AXIS Bank Banking on Technology and Market Segments for Competitive Space Arun Kumar Jain? Affiliate Professor of Strategy, IB and Corporate Governance, EM Strasbourg School of Business (France) and Nidhi Jain, Research Associate, CALIC — Germany X18 Bank (formerly UTI Bank) is the first new generation private sector bank to beestablished in India under the overall reform program initiated by the Government of India in 1991. ‘The Bank is promoted by Unit Trust of Inidia, the largest mutual fund in India, holding 87% of the equity. The Bank started its operations in 1994, AXIS Bank’ first capital raising post-inception was in 1998 through a public offering. The present shareholding pattern is: As a conscious strategy of building an organic growth engine during the year, the Bank continued to expand its distribution network, in both domestic and overseas geographies, to enlarge its reach and accelerate its business momentum. The Bank has developed a branch network which is built on customer-convenience and service, helping it particularly in the acquisition of low-cost retail deposits, retail assets, lending to agriculture, SME and mid-cor- Porates and facilitating the cross-selling of third-party products, During 2007-08, 143 new branches were added to the Bank’s network, taking the number of branches to 651. This includes 33 extension counters that have been upgraded to branches. As on March 31, 2008, the Bank had a network of 651 branches and 20 extension counters as against 508 branches and 53 extension counters a year earlier. Out of the 651 branches, 158 branches are in semi-urban and rural areas, ‘With the opening of these offices, the geographical reach of the Bank extends to 29 States and 3 Union Territories covering 405 centres: wn BSASM SSSR EH Bomam See BeeCompetition among the North American Warehouse Clubs C-67 Shift in Strategy Initial business model The bank started its operation with corporate assets being the main focus area. Corporate loans offered higher yields to the bank during the period FY96 to FY99. Corporate advances witnessed a high growth rate and accounted for about 80 percent of funds lent by the bank till year 2002. However, overexposure to corporate loans also impacted the bank’s asset quality. Strategic Inflection Point _ In 1999 the bank’s net NPAs to advances ratio jumped to 6.3% in FY99 from 3.7% in FY97. Also, when the industrial activity slows down, corporate loans are the first to get hit. This was reflected from a marginal 17% growth in the bank’s total advances in FY02 from a CAGR of 44% in the last four years. Realizing the risk of overexposure to this seg- ment, AXIS Bank started shifting its concentration to retail finance, which presented immense growth opportunities. Strategy shift AXIS Bank started its retail focus with building up of both physical and technology infrastructure, which it thinks are key to acquire customers in retail finance segment. ‘This is reflected from a significant rise in its distribution network. The number of branches increased to 450 from just 35 in FY99. With 95 extension counters and 1,890+ ATMs, the bank was spread. across 248 locations in the country. On the technology integration front too, the bank speeded up the efforts, It is the first bank in the country to adopt ‘Finacle’ as its core banking software, pro- vided by Infosys and itis also the first Indian bank to have a remote disaster recovery management system to protect its business from any eventualities. AXIS’s Current Strategy The bank follows a strategy of broad differentiation, In order to attract retail customers and differentiate itself from its competitors, the company has used the following strategies: Managing changing customer needs A large part of the transactions pro- cessing has been moved to increasingly powerful back office hubs, relieving branch personnel of these transactions tasks and thereby enabling them to devote more time for managing relationships with customers. The Bank’s Centralized Phone Banking Center provides cus- tomers across the country access to the Bank over the phone. Zonal Level Nodal Officers have been appointed to ensure quick redressal of customer grievances as well as to act as the Bank’s interface with the Banking Ombudsmen appointed by Reserve Bank of India. The implementation of regulatory guidelines relating to ‘Know Your Customer’ (KYC) norms continued to improve in compliance, Risk management In order to cope with a volatile and rapidly changing environ- ment and its accompanying risks, the bank’s risk management processes are guided by well defined policies appropriate for the various risk categories, independent risk oversight and the independent risk management committee of the Board. Risk limits are set according to a number of criteria including relevant market analysis, business strategy and management expe- rience. Risk limits are monitored and reviewed