Chaudhry says the bank is expanding the physical infrastructure and spending a lot of money digitally to ensure that “we can reach out to more customers and as that happens, it will continue to give a flip to deposit growth. But right now, deposit growth is a problem in the system and we do need to solve it. We need to get it back otherwise at some stage it will hit our ability to increase credit growth.”On the way forward for the banking industry
It is about how you manage your institution. You are aware that some of these crises can happen geopolitically, globally and some of it can come to India. As long as you have prepared your institution to manage some of those crises, we will not only tide over it, one can actually find opportunities to get a disproportionate market share because suddenly some opportunity can come up. That is how we are looking at it.
My view is that some of these crises might continue. For example, people are saying that there could be a domino effect of the regional banking crisis in the US. This can then go over to a lot of money which has been raised from the marketplace for investing in real estate funds. We have seen some run on the real estate funds. We have seen what has happened to crypto. People have chased with excess money, excess returns and when these returns do not come and if everyone is trying to escape through the same door, there is a kind of a run on financial institutions or funds and that is why this crisis happened.
My view is that there could be more like this, but the regulators know what they are doing. The regulators have shown how quickly they have contained the crisis and so it should be manageable. Unless there are some real shocks, oil price going haywire, unless there is a real shock in terms of some political person doing something stupid in another part of the world, I would say India is uniquely placed and also very well placed.
India has balanced the geopolitical tension very well. Full credit to the government. I also think the regulator has done a great job. For us it is a great time to get it right. How much GDP growth would be; how will inflation play out; how will this excess liquidity which RBI has been slowly withdrawing be managed; what will happen to the currency rate – these are some of the factors which all of the important players have to manage. But overall, India is very well placed and that is why we said we are sitting on a great platform to capitalise on it.
We are on the right path, but my question is that is the peak of the best growth and profit is behind us. I will give you some factors. Factor number one, interest rates sooner than later will peak out, that means peak margin expansion will not happen. Base effect somewhere will kick in and competition has only intensified within private banks to give loans to quality players.
So, yes, I mean you do get times when the cycles help you in expanding your margins and things of that nature but let us also not forget that in any cycle, at any point in time, like for example in case of Axis, our market share in deposits is close to 5% and in advances close to 6%. Should I be worried about whether I can gain market share and can beat industry? Well, if my platform is right, my strategy is right, I am executing well, I should be able to gain market share which should reflect in my increased profitability, which should reflect in being able to maintain margins. Now this is subject to some number of factors I mentioned and that is what I am telling people within Axis that if we have worked so hard to get the platform to this level,, given where we are, we should be able to build on it and do better than what we have done in the past. Why should I worry so much about whether 100 is going to 106.5 or 107 or 108? There is enough to be taken from 100 itself and that is what we should be focussed on.
The basic thumb rule for Axis Bank historically has been that it is at a multiplier of 1.5. Will that be the thumb rule going forward as well?
Well, as I said, at the end of the day when we talk about ranking, it also has market capitalisation built in. We would like ourselves to be rated at similar levels as some of my friendly banks. We have work to do, the market needs to be convinced and if the market is convinced, hopefully it will get re-rated some day. We have to still do a lot of work, establish sustainability, more credibility and as we do that, it will reflect in our multiples. Till then, keep working hard.
While growth is enviable right now, deposit growth is slightly poor. The gap between deposit growth and credit growth is the highest in the last 10 years. Do you see that gap narrowing down which means growth has to come down or deposits have to go up?
It is narrowing down. You have already seen the credit growth come down a little bit in the last couple of quarters. We are predicting the credit growth to be in the 13% to 14% range next year. The deposit growth is obviously muted. This is not sustainable in the long run that you have a jaws ratio which is negative. The deposit growth should be slightly higher than the credit growth. So, at some stage it has to turn.
Hopefully, some of the changes that have happened in the Budget will support the deposit growth in the banking system. Our view is and as you would see, while the bulk deposit rates had caught up with the increasing interest rates earlier, even the retail deposit rates, the retail deposit rates today have already reached the peak of the last cycle. Today, for example, Axis Bank is offering 7.26% for one year. The peak of the last cycle was 7.3%. We are already there.
