Mumbai: After six quarters of consolidation, India’s largest private lender ICICI Bank Ltd is back on the growth path, but it will continue to shrink its UK and Canada operations to meet local regulatory norms. In an interview, Chanda Kochhar, the bank’s managing director and chief executive officer, said the lender’s bad assets will not rise and return on equity will jump to 15% in the next one-and-a-half years from 9.5% now. Edited excerpts:
You took a tough decision to shrink the balance sheet after you took over the reins in May 2009. After six quarters, when you started growing, the regulator doesn’t want the Indian banking industry to grow too fast. You have curtailed your guidance for loan growth target for current fiscal to 18% from 20%.
The consolidation that we started in 2009 was clearly the requirement of that time. We needed to consolidate on the deposit side and increase the low-cost Casa (current and savings account) deposits, and on the assets side, we needed to bring down the retail and unsecured loans where the risks had become very high.
Pending target: Kochhar says the bank needs one-and-a-half years more to achieve a return on equity of 15%. Photograph by Hemant Mishra / Mint.
After successfully executing that for six quarters, our balance sheet has become quite strong. On the back of that, and given that we have significant capital adequacy available, we are back on a good growth path.
It’s not that the regulator doesn’t want the banking industry to grow. The growth of the industry has always been in relation to the GDP (gross domestic product) growth. Indian banking industry grows about two-and-a-half times the GDP growth rate. Earlier, when we were expecting the GDP to grow between 9% and 10%, we could expect the credit growth at 25%. Today, with certain moderation, the industry would probably grow by 18-20%. The growth that we are targeting for our bank is in line with the banking industry.
Are you seeing signs of a slowdown in corporate India?
Both on the retail and the corporate sides, we are seeing some amount of moderation in the credit pickup. Part of this moderation is intended consequences of the policies that we have pursued—if we want inflation to come down, we want to curb some amount of consumption and, therefore, especially the retail sector, which is very interest rate-sensitive, is seeing a moderation on housing loan and car loan pickup.
Currently, the corporations are still implementing the projects that they have on hand. But in the last six months or so, no one has talked about their next big investment pipeline that they are planning three years from now. To that extent, yes, there is moderation in terms of deciding the next set of investment plans.
So the pipeline is shrinking…
The existing pipeline continues and that’s not shrinking, but the new pipeline is not getting base. We have sufficient pipeline for disbursements over the next one-and-a-half years.
Could you give us some number?
It’s on that basis that I am planning 18% credit growth this year and 20% next year. There is a sufficient pipeline for the next two years. If the new pipeline doesn’t build up by then, it will impact capital formation two years from now. For the next six quarters, we have enough momentum of the previous capital investment plans.
Your exposure to commercial real estate jumped 86% last year and that to power sector grew 67%. The fund-based power sector exposure now is 7% plus and your overall real estate exposure is 12%. Aren’t these pockets of risks?
When you look at growth over a previous period, you will have to look at from what base we are talking about. We are talking of a large growth, but coming on a small base. If you look at the total composition of our advances, it’s actually very well diversified. About 37% of our loans and advances are purely retail, another 23-24% of our advances are domestic corporate advances and 25% are international advances, mainly to Indian companies.
What is important is to look at the risks or the credit worthiness of each of those individual proposals rather then brushing an entire industry with one brush.
Your retail assets are now 37%, down from 60%. You were the pioneer of retail financing in India. Are you consciously giving away the space to others?
Yes, we are consciously doing what we are doing. We are concentrating on building a sustainable, profitable portfolio. We are consciously not doing certain products where we think the risks are high—unsecured loans to those who have not been our customers. Then again in businesses like housing and car, we are doing a lot of new disbursements, but we are not really doing it at prices or in product structures that may not be sustainable and profitable. I would not call it ceding leadership. I would say that we are carving our strategy to build a portfolio that is profitable over a long term.
You have been able to bring down your bad assets in the last quarter. Is it sustainable, particularly when growth is slowing and rates are rising?
Yes, I think in the last five-six quarters we have consciously brought down our provisions. The provisions what we declared for the June quarter were almost 43% lower then the provisions we had made in the same period last year. And our net NPA (non-performing assets) ratio is now less then 1% with the coverage of actually being 77%.
The lowest in ICICI Bank’s history?
I think at one time it had (so low NPA), but not for very long. This is a good number to have. We will maintain our provision charges at this current sustainable level. I don’t think we should target at reducing provision substantially from here, but at the same time, I am not seeing any risks to NPA.
Your net interest margin (NIM) at 2.6% is low by the Indian standards, even though Casa is quite high—40% plus.
I think you should take the 2.6% NIM and divide it into our domestic and international businesses. The domestic NIM is actually 3% and that tallies with the 40% Casa. In international business, NIMs are actually just about 1% and the average appears lower than the industry average because the international book is 25% of our total book.
We have increased Casa deposits on a quarter-on-quarter basis. In June, the Casa ratio was 41.7%, a little lower of what it was on 31 March, but if you look at average Casa on a daily basis, we have improved 1% compared to the previous quarter. We are targeting that we would maintain the Casa at around 40%.