regularly.C-68 Crafting and Executing Strategy EXHIBIT 1 The Strategy-Making, Strategy-Execution Process for AXIS Bank Dealing with regulations The bank has undertaken an internal assessment of its preparedness for the implementation of the Basel II accord. It has proprietary software system and data management solution for a phased adoption of the Basel II framework for credit risk management. The bank calculates capital charge on operational risk under both the Basic Indicator approach and the Standardized approach, and has mapped its activi- ties to the eight business lines defined in the Basel IT Accord, The bank has simultaneously undertaken internal studies on several lines of business for an evaluation of the risk profile, capturing of losses incurred and identifying the key risk indicators (KRIs). Keeping pace with technology The bank’s Information Technology strat- egy is focused on capacity enhancement which is able to maintain an efficient servicing capa- bility in a multi-channel delivery environment. The Bank’s IT team process developed a process called ‘SETU’ (Seamless Electronic Transfer to AXIS Bank) for enabling seamless intemet banking funds transfer to corporate and to overseas Banks who preferred to have a regular business tie-up for remittances. The sale and redemption of 58 AXIS Mutual Funds schemes was an additional service through the ATM channel, a feature that is unique to the domestic banking industry. The soft- ware development team also launched a new process called ‘-trade’ to route. ‘corporate procure- ment transactions through the Internet. Product and service innovation The Bank set up low cost rural ATMs at Anand in order to provide convenient and low cost transaction services to the suppliers of milk to the Co-operative. A Channel Finance Hub was also created in order to provide seamless service to various channel finance customers. AXIS bank believes that, in the long Tun, a composite suite of credit as well as liability-related products would make low cost ATM-centered delivery models a profitable business opportunity. (Also see Annexure 5). >‘Competition among the North American Warehouse Clubs C-69 Growth Strategy Objectives + Increasing the market share in various businesses resulting in an enhancement in its core income streams + Improve the quality of its income streams Complementary Strategies for Business Growth and Development Strategic Alliances and Collaborative Partnerships AXIS bank has entered into a variety of partnerships to extend its services to customers through multiple channels and heighten their convenience factor, + ‘Tie-ups with Maruti and Hyundai for selling car loans * Co-financing pact with India Infrastructure Finance Company Ltd (IIFCL) for infrastructure projects + Tie-up with Bajaj Allianz General Insurance Tie-up with MetLife as Bancassurance Partner + ATM sharing, based on alliances with other banks such as SBI and multi-bank shared pay- ment networks + Economic Times Remit2India for money transfer Outsourcing Selected Value-chain Activities AXIS Bank has outsourced certain processes from its value-chain to cut down on costs and achieve greater efficiency: + Outsourcing recruitments to MonsterIndia.com: The bank’s ‘time’-costs involved in processing the applications have been halved. However, AXIS Bank still relies on headhunters for spe- ialised positions. * Ouisourcing Print Operations to Xerox: AXIS is now able to mail personalized chequebooks to its customers within 24 hours of a request. This also means there no unused chequebook inventories lie at AXIS Bank’s 300 branches. * Outsourcing of electronic bill payment (EBP) and ATM management; AXIS Bank has out- sourced its EBP requirements to BillJunction, a specialist bill management service provider. Offensive Strategic Moves AXIS Bank has been following an aggressive strategy to tap the retail domain via the use of ATMs and altemate tech-enabled channels: * Superior Customer service: This customer- oriented approach has enabled the Bank to aspire to providing high levels of customer satisfaction, leading to customer retention and loyalty, which in turn has enabled the Bank to carry out a deepening of customer relationships and increasing cross-selling activities. + Range of services on ATM miachines: The bank has not only developed a huge network of more than 18000 ATMs across the country but it also provides value additions on its versa- tile ATM machines, including LIC premia payment and telephone bill payments for service providers like MTNL and BSNL, as also mobile banking services and mobile refill facilities for Airtel, Hutch, Orange and Idea cellular service providers.C-70 Crafting and Executing Strategy * Aggressive growth in cards business: The Bank is one of the leading issuers of debit cardsin India and offers international debit cards in association with VISA and MasterCard. The debit card base