I expect that it might take a couple of quarters to play out, but hopefully people will see value in putting money back into the banking system and the deposits because some of the alternates might be as expensive or giving similar returns as what the banking system is giving and if it does not happen, at some stage the credit growth has to be tempered. There are no two ways about it.
But all of us are also at the same time ensuring that we are expanding our physical infrastructure. We are spending a lot of money digitally also so that we can reach out to more customers and as that happens, hopefully that will continue to give a flip to the deposit growth. But right now, deposit growth is a problem in the system and we do need to solve it. We need to get it back otherwise at some stage it will hit our ability to increase credit growth.
So, are you rejecting more loans and giving approvals for less loans?
We are very clear that the loan has to come at the right price and the right risk adjusted return on capital. That is why if you look at Axis Bank’s performance, you will see that on the large corporate side, our credit growth was limited because we were not getting the right price. In the last couple of quarters, we have seen the price come back. Our loan growth has also picked up. We are quite clear that we need to get the right return for the money we are giving out in the marketplace, that does not mean that we do not do fine pricing, but the overall mix has to make sense to us and we have worked very hard to get our net interest margins from where they were to where we are now.
We would like to maintain them in the same zone rather than just in the desire to get growth, give it away and unnecessarily put pressure on ourselves. We have created the right operating leverage and we would like to maintain it.
You did get an advantage in the last two quarters because of the interest rate cycle. What would be the lever for Axis Bank going forward to maintain and expand margins?
Beyond a point, just expanding margins does not make sense. In the long run, we wanted our margins to be around 3.8% and above. We have already reached 4.2% if I take out the one-offs. We are already above the zone. I have some margin to play with and our view is that we will work very hard to ensure that we remain in that same zone.
Given that fintechs are now challenging the entire structure and the commission structure, how will that change life for Axis Bank?
So yes, we will always have new players coming in who will challenge incumbents and invariably they will go after the so-called “juiciest” parts of the business. Please understand that banks are not just sitting and allowing the fintechs to come in and take over the juiciest customers. We are also investing in the digital side of the business in a very, very big way and as time progresses, fintechs will find it more and more difficult.
Secondly, fintechs are also realizing that RBI has placed clear rules in terms of how they can and should engage with the customers. If they want to engage with the customers in a certain manner, there is a front door through which they need to come and take a license and then follow the norms of what the licenses are. You cannot stay outside the financial system and get the benefit of this financial system for free. You need to play it in a certain way. That playing means that it requires higher costs because you need to serve the customer well.
If the customer is a company, you need to cater to it. There are certain collection methods you need to use to be able to collect the money from the customers, which means you need to play the game in a certain way. That is the second part.
Fintechs are not just about going and making money. There are certain costs associated with it, which fintechs thought they did not have to incur when they entered the business. Again here, the kind of investments we are making on the digital side, we believe that in many cases we will give a run for the money to the fintechs because they are in direct competition with us.
In many cases, it makes sense for us to partner with them because we can take products to the marketplace with them, which make more sense to the customer. In many cases, they become a front end for us to source customers. And there will be a scenario where in some cases we will take stakes in some of those fintechs because we might never attack the kind of the set of customers they are attacking and learn with them and work with them to ensure that they become successful. And if they become successful, we will also become successful over a period of time. So you have to play an open architecture play where you compete, you partner and you take stakes and we are doing all of it.
Can I say that the fintech space is like an engineering marvel. It is like a Ferrari, but not fit for Indian roads? Indian roads still need an Alto and that is what banks will provide.
No, no, no. There will be some fintechs which will be very successful and they will emerge as a clear competition for banks. But there will only be that many fintechs which would be able to scale up and play that game to that extent. But the Indian financial system is large enough to absorb quite a few fintechs.
Every time when we have spoken to the management and the promoters of companies, they say, look, we do not look at the stock price. It is a function of market and market is something which is based on sentiment, valuation and multiple factors. For bankers, it is important to look at the stock price because that is how you raise capital. Do you look at your stock price every day?
