NPLs may continue for 2-3 quarters: Axis Bank
Private sector lender Axis Bank just concluded its qualified institutional placement (QIP) by raising about Rs 4,726 crore to improve its capital base. Besides, the bank mopped up Rs 811 crore through issuance of preferential shares to five select entities.
Private sector lender Axis Bank just concluded its qualified institutional placement (QIP) by raising about Rs 4,726 crore to improve its capital base. Besides, the bank mopped up Rs 811 crore through issuance of preferential shares to five select entities: LIC, General Insurance, the New India Assurance, National Insurance and United India Insurance.
Funds garnered through QIP will be sufficient to meet growth plans for the next three years. Also, we will be able to meet the Basel 3 norms with this money, MD & CEO Shikha Sharma said in an exclusive interview to CNBC-TV18.
According to Sharma, the accumulated capital will help the bank meet the Basel III norms, the international standard for maintaining capital adequacy ratio, which was adopted by the Reserve Bank of India. Moreover, the funds will be sufficient to meet growth plans for the next three years.
"This time we have sized the capital to be able to maintain tier one of 9.5 percent. It has meant a dilution of just fewer than 10 percent. So, from an RoE perspective that is the kind of reduction in RoE that one would see," she said.
Meanwhile, she attributed the spike in non-performing loans to the economic downturn. On bad asset front, she does not expect any big relief for banks, at least for the next two-three quarters.
"Our retail and SME book have performed well. It is the large corporate book with the slowdown in growth and leverage in certain categories of companies that we have seen a higher level of nonperforming assets and restructuring in the last 18 months than we have seen in the past and that is not surprising in the context of the economic cycle," she elaborated.
Below is the edited transcript of Shikha Sharma’s interview with CNBC-TV18.
Q: You have raised around Rs 5000 crore through qualified institutional placement (QIP). Can you tell us how long will this suffice, given your current rate of growth what does this take your return on equity (RoE) to and when will you come back to your pre-QIP return on equity?
A: In terms of sizing the capital issue we have attempted to ensure that we have enough capital to fund growth for three year period. So, that is broadly the planning horizon that we have sized the capital for. We have also looked at possible implications of Basel III coming in, in FY18.
When we had raised capital in 2009, we had indicated that we would want to raise capital such that we can maintain a tier one threshold of 9 percent and with Basel III coming in, will require tier one of 9.5 percent including capital conservation buffer. This time we have sized the capital to be able to maintain tier one of 9.5 percent.
It has meant a dilution of just fewer than 10 percent. So, from an RoE perspective that is the kind of reduction in RoE that you would see. Therefore, 18-20 is a range we have normally indicated. It is currently about 21 percent. It could drop by 2 percent odd and then come back as the capital gets leveraged.
Q: That should take couple of years?
A: That is what we have said. We have sized the capital raise to suffice for three years growth.
Q: What will this capital be used in terms of your sectoral thrust?
A: It is fundamentally fungible capital and meant to fund growth for the bank. As we see it right now, as a strategic direction we had said that over a period of time we expect to rebalance our portfolio to have retail grown to about 30 percent of the portfolio. Given the slowness on corporate credit recently the retail proportion is already 27 percent.
So, we hit the 30 percent number little ahead of the FY15 guidance, but it all depends upon where the economy goes and where the demand for credit is. If investment cycle picks up again in couple of quarters, which we all hope will happen, then we may still stay with about 30 percent retail proportion.
But currently the guidance would be about 30 percent retail assets, about 18 percent small and medium enterprises (SME), 10 percent agriculture and the balance large corporate is where our portfolio mix lies.
Q: The asset quality has remained resilient for Axis and a lot of private banks but the market is still scared that after all private banks are lending to the same economy. So is it that sometime in the future there is going to be NPL issues rising again in your balance sheet as well? Why do you think you will perform better than public sector banks or the industry in general?
A: I can't talk about any specific bank or segment of banks, but we have been conscious about the risk return that we get from different segments of our portfolio and we have been managing that pretty consciously. Our retail and SME book have also performed well.
It is the large corporate book with the slowdown in growth and leverage in certain categories of companies that we have seen a higher level of nonperforming assets and restructuring in the last 18 months than we have seen in the past and that is not surprising in the context of the economic cycle.
As the cycle turns we would expect that that should also begin to look better as we go along. We might see the kind of levels that we saw in FY13 in terms of NPA and restructured assets could potentially continue for another couple of quarters.
We have been very transparent in our guidance and our concerns as the economy has gone through different cycles and we have not thrown any surprises. We hope that the market will at some point understand that we have been transparent and we have managed our risk return on the portfolio reasonably well through the cycle.