of the Bank grew to 40 lacs (4 million) during year 2005-06 from 30.3 lacs The Bank was the first Indian bank to introduce the travel currency card, a foreign denominated pre-paid * card, which is positioned as a convenience alternative to the traveler's cheque. The Bank was also the first to introduce Remittance Cards, which changes the way inward remittances are sent to India. The Bank launched a ‘Rewards Card’, a pre-paid Rupee card for corporates to facilitate quick payments to theit employees, agents and distributors Expansion of geographical reach: The steady widening of its reach, especially in dis- trict headquarters and small towns, is expected to sustain the momentum of the Bank’s growth in business particularly that of low cost deposits as well as advances to the SME and agriculture sectors. The geographic reach of the Bank now extends to over 26 States and 2 Union Territories, covering 258 different cities, towns and villages. Financial Advisory services: The Bank has been focusing on Financial Advisory Services with special emphasis on the affluent segment of customers. The Banks in the prooess of aoquiring and addressing the segment of customers whose income levels are high enough for them to require Wealth Advisory Services. Use of Internet + AXIS bank was one of the first banks in the country to provide Internet banking services. iConnect, the internet banking service of the Bank saw a tise during 2005-06 in its user base from 8.08 lacs to 18.93 lacs, Mobile Banking also saw impressive registration volumes during the year 2005-06. ‘The Bank has partnered with the Ministry of Overseas Indians to offer an Internet based electronic remittances portal to facilitate remittances from NRIs, The portal also provides infor- mation services relating to investments in financial markets, tax consultancy and investments in real estate, The Bank launched an e-Payment facility for payment of central excise & service tax through the Internet for its customers as part of the e-Governance initiative of the Central Board of Excise & Customs. + The Bank's IT team provides technical and process know-how support for enabling seamless internet banking funds transfer to corporate and to overseas Banks who prefer to havea regu- lar business tie-up for remittances This process called ‘SETU” (Seamless Electronic Transfer to AXIS Bank) has provided a competitive edge for remittances. The software development team launched a new process called ‘-trade’. This process allows large corporates to route their procurement transactions through the Intemet, keeping track of the outstanding dues of their dealers and operating within pre-determined levels for dealer exposure, Evaluation of Growth The Bank has registered an impressive year-on-year improvement in financial performance, The Bank posted a net profit of Rs. 485.08 crores for the year 2005-06, which was 44.98% higher than Rs. 334.58 crores in the previous year (Exhibit 2),‘Competition among the North American Warehouse Clubs C-71. EXniBiT 2 RISING PROFITABILITY. (is cores) 3s 335 Tarot oma Reve Cae, zomg) 200-08 0s FEE INCOME : aS (Source: Annual Report of AXIS bank, 06-06).C-72 Crafting and Executing Strategy Despite strong growth in assets, the Capital Adequacy Ratio (CAR) of AXIS Bank is at 11.08%, substantially above the benchmark requirement of 9% prescribed by the Reserve Bank of India. The Net NPA ratio of the bank is also down to 0,75% from 1.07% during the year 2005- 06. The operational efficiency of the tank, which is reflected in the decline of the cost: income Tatio to 45.03% from 50.69% in 2004-05, The data shows that the customer-centric AB ’s growth strategy has been quite effective for achieving the targeted growth in core income streams while at the same time helping it reduce non-performing assets, Scope for future growth: AXIS Bank has huge opportunities to leverage its existing reputa- tion, brand image and extensive coverage through branches, extension counters and ATMs to expand its share in the burgeoning retail market. It can also diversify into related value-added financial services such as insurance. But perhaps the Bank needs to further reduce the provisions and NPAs (during the previous ‘year 2004-05, NPAs had actually increased from 1.03% to 1.07%) and increase in the proportion of fee income for the growth to be sustainable. Governance & Ethics Structure ‘The Bank says itis committe to achieving a high standard of comporate govemance and it aspires to benchmark itself with international best practices, How itis doing on certain excellence parameters are shown below, The Bank's policy on Corporate Governance has been: * ‘0 enhance the long term interest of its shareholders and to provide good management, the adoption of prudent risk management techniques and compliance with the required stan- dards of capital adequacy, thereby safeguarding the interest of its other