No, I do not. I have learned the hard way. There is no point in looking at the stock price. When you are growing at a pace where you are consuming capital, you do need to raise stock prices. In the three and a half years I have been here, we have raised capital twice – Rs 22,500 crore. That is not a small sum of money. We have just acquired Citi, paid Rs 11,600 crore for it. If we continue to grow at a certain pace at some stage in the future, sometime we might have to raise capital.
I do not see the need now, but sometime we might have to raise capital. So yes, in that sense, the stock price is important. In that sense you want to raise it at the right time, at the right price so that the existing shareholders also benefit. You also give an opportunity to the new shareholders to make money if you leave some room for the stock price to grow. But no, definitely do not watch it.
Which are the businesses where you think you have the right to win? You would like to be one, two or three?
In each of our key businesses, we believe we have the right to win because we are such a large group and we have all the elements in place. You mentioned credit card business. Why did we acquire Citi? One of the reasons we acquired a credit card business was to grow our ranking. Already our overall book size in credit cards has gone up by 40%. Our spend share has gone up from 11 to 16%. We believe, on the acquisition side, on a month to month basis we are number one or number two player now. So that is one business we want to grow.
Burgundy Private is one business we want to grow. On the retail asset side, there are some specific elements which are very, very dear to us. If you look at the combination of mid corporate, what we call the SME business and the small business banking, our share of the overall loan book is already up to 20% because that is something which we focused on. We believe that is a business you can really rule in the marketplace.
Bharat Bank we have talked to you about. Customer obsession we have talked to you about. And customer obsession is a multiplicative factor which will feed to every business of ours. If people on the street say go for customer experience to Axis, a wholesale customer wants it, a retail customer wants it, a SME customer, everyone wants it. Everyone wants a greater customer experience. So there are some of these transformation projects which we believe will feed into every business of ours. As I said, sky’s the limit. We are not going to stop. Aspirations are high. We want to keep pushing ourselves.
I want to go back to that whole ranking aspect. Define ranking for me. Is it market cap? Is it profit? Is it customer satisfaction? What is that number for you?
So to translate that number into something people could relate to, 18% ROE is what we want to aim for. We have never come even close to that number. And you will see over the last couple of quarters we have started hitting that number. Before you say it, yes, it was helped partly by the expansion we got on the rent advice.
Is that sustainable?
We intend to keep it sustainable. It is going to be a tough task. It is an aspirational number we put out there but we believe and we know what elements we need to work on to sustain it at a certain level. Our rent risk margins have helped us. We have had historical low credit costs. They will go up at some stage. This rising credit costs have to be substituted with gains somewhere else. We know where potentially we can gain and we have to gain to keep it at the 18% level. Work is on.
There are a lot of benchmarks in which you are at par with the best banks in India – NIMS for example, credit growth, even though your book size which is reasonably large, credit growth is very impressive. But when it comes to cost, the numbers are not the best in the industry. Why is that?
Well we have a historical context. If you look at the productivity of our branches for example, it is not the highest in the industry. We have some work to do there. Also if you look at the productivity of our sales force in general is slightly higher. It does happen when you are number 3 player and you have reached a certain level of scale for the full scaling benefits have not come through.
In some cases, we were slightly behind in technology. We have caught up now. So those benefits are coming through us. Today also, a corporate salary franchise is weaker than some of the others and as we continue to gain market share there. Have we reached a stage where business is coming to us because we are standing at the right place? I think we need to get to that place where we get our fair share because we are just standing. We are not there yet. Once we get to that, our cost will look similar to others.
How far are you away from that point?
Hopefully let us see it is only couple of years but only time will tell.
Still a couple of years?
Oh yes, it is a long haul. It is a big ship. For everyone it is a big ship. And by the way competition is not just standing there. We have tough competition, smart competition and they are also doing their bit. I mean they also hopefully are talking more about us than before and when they talk more about us they are reacting to some of the stuff which we are doing. They are not going to just sit there and allow us to take their market share away. So we have to work harder.