Axis Bank - Q4 FY23 - Quarterly Earnings Call

Participating Analysts:

1. Mahrukh Adajania - Nuvama

2. Kunal Shah - Citi Group

3. Adarsh P - CLSA

4. Abhishek Murarka - HSBC

5. Saurabh Kumar - JPMC

6. Rahul Jain - GS

7. M.B. Mahesh - Kotak Securities

8. Jai Mundhra - ICICI Securities

9. Anand Dama - Emkay Global

Yield & Margins:

1. You mentioned that you'll grow 400 to 600 basis points above the sector. But what's your view on sector growth and deposit growth specific to your bank?

- The guidance is for the medium to long term. Our projection for next year on the credit side for the system is 12% to 13% and our deposit growth is expected to remain in the same zone as well it is today.

2. There is not much of an increase on a QOQ basis on yields. So, what could be the reason for that other than excess liquidity?

- Mainly due to a 6 basis points impact on net interest margins because of the 13% higher average LCR maintained through the quarter.

3. Ideally with this lending profile, in fact, yield expansion should have been higher on a QOQ basis, maybe 6 bps plus, no improvement on a calculated basis. So, doesn’t that still seem to suggest a slightly lower number?

- We have clearly said that our loan spreads have expanded by 4 basis points as per our computation on an average basis. And overall, we feel comfortable with the loan yields that we are currently running at for the book that we have.

4. Let's say, we are at ~4.20% with some liquidity buffer. And we will get into the next 2, 4 quarters where cost of fund will catch up with yields, which had moved up earlier. So, just wanted to understand we had earlier indicated a margin bank. We had some fundamental improvement in our business also. So, what's your comfort zone on margin if I want to look 12 months out?

- I think we stick by the fact that we don't guide what absolute margins are. But let me help think through the issue. FY23 full year, we have called out is 4.02%. We started on a low number. We ended on a higher number. We report on a quarterly basis, the numbers exist. Our Q4 annualized is 4.22%. And at a full year FY23 NIM of 4.02%, I have delivered a consolidated ROE of 18.84% on a full year basis. I go back to what I have consistently said. We have a 40-basis point cushion over the structural NIM guidance that we have. We will continue to work on the 5 initiatives that I have spoken to you about on improving our net interest margin. Yes, there will be a lag effect of deposit cost increase. We will endeavor to maintain as much as the cushion that we have built for a sustainable period. We do not guide a specific outlook for 12-month margins.

5. If you look at just the yields on advances, is there any particular sector where it has become increasingly difficult to pass on yields because your loan mix has moved favorably in the last 4 to 5 quarters due to all the efforts that you've taken, but the yield is not reflecting a commensurate increase. So, is there any sector where you are finding it difficult to pass on the rates or any comment there would be helpful?

- I am a bit surprised by the comment that there is no commensurate increase in yield. I mean we have worked very hard to increase our NIMs, which have moved from 3.4% to 4.2%, partly obviously one of the reasons I've been able to do it is we have been able to increase our yields and that is reflected. In our case, it has happened faster in comparison to some of the others because we pushed through some of these changes faster than some of the others. So, it can't be timed exactly as maybe to someone you might be comparing us to.

6. You said you've got the delta maybe slightly ahead of what others may have got. So, keeping in mind the loan book mix that we have got, which has MCLR and even some of the fixed trade portfolio as that is getting repriced at higher rates. But do you reckon that despite all of it, we have now started reversing the yields, I mean, are we going back on the cycle, given whatever competition that you talked about? Or we still have some room available to kind of maintain or push up this number?

- On one side, we have factors which are working against us, including repricing of deposits and slow deposit growth. On the other side, we have 5 factors at play where there is still some scope left to continue to push for improving our overall NIMs. Over and above that, if you look at within retail and wholesale, the growth, for example, if you combine the mid-corporate, the CBG and the business banking segment that have seen a meaningful increase in overall share in our overall earning assets. So, there is also a kind of a product mix factor at play. So, while not giving guidance, we are trying to say that we have factors working on both the sides.