stakeholders such as depositors, creditors, customers, suppliers and employees, * to identify and recognize the Board of Directors and the ‘management of the Bank as the Principal instruments through which good ‘Corporate governance principles are articulated and implemented. Further, to identify and recognise accountability, transparency and equality of treatment for all stakeholders as central tenets of good corporate governance, Innovation and Entrepreneurship ‘The Bank experimented with new delivery models for credit, including setting up low cost rural ATMs at Anand. Such application of technology provides customer convenience as well as prod uct innovation. A Channel Finance Hub has been created to Provide seamless service to various channel finance customers. AXIS bank believes that in the long run 2 composite suite of credit as well as liability-related products would make low cost ATM-centered delivery models a profitable business opportunity. Learning, Thinking and Sharing AXIS facilitates communication, collaboration and workflow between scattered employee bases With over 150 branches and 2000+ knowledge workers there was an impending requirement for employees to communicate, collaborate and work in a productive manner. AXIS bank chose WiproCompetition among the North American Warehouse Clubs C~73 to provide an online solution to fit their needs. Wipro set up an employee portal for internal activities and information requirements of thie employees of AXIS. The portal uses Lotus Notes platform with a hub and spoke architecture across the branches of the bank. Knowledge, Competencies and Capabilities Axis bank has skilled and well-trained workforce at all levels, including the front customer interface. ‘Almost a quarter of its managers are recruited from premier business institutes across the country. The knowledge management oriented employee portal spans functions of the bank ranging from marketing, credit banking, merchant banking to support functions such as IT, HR, accounts, legal and administration. The intranet also hosts a plethora of other services like business infor- mation, competition analysis, business plans, proposal formats, policies etc. The portal also offers details of products, circulars, caAxison lists etc. Added benefits of the portal includes workflow related functionalities such as business workflow pertaining to customer proposals, HR related work- flow such as leave and travel requests, admin activities, revenue expense and CAPEX tracking. Technology, Scale and Scope Advantage The bank’s Information Technology strategy is focused on capacity enhancement, which is able to maintain an efficient servicing capability in a multi-channel delivery environment, With second largest number of ATM's AB is leveraging the scale and service advantage. Up-to-date market infrastructure, sophistication in product development, reliable banking techniques and mitigation of risks enables Axis bank to reach newer geographies and markets, expand its customer base and engage in extensive cross-selling to existing customers thus harness- ing the scope advantage. Networking, Interdependencies and Partnerships Axis bank has entered into numerous collaborative partnerships and mutually beneficial strategic alli- ances to extend the marketing reach of its products (car loans—-Maruti etc), gain entry into previously ‘uncharted territories such as insurance (bancassurance partnerships with Bajaj Allianz, Metlife) and provide value-added services to its customers (ATM sharing, Economic times Remit2Inida) and gain a sustainable competitive edge. Selected value chain activities such as recruitment needs, printing operations and electronic bill payment (EBP) have been outsourced to cut down costs and achieve greater efficiency. Total Customer Orientation By centralizing transactions processing, the bank is able to achieve better consistency, The Bank’s Centralized Phone Banking Center provides customers across the country access to the Bank over the phone handling multiple queries. To ensure that customer satisfaction is high and improvements are introduced from time to time in customer service standards, a Customer Ser- vice Committee of the Board and a Standing Committee on Customer Service compris- ing senior functionaries at Central Office have been constituted. ‘Know Your Customer’ (KYC) norms have also been implemented.C-14 Crafting and Executing Strategy Core Values Axis Bank has followed an aggressive path of organic growth by formulating its strategy on the basis of its core values: 1, Customer Satisfaction through a. Providing quality service effectively and efficiently b. “Smile, it enhances your face value” is a service quality stressed on c. Periodic Customer Service Audits 2. Maximization of stakeholder value 3. Success through teamwork, integrity and people References 1. http://www-capitaline.com 2. http/www.utibank.com 3. Axis Bank’s annual reports 4, Management Trainee Handbook of UTI Bank. Case Questions: 1. Analyze the scenario for banking industry in India keeping in mind its market size and growth rates. Also identify the industry's global driving forces, and the current toxic assets that global banks are carrying world over. Map the major categories of banks in India(as classified by RBI) on vatious key perfor- mance parameters, Position Axis bank on this map and identify the critical success factors and performance rating of Axis Bank relative to the competition. 