Axis Bank MD & CEO Amitabh Chaudhry believes the Citi acquisition has brought the bank more than it had expected in terms of business and retained customers. Chaudhry tells Shobhana Subramanian that deposits are a challenge and that until there is enough durable liquidity in the system, rates on deposits are unlikely to come down. Excerpts:
What is the bank’s strategy to garner more deposits?
Earlier, we had only a certain part of the liability franchise that was focusing on deposits and others were servicing customers. Now, we are saying that anyone involved in branch banking has to be sourcing deposits. That was one big change. Also, our outflow rates, in comparison to the competition, were one of the highest. For instance, if it is a financial institution, frankly it’s not a lendable deposit, while with retail deposits, the outflows are lower. We changed our outflow rates, and are now best-in-class. We moved out of certain businesses. We had term deposit rates that were higher than our peers, and we have brought them down.
How is that working out?
We are going about it methodically to ensure that our army marches to a particular tune. We have added to the liability franchise team. We have asked everyone else in the Axis team to look at deposits as an important part of their KRAs. We cannot change the system overnight, but we have moved the needle quite a bit. In a constrained deposit environment, we also want to be conscious that we don’t take any short-term steps that would destroy our long-term strategy. We know we need to get this right.
When do you see deposit rates coming down?
That is subject to durable liquidity in the system. If I am competing for deposits, no bank will reduce term deposit rates. If I reduce rates, I will lose deposits because customers want competitive rates. Rates are not going up, but they are not coming down either, though the Reserve Bank of India (RBI) has cut rates by 25 bps.
With the economy losing momentum, will loan growth get badly impacted?
If durable liquidity is available in the system and the tax giveaways work, it could spur the economy. Our expectation is that credit growth could be 11-12%. But private capex is not picking up and states’ budgets are full of freebies. So, if investment and credit growth do not happen, it will affect growth.
As bankers, we are optimistic because the government and the RBI are aware of this and are taking action. But we also have to be cautious because credit costs have become elevated. If companies don’t do well, the risk of more non-performing loans (NPLs) rises. So, you have to be smart about where you are lending. Not just additional lending, but also the existing lending. We have to be watchful.
How would you assess the risks in unsecured lending?
We have clearly seen risk elevated on the unsecured side and NPLs have gone up across the banking system. I think things are stabilising on the unsecured and microfinance institution (MFI) side. With the RBI removing the higher risk weights, non-banking financial companies (NBFCs) can potentially get more financing from banks. It could mean that the borrowers can get a little more flexibility in terms of managing their cash flows.
Do you see banks stepping up their lending to NBFCs?
So, clearly, when the RBI brought in the higher risk weights, the message was to reduce the growth in lending to NBFCs. By removing the risk weights, it is saying ‘we have controlled it, we expect you to be reasonable’. I am not saying it will take off, ultimately banks also have their own issues. As a bank, we will be very cautious. The biggest constraint today is deposit growth and unless we get that number up, there’s no question of lending exceeding deposit growth.
As a bank, where would you lend?
The returns from mortgages are very low. There are other areas, like SMEs, where there is security and returns are better. Invariably, on the secured side, you need to have a deep and a more well-rounded relationship to make money and compensate for the returns which are low.
When considering an acquisition, is there any specific business Axis Bank would like to buy?
Given the size of the business that we have and the size of businesses that may be available, we have to ask ourselves seriously whether an acquisition is worth it. Most of the businesses, where returns could be decent, are not very large. I don’t see anything happening in a hurry. We have taken a lot of time to absorb the Citi acquisition, a pretty small one, and we are not 100% done.
How much have you gained from the Citi buy?
When we acquired Citi, we were buying a certain amount of loans and deposits. Second, it allowed us to re-pivot ourselves as a large wealth management player and an affluent franchise. We became bigger on the card side and we acquired a solid set of people and have retained most of the talent; it would not have been easy to get that.
So, you are content with what you have got?
We got what we were looking for. Our data show that penetration has been deeper in terms of deposits, the usage of our digital assets has been better, and retention of Citi customers and employees has been more than we had modelled for in the internal valuation. So, we are happy. But it has taken time; the re-carding process is now on. We have retained most of the Citi customers. Because their experience was okay, they have stayed. There will always be some natural leakage and we have seen some of that with Citi too.
How big can the wealth management piece be?
We have become the third-largest wealth management player. Wealth management is a huge opportunity; assets under management are estimated to grow at 25-27% until 2030, though the growth in fees will be lower. Banks have an advantage relative to others because we can tap into the semi-urban markets more easily than standalone companies. Also, since banks are more regulated, they will be very circumspect about doing transactions that are riskier; so, they are perceived to be safer. Banks can create a proposition that standalone companies cannot; as in loans and credit cards.
How is Burgundy Private doing?
We were the first to create the combination of the credit, debit and forex card, a metal card that was unique. Now, we have gone to the semi-urban markets. And the group comes together. We have Axis MF, Axis Securities and Axis Capital to provide solutions for different customers. We are very strong in many of these areas. We are the fourth-biggest in cards and the difference between us and the third- and the second-ranked players is not very large. We also have the largest number of thriving partnerships in the industry.
Would you do anything differently?
We have a clearly defined strategy. Obviously, the profitability of the business has struggled since the customers have become smarter, they are using the benefits more. We have seen banks reducing the benefits on the credit card side because profitability is getting impacted.
Do you feel the bank is adequately capitalised?
We have 87 bps of capital this year in nine months, plus we have 38 bps which we had made as provisions during Covid and have not used. Now, the risk weights have been taken off. So, we will be almost back to where we were when we did the Citi acquisition. If tomorrow growth comes back to larger numbers, we will see at that point.
Is the big gap in valuation between Axis Bank, and HDFC Bank and ICICI Bank because of scale?
It’s a fact that the others have performed well. We need to reduce volatility with regard to our performance, we need to get the consistency right and we need to become more of an all-weather franchise. We are perceived to be a better bank now. For example, if you look at the NPS — the net promoter score — we are ranked No. 2 now, compared with No. 4 when we started the journey. Other surveys, too, are telling us we are doing well. We have come some distance, but also have some distance to go. The ball is in our court. We need to convince shareholders that we deserve our multiple.