The board of Axis Bank on Friday approved a 9 percent stake sale to Bain Capital and other investors including LIC in its bid to raise capital worth Rs 11,626 crore by issue of equity of equity linked securities on a preferential basis.
Approved by the Board, the bank proposes to raise Rs 9,063 crore through issuance of equity and the remaining Rs 2,563 crore through issue of warrants.
However, the capital raise is subject to shareholders' approval at the EGM (extraordinary general meeting) of the Bank to be held on December 8, 2017.CNBC-TV18’s Latha Venkatesh spoke to Shikha Sharma, MD and CEO, Axis Bank.
She said in the past they have raised capital with a three-year cycle with an intent not to come to the market too often. The current capital raising is also with that cycle in mind and assuming growth would come back, this raise would suffice, she said.
The plan for capital raising was done with three things in mind – Indian accounting standards (IndAS) provisioning, growth and subsidiary capitalisation, she said.
She said, the largest portion of the raised capital plus the one that is internally generated over three-years would be utilised for growth.
She also clarified that Bain Capital will be short of 5 percent equity in the bank even on fully diluted basis and will have the right to ask for a seat on the board.
In the interview, she also spoke about growth, slippages, stressed assets, interest rates, M&A etc.
She said the bank has always strived to be a good bank, be a bank that services customers, to be a bank that has strong capabilities. Being a no. 1 bank or no.2 bank is not the big driver – the big driver is – to see that we have a great franchise, that we have enough growth opportunities and that we creating value for our shareholders, she added.
Below is the verbatim transcript of the interview.
Q: It is a big capital raising, the market was preparing for a 5 percent capital share issue. What we are getting is almost double. Can you tell us exactly some numbers as to what is the CET1, what is the Tier1, what will it become after the capital raising and how much of this is for growth and how much for loan loss?
A: Let me start with the capital planning first. As you know, in the past, we have typically raised capital with a three year cycle and our intent has been to not come to the market too often which is why the three year cycle, but we do not want to stock up with too much capital, so we try and stay with our best estimate of what we would need over a three year period and that is pretty much what we have done this time as well.
So assuming that growth that has come back over the next three years, looking at how much we would need for growth. There is also the event of Indian Accounting Standards (IndAS), what would happen during this period, so looking at how that might impact the need for higher provisions and some capital which may be required in a few of subsidiaries which are currently in growth mode.
So those are the three things that we have looked at while planning for capital. And again, our objective has been that we should try and keep CET1 at above 10-10.5. so given that we were hitting 10.95 and given the spate of capital issuances expected in the market, we thought it would be a good time to go and raise capital.
Q: So, 10.95 becomes how much?
A: We had 10.95 end September, the raise is about 220. Given that we may use up some for growth, currently we would expect that maybe we will end up with about 12.75 CET1 at the end of the financial year.
Q: How much of this is for growth? Would not some part be for loan loss because there is a big non-performing asset (NPA) as well to provide?
A: Money is fungible and if we look at the combination of money that will come through the capital raised plus internal generations over the next three years, the largest portion of this capital, internally generated plus raised, will certainly go growth. And then we do expect that IndAS could imply entries in provisioning because of the definition of stage-II and the requirement of provisions that are on an accelerated basis, but I think that would be the next bucket and then it would be the subsidiaries.
Difficult for me to give you an exact number on the IndAS impact at this point because we are still waiting for complete clarity from RBI on how stage-II is going to be defined.
Q: I heard numbers of 75 basis points of the extra capital will go for IndAS. Is that a working number?
A: I think it could be anywhere around that number, so as I said, difficult to predict, but it is not very off. It also depends on what happens to markets because there is provisioning and there is mark to market (MTM) impact of the books, so a lot of moving parts out there.
Q: Before I ask your growth estimates, just a word on the investors. Bain Capital, after the conversion gets 5.3 percent. Is it allowed to keep 5.3 or do you think your whole equity will rise by then because you require RBI permission above 5 percent?
A: Actually, they would be just short of 5 percent even on a fully diluted basis.
Q: So then no special permission?
A: No.
Q: Nobody is asking for a seat on the board?
A: Typically private equity investors do want a seat on the board, so put that in our stock exchange notice that there is a right to get a seat on the board for Bain Capital.
Q: Now for the growth. You did 16 percent loan growth this quarter. Should we assume that as the rate of growth or can it be even better?
A: Over the next three years, our estimation is that the consumption cycle continues to do well and some of large corporate credit growth which has been very subdued because of the slow investment cycle plus some of the credit demand going to the markets rather than to banks, that could change and therefore, we could expect corporate credit growth to go up, plus, which I think a lot of people have talked about.
