Axis Bank's incoming chief Amitabh Chaudhry has a task at hand

Investors have welcomed Amitabh Chaudhry's appointment as Axis Bank's next Chief Executive by pushing the lender's stock up by 5 percent on Monday morning.

On Saturday evening, Axis Bank said the Reserve Bank of India has approved Chaudhry's appointment as new CEO and Managing Director for three years from January 1 next year.​

While the welcome will please Chaudhry, who is the current CEO and Managing Director of HDFC Life, he would know that the same investors could turn against him unless he restores their confidence in the bank, especially with respect to its corporate portfolio.

Since MD and CEO Shikha Sharma's exit was first announced on April 9, Axis Bank's stock has moved up 25 percent on hope of a change in the bank under a new chief.  Sharma will step down by December-end.

Analysts said the first task on hand for Chaudhry is to change systems and processes while working with existing senior executives.

The lender will see a small rejig in its top brass with the recent exit of its corporate banking head Siddharth Rath and the term of Deputy Managing Director V Srinivasan set to end later this year.

"To address the critical issues of mismanagement at Axis Bank, it was critical that the new CEO have two attributes. One was to be an outsider, as the senior executive management under Shikha Sharma had lost credibility," said a note by independent analyst Hemindra Hazari.

"The second was that the new CEO should be a seasoned commercial banker with considerable exposure to manage corporate and retail credit risk and operational risk management," it said.

An Indian Institute of Management (IIM) Ahmedabad alumnus, Chaudhry's profile constitutes very little corporate banking experience. He had a brief stint with corporate and wholesale banking at the start of his career with Bank of America in 1987, where he eventually moved to investment banking. Later, he worked with Calyon Bank (formerly Credit Lyonnais Securities Asia or CLSA) heading the investment banking and technology divisions for southeast Asia.

"Chaudhry also has a vast experience on the technology front which will come in handy as bank further builds upon its digital capabilities and thus boost growth/productivity levels," said Motilal Oswal in a research note.

Axis Bank so far

Axis Bank has been under the scanner of the regulator and investors for over a year now.

Earlier this year, the central bank pulled up the board for proposing another three-year term as CEO for Sharma, whose tenure was then cut short to seven months.

The bank's shares fell almost 8.3 percent from January till April 9, when Sharma was asked to step down and her tenure was cut short to seven months.

Last year, the bank came under the banking regulator's radar for reporting divergences for two consecutive years. In FY16, RBI assessed classification of bad loans to be Rs 9,480 crore higher than what the bank reported and the same in FY17 stood at Rs 5,633 crore.

In June, global agency Fitch Ratings revised the outlook on Axis Bank to negative from stable.

Axis Bank’s capital buffers are less comfortable for its current rating despite raising fresh capital, it said. However, Fitch does not expect the bank's earnings and non-performing asset (NPA) ratio to markedly deteriorate from current levels.

Bad loan trouble

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.

In the April-June quarter, Axis Bank reported a 46 percent decline in net profit to Rs 701 crore after incurring its first quarterly loss (Rs 2,189 crore) in the January-March quarter.

Axis Bank under Shikha Sharma

Coming from ICICI Bank, Sharma took over Axis Bank in June 2009.

Gross NPA ratio as a percentage of total loans, 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 touch 6.77 percent by March-end.

However, it improved marginally to 6.52 percent in June. In absolute terms, gross bad loans ballooned from Rs 915 crore to Rs 32,662 crore in June after peaking to almost Rs 34,250 crore in March.

Course correction

For now, the bank has made corrections and improved its risks and growth strategies.

Its retail advances are going strong, making up 48 percent of the bank’s total advances.

Its exposure to the top 20 borrowers as a percentage of Tier I capital has come down to 118 percent at present compared to 287 percent in March 2011.

Moreover, 94 percent of the bank’s incremental sanctions are now going to corporates rated ‘A’ or above compared to 68 percent in FY12.