Axis Bank to accelerate divestment of Axis Finance amid regulatory pressures, says CEO

Mumbai: Axis Bank is fast-tracking plans to sell its stake in non-banking subsidiary Axis Finance through a listing or by bringing in a strategic partner.

The decision was influenced by regulatory restrictions, which force banks to maintain a clear separation of their subsidiaries and limit continued capital infusions, managing director and CEO Amitabh Chaudhry said in an interview with Mint.

“It is part of our strategy and we may do it sooner than expected. A clear direction from the regulator is that if you can do a particular business in the bank, you should not do the business in a subsidiary. If you want to do that, then there should be an arm’s length relationship,” Chaudhry said.

Chaudhry also acknowledged that continued capital injections into non-banking subsidiaries may not be viable in the long term. “At some point in the future, if you have to grow, you will have to raise external capital. We don’t necessarily have to go public; we can even look for strategic partners to join us,” he added.

Axis Finance reported a 26% year-on-year increase in net profit ₹154 crore in the June quarter. Axis Finance is a much smaller segment than HDFC Bank’s subsidiary HDB Financial, which is preparing to go public.

At the end of June, Axis Finance’s assets under management amounted to ₹34,104 crore rupees, compared to HDB Financial’s loan portfolio of ₹95.6 billion rupees.

Vision for Axis Bank: From 3rd to 1st place

Chaudhry, who will complete five years at the helm of Axis Bank in December, is awaiting RBI approval for his next term. The board has already given him the nod to continue for three more years, till 2027.

His vision is to propel the bank from its current No. 3 position to the top, though he has not set a specific timeline. He stressed that Axis Bank is already a leader 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 boost customer satisfaction, where bank officials can listen to recorded calls of customers at their branches and understand their concerns.

There are many companies where we have changed our ranking from number three or four to number one or two, but there are still enough companies where our ranking is still number three and number four.

“We have reached a certain point. We have delivered on many of the things we had decided and we have come a long way. When I came here, I made it clear that I had not come here just to stay as number three. We have to start looking at how we can become number one and number two in various sectors,” Chaudhry said.

“There are many companies where we have changed our ranking from third or fourth to first or second, but there are still enough companies where our ranking is still third or fourth. And again, I am not just talking about their size, but also their profitability, brand image, market impact, customer perception, etc.,” he added.

However, Chaudhry was quick to clarify that he is not looking to ascend to the top spot via inorganic means. The bank had just completed the integration of Citibank’s retail division with itself in July this year.

It is also not convinced to acquire a microfinance company to increase the rural loan portfolio, due to the cost structure. Two years ago, the bank had explored talks with Spandan Sphoorty Financial for an acquisition, but the talks failed due to valuation issues.

“Many of these institutions are run by founders or a group of people who have taken the business from almost nothing to where it is today. They have their own culture, which does not necessarily match Axis’s.”

“Secondly, how do you keep the founder’s management motivated to continue to run the company, add value to it, look for a growth path for the next decade and plan beyond? And thirdly, under what structure do you acquire? Because if you look at some private sector banks, I think over a period, they had to bring a lot of the MFI assets into the bank. So, the cost structure has changed. In that case, it’s best to build an MFI business internally,” he explained.

Chaudhry is also not keen on listing other subsidiaries of the bank (Axis Mutual Fund or Axis Securities) as he believes it would not have much impact on the bank’s capital base.

The bank also has no intention of increasing its stake in Max Life to 51% from the current 20%. The bank’s core equity capital stood at 14.06% at the end of June, compared with ICICI Bank’s Tier 1 capital of 15.6% and HDFC Bank’s 16.8%.

That said, Axis Bank has achieved a return on assets (ROE) of 18% over the past five years, a target Chaudhry had set for himself when he joined. Analysts have balked at the idea that the bank’s ROE could rise to 18% from 2.5% in 2019.

“18% is a good benchmark, so we will stick to it for some time because if we aim higher, we may stop investing in the business. We have been telling our shareholders that if we meet the 18% target, and even if our cost to revenue ratio is slightly higher, I am investing for the future, and that is very important in a growing market like India,” he said.

The bank’s share price has increased by 83% over the past five years and its market capitalization has increased by 121%. The shares are currently trading at ₹1,173.10 on the National Stock Exchange, 1.7% more than the previous close.

18% is a good benchmark, so we will stick to it for some time, because if we aim for more, we may stop investing in the business.

Like other banks, Axis Bank also faces three major challenges going forward: rising cost of credit or the amount of provisioning banks have to make for loan losses, slow deposit growth and rising churn.

Axis Bank had seen its credit cost rise to 1.19 per cent in the first quarter from 0.68 per cent in the fourth quarter, partly due to rising slippages in the unsecured loan portfolio.

“Look, the credit cycle was at its lowest level a couple of quarters ago. It’s natural for it to increase. Some of this is reflected very clearly in the numbers. If you look at the numbers, there is an increase in system-wide credit costs“The risk is very high, especially on the unsecured side. Will it return to the historical average soon and continue for a long period of time? I suspect not. Most of the big banks have created better controls and more granular lending operations, so I think we will see an increase in the cost of credit, but it will settle at a lower average than before,” he said.

While analysts acknowledge Chaudhry’s performance in turning the bank around over the past five years, they remain skeptical whether the bank will be able to break into the big leagues very soon.

“Since taking over the reins, Chaudhry has delivered an impressive return on equity (ROE) of 18 per cent, bringing much-needed stability to the bank. However, the path to becoming the number one 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 merger of HDFC Bank, the strengthened position of ICICI Bank and public sector banks emerging as more formidable contenders.”

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