Mumbai: Axis Bank Ltd will not be able to maintain the scorching pace at which it has been growing, but will definitely grow at a faster pace than the industry, says the bank’s managing director and chief executive officer Shikha Sharma. In an interview, Sharma spoke on issues, ranging from the bank’s acquisition of an investment banking business to the fate of its private equity venture and its plan to buy a stake in an insurance company. Edited excerpts:
When you took over as chief of Axis Bank in June 2009, an analyst said the bank had solid foundations, that it would be difficult for a new chief to run it down or improve on it.
That’s for you to judge, but I agree that Axis Bank is a fantastic franchisee. The challenge of making sure that I protect and take it forward is what attracted me to the job.
This bank has seen phenomenal growth in the past five years in every parameter—profit, interest income, advances and deposits. Is it easy to maintain the momentum?
To keep up that pace of growth is definitely going to be tougher with the scale that the bank now has. It’s something that is evident in any industry —as the company grows larger in scale, the rate of growth has to slow down. To expect that we will sustain that rate of growth is unrealistic and that’s not what we are attempting to do. However, given the size of the bank, given its strong franchise and capability, the goal would be to try and do better than the industry. We have been one of the fastest-growing banks.
You have drawn up a five-year strategy.
About 1.25 times industry is what we think we can reasonably grow at, given the scale of the bank right now. If the industry grows at about 18-20%, we should be able to grow at 20-25%—that’s a significant drop from what has been seen in the last five years, but it is still a very healthy rate of growth and not a growth you will find in too many banks across the globe.
Your net interest margin (NIM) is falling.
Our long-term NIMs have actually been around 3.25-3.50% and we are trying to maintain that. Ever since we did the equity issue in October 2009, our NIMs have seen expansion for a couple of reasons—higher capital and re-pricing of expensive fixed deposits. Besides, our Casa (current and savings account) deposits were growing. All that led to significant expansion in NIM—it even went up to close to 4% at some point. But that’s not sustainable.
Will you now focus more on fee businesses to balance the drop in NIM?
We want to grow a little ahead of the industry and generate returns for the shareholders—delivering RoE (return on equity) on a stable franchisee is the key objective. NIMs are one of the elements of achieving that, but what NIM you achieve depends on the product mix because your operating cost and credit cost for different businesses are different. So a single focus on NIM is difficult. Our target RoE is 18-20% and the proportion of fee income to operating revenue will change depending on the product mix.
Interest rates are going up and so are stressed assets of the banking industry. Bad time for bankers?
It is a tough time and the world is becoming more and more volatile and less predictable. It’s going to be very tough to manage any business, but such an environment differentiates good management from not-so-good management.
How do you tide over this tough time?
We have the same uncertainties that anybody else has and, therefore, we have to make sure that we have the right risk profile, right operating efficiency and right customer base.
The savings bank deposit rate has gone up and eventually it will be deregulated. Will that cure Indian bankers’ obsession for Casa?
Let’s look at what is behind Casa—a loyal customer who wants to stay with the bank.
It is about creating a sustainable customer franchise and making sure that they want to continue to do business with you. That has resulted in benefits in terms of Casa fee incomes. I think Casa will continue to be important for banks.
What is your take on savings bank deregulation?
It should be done in a way which is correctly timed for the market and we have to think through all of the consequences. It’s actually a very rich product and we have to recognize that ultimately there has to be a balance between a bank’s financial strength and creating value for customers. When we deregulate, one of the necessary consequences will be that banks will not be able to offer a full-service product at the same price to all the customers. You have to have differential pricing depending on the value of the customer.
Can you have a geography specific approach? For instance, in Mumbai, where people are very price conscious, you offer X, but in Nagpur you offer X-minus—would that be possible?
That will depend on the regulatory structure and the environment. But is there going to be a commercial case for offering different pricing to different customer segments? Very much so, because the cost of delivery will be different and the value of balances that a customer places with the bank is different so there is definitely a commercial case for pricing this.
Do you fear a rate war once it is deregulated?
I don’t fear too much. There will be some volatility in the interim but... even today term deposits of two weeks are deregulated. A two-week term deposit from just a pure savings perspective is not different from a daily balance product. Why does a customer choose to be with a particular bank? It is because he values the full-service proportions that the bank gives. I don’t think it is going to result in a rate war in the long term, but it will create some blips and uncertainty in the short term.