Q: Your fund and non-fund based exposure to power sector in particular has been rising. From FY09 to FY12 exposure to power has gone up from 1.3 percent to 4.4 percent on fund based. On non-fund based exposure has gone up from 3.7 to 20.8 percent. I admit the government is hard at work but it is still possible that when the power companies you have lent to are ready for commencement no one is there to buy power yet. What have you got to say to people who are afraid that that exposure could go awry because much of that exposure came on your books when you last raised QIP?
A: As far as the power sector is concerned, India has a long-term demand supply imbalance issue. Creating assets is not easy on the ground. While there can be some short-term pain in some of these projects if policy does not get cleared up, in the medium to long-term these are real assets with real value and therefore do not cause erosion in terms of credit quality to the bank.
Some of them may need some restructuring, will need some cash flow adjustment, but I don’t think we are seeing a scenario where it is going to result in credit cost jumping up for the bank. That is what we have said in the past that is what we are saying today as well.
If anything we have seen a lot of positive steps on part of the government, we have seen lots of states increase tariffs; a restructuring plan being put through for SEBs, Coal India coming in and begin to sign Fuel Supply Agreements (FSAs). So, there have been lots of positive steps. If anything the situation should look better today then it did nine months ago.
Q: What about the draft norms on restructured assets, which came out a few days ago. What do you think is the impact on your bank in particular and as well as for the banking system as a whole that maybe restructuring is not going to be very beneficial after April 2015 and even now is beginning to look less and less attractive because you have to have higher provisioning and after eight quarters again these restructured assets could anyway slip into non-performing loans (NPL).
A: The new guidelines have couple of components; one is around standardising disclosure, which is always good for an industry because if you have standard set of definitions then comparability becomes easier. The second is around increasing provision levels in a phased fashion and that is fair. Going up to 5 percent over a period of time and phasing it out so that you do not do it at the time when economic cycle itself is weak is perfectly fair. I do not think it is going to make big difference to the profit and loss (P&L) of any bank.
The third bit is around making sure that there is more balance in who takes the pain in the event of restructuring between what promoters have to bring it to the table and the sacrifice that banks make. That is a good move and it will ensure that everybody shares pain of restructuring in a more equitable fashion. There is the issue of what happen to these restructured assets post FY15.
It does mean that if the guidelines were to be implemented as they are in the draft that any asset which is restructured post FY13 will get converted into a non-performing asset in FY15 unless it reaches its period of two years of performance as a restructured asset. People are going to be lot more conscious about the restructuring that they do post FY13.
However, RBI has separated out infrastructure recognising that infrastructure is a long gestation projects, there could be delays in approvals, there could be some implementation issues, which could legitimately require the CoDs to be postponed and therefore the repayment schedules to be postponed without impacting or impairing the quality of the underlying asset. So, all in all the broad components of what is being talked about is fair in terms of detailing, I am sure banks will send in comments in terms of where there could be some refinement that could be required. But broadly it sounds like steps in the right direction.
Q: You would say that the new rules could shave off a bit in terms of earnings per share (EPS) across the banking sector?
A: Not much. If we look at our own book, our restructured assets are just above Rs 4,000 crore. If we knockoff the stuff which has been performing for two years then the net impact in terms of the additional provisioning is not a high number. So, it is perfectly manageable.
Q: Can you give us your visibility with regards to asset quality i.e. slippages and restructured assets possibly for Axis Bank in particular maybe your visibility in the next two quarters?
A: We had mentioned earlier that our credit cost should be about 85 bps for FY13. Given that the economy has not yet turned around maybe credit cost will be around the same level in FY14. As the economy turns around credit cost will begin to come off. But 85 bps is not a frightening number.
Q: Some have just chosen to cut their deposit or lending rates. What should we expect from Axis Bank and by when?
A: The standard answer, the Asset Liability Committee (ALCO) will decide. Our goal has been typically to look at our cost of funds and be able to transfer any increase in that cost of funds or reduction to customers. So, that is the basis on which the ALCO will figure out whether a base rate cut is warranted.
Q: Can you give us a timeline in terms of when the ALCO could be meeting?
A: I think you should see some action in the next month or so.
Q: What about life for you after the new bank licenses are given? Don’t you see poaching more use of the savings rate deregulation, all that making money tougher, making money more expensive for you to draw? One year down the line when the license will be given how will life change for you?
A: It depends upon the kind of players who come in. As far as will there be a fight for talent, of course there will be. Talent stays in an organization for multiple set of reasons. You stay there because you are learning, there is challenge, there is transparent fair environment and competition is one part of it. So, if you are a preferred employer people will stay and in any case it is a market out there and we will have to go out and compete to retain our talent.
We have had a good track record of that in the past, so hopefully we will continue to have a good track record of retaining our talent. As far as what it will do to market dynamics – again we have to see who the players who come in and what kind of tactics they want to deploy and respond accordingly. It is too early, but a strong retail franchise has inherent advantages in terms of customer preference, in terms of efficiency of operations and as long as we have that we have the ability to compete effectively.