Mumbai: India’s second largest lender by assetsICICI Bank Ltd has seen close to a 41% erosion in its market value this year. This is much higher than the 25% loss registered by the Bombay Stock Exchange’s benchmark Sensex index. After growing at a scorching pace in the past few years, ICICI Bank is going slow both on loans as well as wholesale deposits. However, Chanda Kochhar, joint managing director and chief financial officer of the bank, insists that there is no slowdown and the bank will continue to remain the market leader in retail space.
In an interview, Kochhar talks about the bank’s changing business strategy when interest rates are going up and the banking regulator is squeezing liquidity from the system. Edited excerpts:
Since the beginning of this year, ICICI Bank has been an under performer. Till January, it was India’s most valued bank in terms of market capitalization, way ahead of State Bank of India, even though its asset base is much lower. Now the scene has changed and State Bank has overtaken you. How do you address investors’ concerns?
First of all, I won’t accept the fact that we are an under performer. You have to compare us with the Bankex (the index of the banking sector) and not with the Sensex. The Bankex has moved much more sharply than Sensex and if you plot our numbers vis-a-vis the Bankex, our performance is, in fact, better compared with many other banks.
Moving carefully: The strategy hasn’t changed, maintains Kochhar, but it will wait for the right time to move on its IPO plan for subsidiaries. Photograph: Ashesh Shah / Mint
I would say we are performing in line or better than Bankex.
The relative market capitalization moves on the basis of relative share prices but you have also to keep in mind that during that period, State Bank made a rights issue. So, part of the raise (in market capitalization) is also an account of increase in share capital and not just its performance.
To listen to the edited extracts from the audio recording of Chanda Kochhar’s interview with Mint, click below
What’s your message to soothe the frayed nerves of the investing community?
There is nothing to really worry about, especially nothing specific to ICICI Bank.
I think there are certain challenges in the environment and all of us have to readjust with that. At this level, the bank’s share is definitely a very good investment.
We have a lot of holding in our subsidiaries and if you assign some value there and some value to us, the bank’s share at this price is a great investment.
Also read: ‘You can say that the buck stops with me’
When do you plan to unlock the value of your subsidiaries? You were almost ready with an initial public offering (IPO) for ICICI Securities Ltd, your investment banking arm.
Clearly we have value in four to five of our subsidiaries. We believe that over a period of time we should start unlocking the value. We had articulated this thought process earlier and it still stands. But we would take the step when the market is right.
In a way, we have the comfort and the luxury to wait for some time because we are very well-capitalized as far as the bank is concerned. We have sufficient capital to fund not only the bank’s growth but also the requirements of our subsidiaries.
As they are growing, we are putting in capital (in them). The strategy hasn’t changed but the timing of it should be correct.
So, no IPO this year?
Well, if the market remains like this, I don’t think we will be in a hurry to do anything.
There is a distinct slowdown in the growth of your advances as well as deposits. Are you scared of growth, particularly for retail loans?
First, I would like to say we are not slowing down anything. We are still the largest player on the retail side with a portfolio of Rs1.3 trillion.
That’s a stock and even if you don’t do anything for two years, you will remain there…
Let me explain. By sheer size (of our retail assets), we are at least two-and-a-half times bigger than the next player in the business. Going forward, we will continue to be the largest player.
We are being the most agile to adjust ourselves to the changes in the macroeconomic environment. When this business was growing at 30-35%, we were growing at that pace or sometimes even faster than that.
The logic was very clear—in a falling interest rate scenario, it makes sense for us to keep relying on wholesale deposits; borrow one-year money and may even lend (for) three years because you will keep refinancing yourself.
In a falling interest rate scenario, that was absolutely the right thing to do.
In a rising interest rate scenario, it does not make sense to rely on wholesale deposits and lend long.
We are making this adjustment. In a way, we are the first one to recognize the trend and respond to it.
Also read: ICICI to refocus on corporate loans
So, what will be the growth of retail assets?
I still maintain that it will grow at 5-10% while many others think the industry is going to grow faster than this. Sales of new homes are going down and the car market is stagnant. And, on top of all these, the interest rate is going up. So, the number of people who can afford loans is going down. In a rising interest rate scenario, it is not advisable for banks to grow faster than the industry and fund their growth from wholesale deposits.
At the same time, the corporate credit is growing at more than 30%. Clearly we are seeing a large investment pipeline.
People keep on asking me whether the investment pipeline is still there. I must say that in the last three months nobody has added another project to the pipeline but, at the same time, nobody has withdrawn any project.
That itself is good news. Having a pipeline of $600-700 billion (about Rs25-29 trillion) to be invested over a period of three years can easily give India a growth of about 7.5% and give the banking sector a growth of 15-16%.
We are not slowing down. We are the largest player in the retail industry and we will continue to remain that way. Our earlier strategy was right in a falling interest rate scenario. We have changed that.
If you don’t change your strategy in a changing macroeconomic environment, you are not being responsive enough as a bank.
So, there is a slowdown in demand?
The basic demand still exists because we are still a young country. People are getting jobs and they want to consume. But the affordability reduces the number of people that can take bank loans.
The retail industry was growing because with every fall in interest rates more and more people were becoming eligible for the loan. Now, with rising interest rates, fewer people become eligible for loans.
With rising inflation, there is also pressure on people to spend less. So, a person who had taken a housing loan two years ago and was planning to upgrade his car won’t do that now as he may not be able to afford another loan. That’s where the impact comes on car sales.
Are rising non-performing assets a concern?
The way to look at this is the credit losses. In percentage term, NPAs (non-performing assets) will increase for everybody as the rate of credit growth is slowing down.
The underlying worry should come if there is an increase in credit losses. For housing loans, the EMIs (equated monthly instalments) have not changed. People are living in those houses hence there is no major change in credit losses there.
On the auto loan portfolio too, there is no major change in credit losses.
However, people who were earlier paying dues on time now pay one or two days after the due date.
There are two categories of personal loans. There is no problem for those loans that we give to our own customers as the bank directly debits from their accounts. But in one segment—the small-ticket personal loans—the losses were higher and we made our exit from this business in November last year.
We will also see some pressure on the credit card industry as a whole but the losses are not going haywire compared with what we have budgeted. It’s not a runaway increase. Our credit card NPAs are certainly not in double digits.
Your June quarter profit was affected because you had to make provision for the deprecation in bond portfolio. How do you derisk the portfolio from rising rates?
We can’t derisk the portfolio entirely as we will have to carry some amount of fixed income securities (in our books).
So, we don’t take very large trading positions.
In such a volatile market, a bank need not get into too much trading to make money. As long as we remain away from that temptation we can manage.
Overall, it’s a very critical time. For the entire industry, it has been a very volatile phase; a trying time.
We don’t know which way things will move. There are so many variations in the external environment which are not under our control but affect our balance sheet.
You reported huge mark-to-market losses on account of the bank’s exposure to credit derivatives as well as an erosion in value of investments made by its subsidiaries in the UK and Canada. Are the losses mounting?
No. Last year we had made sufficient provisions. Actually, we have wound down a major part of the book and we do not have to provide anything extra.
What about the losses in derivatives sold to local firms?
It was never a problem as far as the banks were concerned. The companies have taken some positions—they made profits in the past and losses too.
Some companies will always debate and take legal recourse (against banks). However, in some cases we have got very favourable decisions from the court, and very fast.
Some cases were dismissed and the courts allowed us to go ahead and recover (the money).