, in terms of technology not working the way it should work, in terms of a bad digital experience.
There is that risk which you need to be aware of, your operating risk increase manifolds. It is not just about investing, we also have to be very fully aware of the risks which you are creating because you are moving towards a more digitised world in the future and everything is connected. You could get impacted because someone else did not do their job well and that is why the Reserve Bank of India very rightly so is coming after banks and the institutions in a big way to ensure that they have a very robust strong, scalable technology architecture.