7. Post the acquisition of Citi, when we look at the next couple of quarters, is the housing yields reflecting the book at which you are carrying today and also for the credit card book and also on the deposit side.

- Just to set context, the total Citi asset book that came over was ~Rs. 29,000 crores, that's about 3.5% of the total assets at Axis level. Of that book on a proforma disclosure basis that we did in January, Rs. 9,000-odd crores was credit cards and the balance was mortgages, Auto, CV, etc. So, first and foremost, on a cumulative number basis, will this move the yield insofar as the non-cards business is on Axis book yields? No. On a disbursement yield basis, I have said, we have decided to operate as one franchise, and therefore, disbursement yields should be consistent. We don't want to have internal competition vis-a-vis the customer. On credit cards, the Citi franchise, obviously, was a superior franchise in terms of both spends on cards and that we hope we will continue to sustain.

8. If you can talk about the pricing in your fixed rate book given that the repo rate and EBLR-linked products would have seen a 250 basis point upward revision over the last 12 months.

- 42% of my fixed rate book matures in the next 12 months. That should give you comfort that if there is an uptick, it will get captured in the market space. We are very confident that we are not underpricing ourselves to competition. Therefore, book yield should get captured.

OpEx & Other Expenses:

9. Breakup given in the notes to accounts of Rs. 5 billion for provisions and for OPEX on harmonization is part of the Rs. 20 billion or Rs. 15 billion Citirelated OPEX over 2 years that you had pointed out?

- This is transaction-related expenses. I had specifically called out in our communication previously that we will incur integration expenses of Rs. 1,500 crores post tax over the next 18-month period. Therefore, the Rs. 12,489 crores does not include integration expenses. Integration expenses are recurring and integration expenses are, therefore, sitting in the operating expenses line on a reported basis this quarter

10. Just wanted to understand, as you get into FY24, you'll have a full year of higher OPEX business costs running in, you’ll add branches as well. And overall, the cost to asset of acquired Citi business would be more. So, just wanted to understand, do you want to recalibrate your guidance of 2%? Or you think over a 3, 4-year period, you will get there?

- We have given a broad sense of what our cost to assets for Q4 is, which is 2.25%. And then you see a dotted line, which is showing you a number of about 2.40%, this is post annualization of costs booked for 1 month. That should be a fair indication of the annualized impact across integration expenses and cumulative book taken over.

- Yes, we have a guidance out there which said we would expect to get to around 2% by FY25. We will work hard towards normalizing the number, but very clearly, the Citi business is entirely a retail business. Retail businesses run at higher cost ratios. And therefore, there should be a recalibration in all our minds to where that calculation will land at. But in the medium term, we stay committed to getting to the 2% cost to assets.

11. The 2.4% number includes both the running cost, which is a higher OPEX business and the one-off integration costs, does that include both or that only includes the running costs?

- It includes both cases, the best estimate that we have currently.

12. On the cost side due to integration or rather the merger cost, the only thing that is now left is the integration cost, right, which is Rs. 1,500 crores over the next 18 months that you have alluded to a couple of times.

- It includes both cases, the best estimate that we have currently. All onetime costs with respect to the purchase have been dealt with. The Rs. 1,500 crores is post tax and we will incur that over an 18 months period. That’s absolutely right.

Growth:

13. Just trying to understand the growth trajectory now that the integration may be going on full swing. How should we think about how the growth will look like over the next couple of quarters? When do we expect some delta to start reflecting from the Citi customers in the portfolios where they are significant?