You can always cartelize.
How can you do cartelization when you have the number of banks you have in the country? Cartelization happens only when you have very few members.
You have been talking about the right business model. What’s that? Are you following the ICICI Bank Ltd model where you spent close to 30 years before this assignment?
Am I trying to follow some other bank? Definitely not. That would be a travesty. We should be good at what we have been doing. Having said that, however good you are, there is a lot to learn from other people and that could be from the banking industry as well as other financial sector intermediaries. You will learn from wherever you have great experience. If I look at the Taj hotels and the dramatic improvement in service in the last decade, I think there is lot to learn about customer service from them.
A banker learning from the hospitality industry?
Yes, you go and learn from whoever does well. For instance, when you come to HR (human resource) practices, I think some of our IT companies have done a fantastic job, so it makes a lot a sense for us to go and look at what they do and what we can learn from them and transfer over here.
You paid Rs 2,067 crore for the investment banking and securities business of Enam Securities Pvt. Ltd. Isn’t that too much?
It depends on what value you see in the transaction. There are very few franchises of this quality that are built in the country. This was among the three-four top investment banking franchises which have been around for a couple of decades. It’s a high-quality franchise you are buying which has a legacy behind it.
Once you net of Rs 200 crore of money which you set aside for employees and another Rs 267 crore of cash and cash equivalent which comes with the franchise—remember this was the entity owned by promoters who did not take out cash and all the cash was redeployed in the business—you are talking of about Rs 1,500 crore. Its projected profit for FY11 is Rs 100 crore. So we paid 15 times and for a franchise of this quality it is a very fair price.
You planned to have Vallabh Bhansali (of Enam) on your board, but the Reserve Bank of India (RBI) is not allowing you to do that.
The original thought was to have Vallabh join the board so that there would be a continuity in the transition of the franchise to Axis Bank. Given all the conversation we have had with RBI, we will not be inducting Vallabh on the board. I think the important problem for us to solve is how do we ensure that Vallabh continues to have a relationship with the entity and helps us to transition the franchisee. We will figure out an appropriate structure to ensure that continuity is available.
You picked up about 4% stake in Max New York Life Insurance Co. Ltd sometime in June last year.
In June last year, we actually relooked at our bancassurance partnerships and after evaluating the players we decided to go with Max New York. We also decided that there was an opportunity for us to invest by taking a 4% stake in Max which is what we are hoping to do. Max has written to the regulator and we are hopeful of getting the approvals. RBI has cleared it and Irda (Insurance Regulatory and Development Authority) should also hopefully clear it soon.
You know when you try and do something new which doesn’t have a precedent then obviously that takes a bit of time.
Do you want to close down your private equity arm?
You can’t get emotional about businesses... you have to be passionate, committed to make a difference and to create anything of value, but there is no emotional environment. When we crafted our five-year plan, we realized that private equity was too small and the way it was going to pan out was probably not something that needed to be a focus area for Axis Bank.
We will run this fund to its natural conclusion. We have a professional team which will continue to manage the fund.
You plan to make Axis Bank a one-stop financial shop?
Our goal is to be the preferred solution provider to our clients—corporate customers, SMEs (small and medium enterprises) and retail customers. They may not be manufactured by us, but they could be sourced from a best of breed enabling us to provide a full suite of solutions to our customers. So we are agnostic to whether we manufacture or distribute. If it is not the best use of my capital to manufacture a particular product or if we are not going to be among the best of breed in delivering that service, then we will be happy to distribute.
Currently, we are a full-scale commercial bank, we are a full-scale retail bank and we have a very wide suite of products for our SME customers. We are also a very famous payment franchise. We will continue to grow all these franchises.
On corporate banking, one of the missing pieces of the puzzle was an equity capital market and M&A (merger and acquisition) franchise, which we think is critical to deliver a full suite of services that is not something that we can distribute—you have to deliver yourself.
What about overseas operations?
India is one of the highest growth financial services markets across the globe and we are happy that we remain primarily a domestic bank. Many of the companies that we have relationship with are looking at doing business outside India. They are going global and they have banking needs and we want to serve those needs. That’s the primary reason behind our international operations and what percentage of our balance sheet therefore becomes international depends on what the real India does. Right now it is about about 12-13%.
This is the transcript of an interview which was first telecast on Bloomberg UTV on Thursday.