The investors are concerned about your low return on equity (RoE)—the lowest among private banks.
It was 7.5% one-and-a-half years ago; now it is 9.5% but even that’s low. One major reason why it is low is that a large part of our equity is invested in not just banking subsidiaries but also in other subsidiaries—the life insurance, general insurance, and so on. While the equity has been invested there, we have not collected dividends from them. But these companies have now started making good profits. So, if you actually add the value that is getting created and if you look at the consolidated profit, our RoE is already 12%. I am very conscious that we need to improve and increase our RoE. In fact, one-a-half years ago, I had said that I want to double the bank’s RoE from 7.5% to 15% over three years. Another one-and-a-half years is what I am targeting to get to 15%.
Your life insurance outfit is a capital guzzler. You have a general insurance firm, an asset management firm and an investment bank. Any plan to take them to the market?
These companies have turned into profit-making companies and, therefore, they don’t require further infusion of capital. They are generating profits and we are not in a hurry to take them to the market. Over a medium term, three to four years, you would see some amount of monetization that we will do out of these investments. But I would think that currently when the guidelines are not clear and there have been a lot of regulatory changes in the life insurance and the general insurance industry, we are just happy with these companies making good profits and adding to our consolidated profits. When the time is right, we would take them to the market.
About 25% of your loans originate overseas. In the UK and Canada, you are raising money locally, but giving loans to Indian companies, and the local regulators are not happy with this. You are being forced to shrink your loan book.
Our international operations are in two forms—through our branches and subsidiaries. As far as the business through branches is concerned, there is no change in the regulatory approach. We raise wholesale funding and deploy it for India-linked assets.
As far as the two subsidiaries are concerned, both UK and Canada, we raise a lot of local retail deposits as that’s a very cost-competitive source of funding for us. Our approach on lending has always been that we will lend to India-linked assets, because that’s the risk that we understand and that is the business that has been doing very well.
After the 2008 global financial crisis, every regulator is becoming quite nationalistic and is saying that if the banks raise local retail deposits, they should deploy money locally.
It’s very important to have the comfort of the regulator in every geography where you operate. Initially a certain business model was okay with the regulator, but with the changes in the global economic environment, they are looking at a different business model and it’s the duty of every regulated entity to create a business model to the comfort of the regulator.
We are really not growing the subsidiaries operations and the growth in the international side is coming from our branches. Our branches grew in business almost 20% even in the last financial year and a similar rate even in this quarter.
Some of the loans that were given from your UK book to the Indian companies, particularly real estate companies, have gone bad.
No, if you see the NPA ratios even for the subsidiaries, they are at comfortable levels.
You wanted to have a new chief executive for your UK operations, but the local regulator had spiked it.
No, that’s not true. In the changed global environment, the regulators do not like to see many changes. You have to phase out the changes that you make—a combination of environment changing, business model changing, management changing. I think all these cannot be done at the same time, you have to phase out changes.
If NIMs are so low in the overseas business, what’s the point in having 25% of your book overseas?
As far as the branch business is concerned, while the NIM is still about 1%, if you look at the fee income and the expenditure ratios, the RoE is actually still healthier than domestic operations, because you do not have to keep separate capital.
For the two subsidiaries, RoE is also low because you are putting extra capital over there and this is why we are into the consolidation phase.
We are not growing the balance sheet—it’s static for the last one-and-half years and as the repayments happen, the new loans will get added, but may not get added at the same rate.
At some point, will you close them down?
No, I don’t think we will close them down, because they do serve a very good strategic purpose for being able to offer certain products to the customers, which we otherwise cannot. We will not close them down, but clearly they will come down in their size of operations.
Another area of concern is talent crunch in ICICI Bank. You don’t have a second line.
One would find it very difficult to find another entity in the financial service area that will have that much of depth of talent pool. We have a talent pool that heads various business within the bank, each of the subsidiary companies.
So ICICI Bank is not a Chanda Kochhar show.
Of course, it’s not. It can never be. It is a team show.
Your objective is to be among world’s 20 most valued banks in terms of market capitalization. Now, you are not within the first 50. How will you do it?
We have to always set an aspiration for ourselves and then strive to get there. I think India’s growth itself will give opportunities for Indian banks to become substantially bigger.
Here, I draw an example from China. In the last 10 years the Chinese economy has grown and given opportunity to Chinese banks to come into global rankings. India’s growth will help us grow at 2.5 to three times the GDP.
Within that, we will grow at least equal to the industry rate or a little higher than that. Our profitability and RoE are low and we will improve that.
As the RoE improves, the market cap will increase at a faster rate, because the market would recognize not just our growth, but our improvement in profitability. It is about making the right opportunity out of India’s growth and creating a business strategy that gives us a profitable and sustainable growth.
You have changed many things in ICICI Bank, but the ambition to grow big and fight with the Chinese banks is the legacy of Kamath. Right?
Yes, absolutely, the idea of ICICI Bank is always about aspiring to the next level and wanting to get there.
This is the transcript of an interview that was first telecast on Bloomberg UTV on Thursday.