Axis Bank is set to announce its new leader next month. The third largest private bank in India is in search of its new chief executive officer and managing director (CEO and MD) to succeed incumbent chief Shikha Sharma.
Sharma’s term is set to end in December 2018. On Tuesday, without giving names, Axis Bank said it has shortlisted three candidates to take over the baton from Sharma.
The names doing the rounds are V. Srinivasan, Deputy Managing Director at Axis Bank, PS Jayakumar, CEO and MD of government-owned Bank of Baroda and Pramit Jhaveri, CEO at Citi India.
Bank of Baroda and Jayakumar have denied the reports saying they are “merely speculative and there is no merit in these news reports”. Citi spokesperson also strongly rubbished the reports as speculations.Axis Bank’s board of directors met on July 9 to deliberate on the succession planning process. A sub-committee headed by director Prasad Menon and aided by global executive search Egon Zehnder considered more names including Shirish Apte, former CEO and Chairman (Asia Pacific), Citigroup and B Sriram, the former SBI MD who recently took charge at IDBI Bank for three months.
The new CEO and MD of Axis is likely to be announced next month after the approval of the Reserve Bank of India (RBI).
But the larger question is whether the bank needs an insider or an outsider to lead it in the present circumstances?
Outsider or Insider?
“An internal candidate is unlikely. Axis bank has also been under the scanner of investors and an insider may not help soothe them. At present, it needs a strong-willed person who can change the systems and processes. Someone who can take head-on, along with existing senior executives…Jayakumar is a good candidate, while Jhaveri may be too expensive for Axis Bank,” according to a source.
Sharma’s gross salary for FY17-18 stood at Rs 4.88 crore, while Jhaveri’s current salary is not in public domain, it is likely to be substantially higher than Sharma’s.
Axis Bank after Shikha Sharma: Will it take an outsider to bring the bank back on growth path?
The source added, Jayakumar has also worked in a multinational bank (Citibank) and is doing well with Bank of Baroda at present. “Historically, he also has been in the professional mould and also managed well in the limitations of a public sector undertaking and managed the people challenge.”
But there will be difficulties. “Challenges for a person coming from outside would be the ability to settle in such an environment and getting Axis bank on the growth path. Its retail book is on track but the resolution in the corporate book will be key…Yes, there may be a process change required. But I would assume an insider may also be looked at…I wouldn’t speculate (on the names),” Abizer Diwanji, Partner, and National Leader – Financial Services, EY India.
Diwanji believes Axis Bank has a corporate banking problem similar to many other banks, yet is much better than the likes of IDBI Bank and few other public sector banks.
The NPA burden
Axis Bank’s asset quality has deteriorated substantially in the past three years with its non-performing assets (NPAs) surging over 300 percent.
The situation worsened especially after RBI asset quality review (AQR) in late 2015 which led to a rise in bad loans for most lenders. Axis Bank was among the worst hit given the heavy project financing in its corporate book.
During Sharma’s tenure, Gross NPAs to total loans ratio, which was 0.94 – 1.68 percent between June 2009 and March 2016, breached 2 percent for the first time since Sharma took over. It rose further to reach 6.77 percent by March end 2018.
Since she took charge of the bank in 2009, Axis Bank’s gross bad loans ballooned from Rs 915 crore to Rs 34,248.64 crore at the end of March 2018, while on a net basis, the bad loans stood at Rs 16,591.71 crore, largely from the corporate portfolio.
To add to the trouble, in the quarter ending March 2018, from January to March, Axis Bank reported its first-ever quarterly loss (Rs 2,188. 74 crore) since it listed over two decades ago. The bank also, for the first time in 10 years, skipped declaring a dividend.
Axis after Sharma
In April, after RBI’s nudge and pressure from investors and shareholders, Sharma’s term was reduced to seven months from three years at her request. Sharma has been at the bank’s helm since June 2009.
In its annual report released in May and the last quarter financial results for FY17-18 announced in April, outgoing Sharma attempted to clear her image as well as of the bank that took a beating with negative headlines for over 18 months.
A senior analyst says, Axis Bank can be a good growth story from here on, so the new leader can benefit if he/she can manage a turnaround.
“For Axis Bank, the next challenge is to sail through management transition in addition to dealing with some of the remaining stress assets,” said Udit Kariwala, Associate Director at India Ratings & Research of the Fitch Group.
Diwanji says the private lender has a strong and growing retail book, which is not a concern. “Axis has limited problems given the size of its balance sheet and market capitalisation. Except for fully assessing the NPAs and providing for it, Axis Bank is otherwise quite stable.”
That said, the bank’s problems are still at historical highs and may need more than just a clean-up.
Its credit costs are at 2.82 percent, the most in at least 14 years. Its price-to-book ratio is 2.3 times, as compared to its smaller peer Kotak Mahindra Bank’s about 4.0 times, as per Bloomberg.
However, with a strong retail franchise, as Diwanji puts across, and capital infusion worth Rs 11,625.8 crorefrom the likes of Bain Capital and other investors, the bank may be well-positioned to turnaround.
At a time when the banking industry is fixing its bad loan problems, no bank including Axis Bank would remain immune to it. But for Axis, it is important the new leader does not kill the goose that is probably poised to lay the golden egg.