- So, we have taken it over as of March 1. We did not have any data before that, where we have got an idea of the customers. As we said, the senior management team has been visiting some of these customers and getting a sense of the customers out there. We have also mentioned that we saw 60 plus synergy initiatives, which could be undertaken by Axis to the combination. I also mentioned that 20-plus synergy initiatives are already in play in the first quarter and the synergy benefits are obviously around 3 things. They are around deposits; they are around revenues and expenses. So, these things will play out through the year and beyond, because we are also going through the transition to LD2 when all the systems, all the cards, every technology will be onboarded on to the Axis platform. So, while changing the wheels of the car, we are obviously pushing through the synergy benefit. There's a separate team which is working on it.

14. You had kind of indicated there is a potential slowdown that you are seeing on the growth side. Any possible reason for calling it out this early? Is there a demand slowdown that you are seeing? Or is there any kind of risk that you are seeing out there that you are worried of?

- I think the narrative on what is going to happen in the world has changed every one month. What we are really saying is, on one side, we have a platform we can capitalize all the opportunity that comes our way, and we will grow at a certain rate above the industry. But at the same time, it is very, very important for us to be cognizant of some of the risks out there, which could play out and to reunite some of those risks as and when they emerge and to be able to change our path, our way to ensure that we don't get hit by unexpected risks and unexpected losses are the things that return the other way.

15. While I understand that we don't give guidance, and we have the stated aim of growing 400 to 600 basis points ahead of the industry. For FY23, if I exclude Citi, then we are very close to the industry. And this year, probably we had one of the best tailwinds for NIMs. So, I wanted to check as to what were the 2, 3 key constraints, which limited our loan growth to similar to industry level? And to what extent you think they have been addressed.

- Our growth rate on the wholesale side was quite muted for the first 3 quarters because in a very calibrated way we realized, we were not getting the kind of pricing which we want. And we did not want to participate for the sake of participating in whatever transactions which we were coming our way. So, a large part of our book did not grow that much in the first 2 quarters and it was muted growth in the third quarter. As things have stabilized, I think we have demonstrated very clearly in this quarter that we can grow faster than the industry. As we have always said, you can't deliver 400 to 600 every year or in the medium to long-term basis, we believe that, that's the kind of growth we can demonstrate over a certain period of time. And that's the growth we are very confident we can deliver as we continue to move forward because we have the platform, we have the reach. We are digitizing extremely fast.

Deposits

16. How the growth translates into branch expansion? Because the HDFC Bank is likely to set up many more branches. Would you want to scale up your branch expansion given that deposits are getting tight in the system?

- We expect to add up to 500 branches this year. Obviously, we keep calibrating our thought process around it as the year will move on. We do not want to react to what others are doing. We want to do what we believe will be the right way to grow our business and grow our deposits and reach our customers in a particular way.

- We have maintained a pretty consistent stand that we believe that the combination of opening new branches, our mobile app, which for us is the largest brand for us, the fact that we have these business correspondent relationships, the fact that we have expanded our VLE network is a way to reach our customers in different forms, in different ways, and we will continue to build on that strategy.

17. In the Analyst Day back in November, I think you had shown a slide where you had shown a movement of lendable deposits versus non-lendable deposits. And the lendable deposits had gone up, I think, 10% in the first half, non-lendable down about 17-odd percent. Can you give an update on how that has trended? Ideally, it would have improved further the mix?

- The other way to look at the same data point is the reduction in outflow rates. As Amitabh called out in his opening remarks, our outflow rates on a Basel reported basis, are down by about 550 basis points. So, if we had an outflow rate of 25% to 26%, our rates would be in the 21% to 22% range now. That itself shows you the improvement in the quality of the deposits. As outflow rates decline, lendable deposits by implication increase.

Credit Costs/ Provisions/ Write-offs:

18. Does the write-offs being higher has to do with the acquired Citi portfolio because NPAs are given separately, but any impact of Citi on write-off?

- The entire Citi portfolio is retail led, and I have a rule-based policy of writing off retail loans that I have discussed with you previously. Given that the portfolio was just acquired a month ago, there would be limited to no impact of the Citi portfolio and our rule-based write-off.

19. Recovery upgrade momentum is quite high this year. How should we think about it going into next year? Would you expect this momentum to start moderating? How do you think about your credit cost for next year?