But we do think this whole demonetisation and GST is going to result in a faster, move from informal to formal. And to be honest, we are already seeing indications of that. So we are seeing some of that shift, even in the numbers that we are seeing today. So if you take a 3-5 year view, some of that growth will come in as well. So I would expect that for a bank like ours, the base line we would expect growth to be above that 16 percent number. But we will see how it goes. We live in such an uncertain world right now.
Q: Let me come to the loan loss provision as well. As you say, you will have reserves also to shore up your capital. How bad can it get? That Rs 8,000 crore slippage was a nasty jar. Is that the peak? Should we see it receding from here on and where do we end? 5.9 becomes what, 7?
A: Again on the whole recognition issue, a couple of years ago, it was primarily based on record of payment and we move towards IndAS, it is going to move to a different process where provisioning is going to look at inherent strength of account. So we have a big swing happening on that and that is going to impact what happens in terms of provisioning as well.
Having said that, we have said in the past that we think that the slippage number should begin to come down and if you look at our numbers, they were coming down except for the divergence issue which has come up in this quarter. So we would expect that post that, you should see the numbers starting to come off, but we will see higher than long cycles, slippages, for a couple of quarters still, as things settle down.
Q: Why I am asking you about the 7-8 percent NPA is for two reasons. One, other lenders like ICICI Bank peaked off at 8 percent or so it seems. As well, if I take your R 27,000 crore gross NPA and add the Rs 15,000 crore which is your double B, you come to about Rs 40,000 crore which would be at the moment 10 percent of your book. So is that the peak? It does not get worse than that?
A: I would be very surprised if it gets to a 10 percent number.
Q: So 8 is a good number to work with?
A: I do not want to commit to any number. You will hear it when we give our guidance for next year. But, I can certainly tell you that we expect the gross slippage numbers to slowly come off and by the second half of FY19 is when we would hope that we should get back to a long-cycle credit cost type of number. So the next couple of quarters could still see elevated slippages and then the second half of 2019 is when we expect, long cycle average. And our long cycle average is about 1 percent credit cost.
Q: What is causing this divergence between the RBI and at least private sector banks? Is it more optimism or is it that RBI is preparing for IndAS?
A: As I mentioned earlier, the recognition process for banks till a couple of years ago was purely based on record of payment and that is what we knew and that is how we disclosed it. But over the last few quarters, ever since asset quality review (AQR), RBI has access to a lot more data of the entire banking system and they are using that to look at flows and try and assess inherent weakness and I think yes, preparing banks with a more fortified balance sheet and that resulted in accelerated recognition in some cases.
So, at the point of AQR, we had a very small divergence. But subsequent to that, with some of this data across banks that RBI is using, we have had divergence numbers last year and this year again. This year, as we have pointed out, only 6 percent of the total banking exposure to the companies which were identified during the divergence is NPA. So it is not like there were reports on what were we trying to do. I just want to say that it was not that we were trying to do something.
I think RBI as a regulator is looking at fortifying balance sheets, accelerating provisions and they have told us to downgrade some of these assets and we have done that. Hopefully, some of these will see recovery and upgrade over the coming quarters.
Q: Besides steel, which was the big shocker across banks? There is of course, power and telecom. What is your exposure to telecom? If you knock off the top-three telecom players, Aircel, Reliance Communications, are all looking vulnerable. What is your exposure to those?
A: Our funded exposure is largely to the high quality names here.
Q: So we should not expect?
A: We would hope not to see any shocks there.
Q: Let me now come to the bank building. You have got a fresh tenure at the helm of Axis and you have got a lot of money. So, what is the big plan? Is it a technological overhaul? I mean FreeCharge is anyway sitting.
A: Yes, the money still has to come in post shareholder approval. So we should not jump the gun there, but yes, it is good to have a commitment from long-term investors on this capital. But to go back to your question on what is the plan over the next couple of years, if I go broadly, the plan over the last several years has been to balance out the ending side of our balance sheet, grow the consumer lending franchise, strengthen our SME franchise, it has always been good, but I think we have made a lot of investments in terms of process reengineering, some of our risk infrastructure on SME and as this whole shift from informal to formal happens, we see those are the two big growth engines. So I think consumer lending should continue to grow and I think SME should come back into higher growth mode. All the government policy initiatives are around that as well. So, I think we would be well positioned to capture that growth. And that could come both, from standard ways of lending plus using technology to lend.
Q: That is what I wanted to ask because we see all the non-banking finance companies (NBFC) going big into big data and analytics. Will you use some of this money to upgrade technology? I do not know if it is expensive.
