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CEO Speak: Prudent approach, strategic initiative to drive sustainable, superior returns

We interacted with the senior management of Axis Bank including Mr. Amitabh Chaudhry - MD & CEO, Mr. Puneet Sharma – CFO and Mr. Rajiv Anand – Wholesale Banking, Executive Director. Prudent and conservative path to cushion volatility and deliver superior RoEs was evident from: 1) Not chasing growth - lending to right segments at a right price; 2) more focus on RaRoC than book growth in corporate banking; and 3) carrying forward covid buffer and utilising it in extreme contingencies. Few encouraging strategic initiatives include: i) Re-oriented corporate structure and leveraging Axis One platform; ii) preparing itself for a huge opportunity in government business; iii) change in mindset and technology-led structural transformation in MSME business; iv) GIG-A hiring to save incremental costs; and v) graduating from ETB to KTB for wider penetration. As per the current approach, we believe the bank is set to move towards >15% sustainable RoE in medium term. Maintain BUY with a revised target price of Rs953 (now assigning 2.2x FY23E ABV for banking business with improved visibility and Rs58 per share for subsidiaries; earlier Rs814). Key risks: Higher stress and lower-than-anticipated growth can cap RoE improvement. Prudence and conservatism clearly evident:

* Contrary to cautious outlook, economic recovery is looking up: The management highlighted, contrary to its cautious outlook 6-9 months back, it is now comfortable and positive about better economic recovery. Activity levels, too, are getting back to or better than pre-covid levels. The bank is also very well poised to support grow and participate in recovery. However, it remains cognisant that large and stronger players are talking more about growth while weaker and smaller players are getting marginalised.

* Will follow the path of prudence: It will not chase anything and everything but will lend to right entities/people in right sector/segment at a right price. It will remain cautious in some sub-segments namely LRDs, commodities etc. In corporate segment, it will focus more on consolidated offerings and RaRoC over book growth to drive the operating profit. Will drive retail lending hard skewed towards secured segments and will build MSME segment on a granular basis through its technology-led transformation programme.

* More focus on RaRoC than book growth: Bank is not pursuing corporate credit growth at the cost of margins, though in its area of strength it is willing to grab the opportunities coming up at a fair pricing. Instead, Axis is focusing on consolidated offerings to its corporate banking customers including cash management, forex, trade financing etc. It is driving enough non-credit fee and float levers that aid in generating targeted risk adjusted return on capital (RaRoC) that may not necessarily purely flow from mere lending. Following a capital-light model and managing RoRWA, it will actively pursue originate and distribute model. All these factors support sustained growth in pre-provision operating profit in corporate banking segment despite moderating credit growth.

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