3. Performan internal environment analysis for Axis Bank on various parameters. Draw a value- chain and aggregated SWOT analysis and identify its core and distinctive competencies. ‘What are the future challenges you foresee for Axis Bank and what strategies should the bank adopt to meet these challenges? =year ‘Competition among the North American Warehouse Clubs C-75 Annexure-l | UTI Bank Ltd. Financial Performance Balance Sheet (2003-2007) Year ag Ca ey ‘Mar 04 ‘SOURCES OF FUNDS: Capital 28163-27869 2788 23158 Reserves Total aiiteo 2,593.49 «2,194.99 904.84 Deposits 58,785.60 40,113.53 31,712.00 20,953.90 Borrowings 519560 2.68098 1,781.41 52778 Other Liabilties & Provisions 5,995.28 4,11799 1,898.16 1,592.10 TOTAL LIABILITIES 73,309.71 49,784.63 37,799.78 24,150.17 [APPLICATION OF FUNDS: Cash & Balances with RBI 4,664.03 2,429.40 3,448.74 3,776.93 Balances with Banks & 225728 1.21244 1,084.20 1,886.27 money at Call Investments (26,897.16 21,527.35 15,048.02 7,792.76 Advances 3667648 22,914.23 15,602.92 9,362.95 Fixed Assets 673.19 86771 51844 495.16 Other Assets: 1944567 1,733.50 12744 886.1 Miscellaneous Expenditure 0 o 0 o not written off TOTALASSETS 73,309.71 49,784.83 97,799.76 24,180.17 Contingent Liability 184,164.75 98,685.38 53,185.74 97,439.67 Bils for collection 6274.63 4,382.20 3,616.98 1,015.81 Annexure-2 UTI Bank Ltd. Financial Performance Cash Flow Statement (2003-2007) ag tay oat) Uae Cash Flow Summary Cash and Cash Equivalents at Begi 3esie4 4502.94 4340.92 9569.71 the year Net Gash from Operating Activities 5295.03 240.17 4384.19 217738 Not Cash Used in Investing Activities -3655,57 -200747 -6279.8 —-190.94 Net Cash Used in Financing Activities 163701 996.2 110823 © 10706 Net Inci(Dec) in Cash and Cash Equivalent 3276.47 8611 162.62, 2098.5 Cash and Cash Equivalents at Endof the «6918.31 364484 4502.04 5663.21 (Rsin Crs) eas 230.19 68792 16,964.72 719.31 1,011.04 19,613.18 4,800.03, 1,969.68 7184102 7,179.92 905.51 71702 0 19,613.18, 13,068.08 1,072.45 (Rsin Crs) ae 2703.32 175117 1208.03 923.25 866.39 3669.71C-16 Crafting and Executing Strategy Annexure-3 UTI Bank Ltd. Financial Performance Profit & Loss Statement (2003-2007) (Rs in Crs) ea Mar 07 Mar 06 Mar eed Income Interest Earned 450040 2,888.79 1,924.16 169854 1,464.81 Other Income 1,019.03 73173 433.24 BANG 412 Total 5873.49 8,620.52 2,86740 2,140.18 1,876.81 Expenditure Interest expended 2993.82 1,810.56 1,192.98 102045 1,142.41 Payments to/Provisions for 38135 240.2 176.86 121.25 85.23 Employees Operating Expenses & 48753 838.11 24749176868 191.93 Administrative Fxpenses Depreciation 11186 92.19 8158 6189 48.91 Other Expenses, Provisions & 60313 408.17 154.79 «329.5 16713 Contingencies Provision for Tax 41857 = «30194 153.72 077874 Deferred Tax 8136 85.73 154 26.47 5.08 Total 4914.40 9,195.44 2,022.82 1,861.87 1,684.63 Profit & Loss Reported Net Prof 659.08 485.08 884.58 = 27831 192.18 Extraordinary items a7 -1.01 “154 “0.87 0.99 Adjusted Net Profit 66073 486.09 336.12 279.18 193,17 Prior Year Adjustments 318 0 0 0 0 Profit brought forward 73.04 19741 182.1 122.46 78.64 Appropriations Transfer to Statutory Reserve 164.76 12427 83.64 69.58 48.05 ‘Transfer to Other Reserves 1565-20297 14788 83.78 52.6 Trans, to Government /Proposed Dividend 148.79 112.55 8775 65.31 an Balance carried forward to Balance Sheet 1,029.07 73404 19741 482.4 122.46 Equity Dividend % 45 % 28 25 22 Earnings Per Shafe-Unit Curr 22.62 16.87 1181 v7 8.35 Book Value-Unit Curr 120.49 103.06 8795 49.07 39.88Annexure-4 Market reach ut Icic) ‘SBI HDFC ‘Competition among the North American Warehouse Clubs C-77 Deduct 508 950 9000 684 (Source: www.wikipedia.org; wewsbiorg.in). Branding (tears 2341 3600 6800 1605 Ranking In annual survey of most trusted service brands, 2006 conducted by ET ut ICICIBank SBI HDFC (Source: bip:/leconomictimes.indiatimes.convNews/Brand_Equity/Brands_Nows) Employee efficiency ut ICICI Bank SBI HDFC. (Source: Prowess database) Annexure-5 Lae al asad) 0.08 on 0.02 0.08 Axis Bank’s Areas of Operations Roa B ‘Buginess/employee (Rs. Cr) 10.24 9.05 2.99 6.07C-78 Crafting and Executing Strategy ENDNOTES. ‘The case Is prepared only for classroom discuss.on purposes and not to eicize the process of adrinistrative decision-making or actual decisions atthe company. Copyright Arun Kumar Jain@2009. 2 Fram Annual Report 2008.