A: What we are happy about is where we sit on our whole consumer lending franchise. From day one, it was built on data: scoring models, straight through processes. So as far as the consumer lending franchise is concerned, we will keep learning and seeing how to use more data which is available, but the core of the building blocks to doing that are very much in place. And we would leverage some of that same learning and process as we go into at least a smaller ticket of the SME franchise. So when it comes to the larger tickets, you will still use a lot more judgement and typical credit tools, but certainly for smaller ticket sizes, the availability of data, one can move to more automated underwriting and risk management.
Q: Do you see yourself acquiring something more like FreeCharge and expand digitally or expand your analytics base?
A: We will keep looking at acquiring capability, partnering as we go along and if something makes sense, we would certainly look at that, but I do think we already have a lot of investments in that area. So, I do not think the capital is going to go into a lot of capital expenditure in that area. Certainly accelerate that growth and to that extent, capital to fund that growth yes, but not as much into technology per se.
Q: What about mergers itself? You were in the midst of a big merger talk. Is anything on the table in terms of inorganic?
A: On mergers, our philosophy has been fairly clear and steady that every time we have done an acquisition and we have done two so far, they have been to acquire a strategic capability that we felt would be very hard to build organically. And if there was a high quality inorganic franchise available, that is what we have been open to looking at acquiring as we go along. As we move along, we have to respond to how the environment is changing. At this point of time, the way we look at it, we have a lot of the core capabilities we need to grow and they are aligned with the growth opportunities we see in the market. And we think there is a lot of growth opportunity. So frankly, a merger and acquisition (M&A) at this point of time could be a distraction for us. But having said that, we will see how things shape.
Q: You were from insurance. Do you regret leaving it? Therefore a desire to pick up insurance?
A: I have done insurance for nine years. So why will I regret not being there? I have done that for nine years. I have been there.
Q: So you best know whether you can pick up stake in some insurance. And anyway Max Life Insurance, I thought, was looking for partners.
A: As far as insurance going forward is concerned, over the last eight years in Axis, as you can see, we have been very busy growing and building new capability and within the bank itself and within some of our chosen subsidiaries, asset management, Axis Finance, that has worked well for us so far. Going forward, if there is an interesting opportunity in insurance, we will certainly evaluate it, but we will see how that goes.
Q: What is top in your priority to pick up something in insurance or pick up something in asset management companies (AMC)?
A: As far as AMC is concerned, we have gone from virtually nowhere in 2010 to being the number 10 player. I think we are well positioned for the growth. We would look at an acquisition only if it is going to create value for shareholders.
Q: So acquisition is not foremost in your mind in any part, banking, insurance, AMC?
A: Certainly, for banking as I said, we have a lot of the core capabilities, as potential for growth. So it is not our number one agenda at all. AMC again, unless something came across at a very attractive price and created value for shareholders, we believe we have enough capability to continue to grow organically. If we look at doing insurance then we would evaluate organic-inorganic given that we do not have a starting position at this point. So we will look at it. But is it is number one on my agenda of things to do at this point? No, but certainly we would evaluate if something interesting came along.
Q: And for those who are trying to acquire you?
A: As I said, on acquisitions, our position is clear. Either it needs to add a strategic capability or it needs to be accreting value to our shareholders. If that is the case, we would always be open to examining anything. But, we are not looking at anything at this point in time.
Q: Let me come to the asset quality part yet again. I was asking you about these technology questions also because your judgement on slippages has clearly gone wrong. So, what is it that went wrong? Is it something that you will want to strengthen now in the bank or is it something that the economy took you by surprise?
A: I think there is a bunch of things. One, I think the regulatory stance on that has changed for good reason that the regulator is saying I want to move more and more towards intrinsic strength rather than record of payment of loan. That has accelerated recognition for the entire system. At the point that we put out the watch list, this whole journey was not quite complete and so I think we did not factor it well enough into our assessments. The second thing is from an economic perspective as well, some of the sectors which have had stress, steel I think the minimum import price (MIP) has made a big difference. And also the global increase in prices has made a big difference to the fortunes of that sector.
So some of the stance on these changes with what is happening in the real economy as well. On power there has not been much improvement and on infrastructure also, there has not been a big improvement. So we will have to wait and see what happens, but some of that has turned out to be worse than what we might have hoped when we started it. What have we tried to do to get some of this better as we go along? Some, there has been a shift and we want to make sure that we factor that shift in as we estimate slippages for the future.
We have also invested a whole lot in data base on our corporate book. And cutting it in different ways to see how it is moving because if it is purely judgemental, you can get that judgement wrong, but ultimately, data does give you trends and while you cannot be very scientific about it, but if you use multiple data cuts, you do get a higher degree of confidence in terms of how the book is moving.
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