- Broadly, the upgrade and recoveries are reflective on the net credit cost number. But if you even look at where our gross credit costs are that we show you a data point, which is over 15 years, and we show you every quarter. The gross credit cost itself has improved meaningfully.

Corporate & SMEs

20. When we look at our SME book that’s been growing at a pretty faster pace, so what is there basically driving the growth? Which are the segments where we are going? And have we increased the yields on this portfolio in line with the increase in the repo rate?

- So, point 1 is that growth in this segment over the last 18 to 24 months has been strong and continues to be so. The portfolio is very well diversified across sectors and geographically. We also managed from a risk perspective the ticket sizes that we do on a per company per corporate basis within this space. And as far as the yields are concerned, this book is linked to repo. So, therefore, the impact of higher rates as a result of the repo rate increases have been passed on.

21. Particularly on the corporate growth front, as you said last year, there were some issues in terms of corporate growth but how do you see the corporate trade you are picking up this year? Can you provide some insights on that.

- So, we are seeing demand on the corporate side across multiple sectors, for example, in iron and steel, commercial real estate, infra, roads, and NBFCs. So, demand is quite robust at this point in time. We are also seeing a reasonably strong uptick in terms of private CAPEX. However, not all private CAPEX is being funded by bank loans, given the fact that corporate cash flows continue to remain strong. And corporates have de-levered, they are using their own balance sheet to fund CAPEX as well. So, demand continues to be strong and across multiple sectors.

Subsidiary:

22. For Axis Finance, the growth is very high, building off retail business of a low base. So, what kind of customer segments or retail business is being done back?

- Axis Finance has been trying to grow the retail side of the business quite actively. They are into LAP, business loans, and I think they have built a niche for themselves based on some of the technology and the kind of customer end to-end solutions they have developed. The portfolio quality is pristine at this point in time. They've also developed what they call emerging market business, which is more the SME side of things. Their overall wholesale business continues to do well. Axis Finance has also sold a pretty decent portfolio through the year because they were getting very good rates, and that is also reflected in the P&L. We are quite positive about how that business is being built. And obviously, Axis Bank is very, very supportive of what they are trying to do. They intend to continue to expand the franchise as we move forward. Actually, they just completed 10 years and is one of the fastest-growing NBFCs if you look at in terms of the growth and profitability in our 10-year history. So, we are very, very happy with what they have achieved.

Others:

23. And any reason for running LCR at 129% and excess SLR at Rs. 75,000 crores?

- If you look at the historical LCR that we have maintained, it has been in the region of 116% to 121%. This quarter was 129%, so about 8% extra. Part of this is explained by the fact that we had to pay for Citibank acquisition of about Rs 12,000 crores, for which we were carrying excess liquidity. Partly, we had a much better outcome on cash flow side depending basis some of the transaction banking-related flows that we received. So, that resulted in a much higher balances in current account and a much higher holdings in government bonds. So, both of these have contributed towards this increase in the LCR of 129%. I think it will normalize over the next 2 quarters.

24. The sequential movements on the fee growth have been very strong. How much of that is durable? And how much would you attribute to a, let's say, year-end effect, typically March would have a bunched-up effect?

- Everything we are doing in Axis is to trying to build a granular business. Nothing is being driven one-off, onetime or pushing it towards end of the quarter or end of the month. Yes, you can have some transactions, some things which worked out and you had a little bit of a spurt. But otherwise, please understand and appreciate, the entire drive over the last 3.5, 4 years is to get everything granular so that we can repeat our numbers QOQ on a predictable basis.

25. Can you help us 1-month PPOP and profit of the Citi portfolio?

- We are operating Citi India Consumer business and Axis Bank as one bank. And therefore, we don't intend to report Citi independently on go forward basis.

26. So, we have fully passed on the rate hikes or like there has been some back and forth like the customer comes back and basically, we review the rate?

- They've been fully passed on.

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