Mumbai: Chanda Kochhar took over as managing director and chief executive officer of India’s largest private lender ICICI Bank Ltd in May 2009 amid rising bad loans and falling profit. In March 2009, the bank recorded a net profit of Rs.744 crore, and gross non-performing assets (NPAs) as a percentage of loans were 4.32%; this crossed 5% over the next year. Kochhar responded by shrinking the loan book and cutting exposure to unsecured consumer loans. The strategy has worked. In the December quarter, ICICI Bank posted a record net profit of Rs.2,250 crore and contained gross NPAs at 3.31%.
The bank is back on the growth path but “not at any cost”, as had been the case earlier. In an interview last week, Kochhar said the bank can grow a little higher than the industry average and aspire for an 18% return on assets. Edited excerpts:
A record net profit in the December quarter, three times as much from when you took over...
It’s (the result of) a consistent effort to improve return on assets (RoA). We began in April 2009 with a return on asset of 0.98%; now it is 1.6%. Our whole focus was on improving RoA. It has been achieved by expanding the net interest margin—which was less than 2.4% then and now (is) more than 3%. We also wanted to bring down the credit cost (provisioning for non-performing and restructured assets). At its peak in 2008, it was 2.2% of our average assets; currently it’s 0.7%. Also, our cost-income ratio at the peak was 50% and now (it’s) in early 40s.
The objective was to make sure that the funding structure is right, operating expenses are within affordable limits, and the quality of assets is improved so that provisions come down.
That’s what I meant when we said we were launching the four-C strategy—higher CASA (current and savings account) ratio, credit costs, cost of operations, and finally, capital preservation, because at that time the risks were high.
In June 2008, the bank had a Rs.2.24 trillion loan book, and that dropped to Rs.1.79 trillion by December 2009. It plateaued there before starting to rise and now it’s Rs.2.86 trillion. Is the consolidation phase over?
Yes, the consolidation phase is over, but it doesn’t mean that we should undo the consolidation. The most important part is, as we go forward from here, we have gathered enough balance sheet strength to grow profitably. We will continue to focus on this current model. In this phase, we have taken the CASA ratio up from late 20s to close to 40%. The operating expenditure has been brought down to close to 40% of income, and credit costs are less than 1%. We have redone our composition of both deposits and assets. We will grow, but we will keep an eye on the same parameters to ensure that we will grow in a manner that enables us to maintain high CASA, low costs and quality of assets.
So it’s not growth at any cost any more? At some point, growth was an obsession of the bank...
Not growth at any costs, but on a model which gives us sustainable, profitable growth.
Inorganic growth has all along been a part of ICICI Bank’s strategy. You have a pretty high capital adequacy of 19.5% but haven’t done an acquisition for three years.
We believe that growth from our infrastructure like branches, ATMs, customer base, etc., is a part of our growth strategy. But any time we get a right inorganic opportunity at a right price, we should buy it because it reduces our time to grow, and that’s exactly how we handled (the acquisitions of) Bank of Madura, Sangli Bank and Bank of Rajasthan.
Even while we were in our consolidation phase, we did an acquisition—Bank of Rajasthan. But in the consolidation years, what I told my people was that growth has different connotations—we may not be growing our balance sheet, but we will still be growing branches, volumes of transaction banking business, current and savings accounts. Fitting in line with that was the fact that we had a good opportunity of a good bank with a large branch network and customer network at a good price, and we bought it. From here on, the approach will be the same. If I ever come across an opportunity which is available at a right price and which is at a substantial size that can make a difference to us, we will always be open (to the idea), but as of now there is nothing (on the table).
It’s also been quite a while since you hit the capital market to raise equity.
The requirement was there as we were growing at 30% every year. We were consuming the capital—when you are on that growth treadmill, you keep requiring capital to support growth, but today the situation is very different. In the last couple of years, we have conserved capital because our focus was not growth for the sake of growing. We first wanted to set our CASA ratio right and asset base right; we have conserved capital.
Besides, we are throwing up better profits than what we did in the past, which creates capital.
We also have our subsidiaries available where we have created value. So if we need capital, we always have the ability to divest something. In my view, we have many years before we need capital, as the capital we have will allow us to grow for the next two-three years. So, no (equity) dilution for at least three years.
Will you be taking your life insurance, asset management and investment banking business to the market?
We will do that in the medium term, from one to three years. It is important for us to release some capital from some of these subsidiaries, even from the point of view of establishing a proper value benchmark. We will clearly look at it and, of course, we will prioritize.
The life insurance business is the biggest, where the largest amount of capital is involved, and that would be the natural first choice. But it makes sense for us to wait and see whether there is any clarity on the level of foreign direct investment—26% to 49%. We will wait for the clarity as we are not in a desperate requirement for capital. We can wait for that period where we can do it in the most optimal manner and get the best value.
What about investment banking and asset management?
It’s not a great time to take investment banking to the market... The AMC (asset management company) is a very small capital-consuming business. It is the two insurance businesses that would be the priorities.
Once, ICICI Bank was the leader in retail banking, but you have given up that position to HDFC Bank Ltd.
When we took the retail business to 60% (of our book), India was passing through a phase where there was hardly any capital investment and most of the growth was getting driven by consumerism. There was less activity on our basic business of project finance and more activity on consumer finance. So the additional business was mainly retail.
We have brought down a part of the retail business—unsecured loans. While the other part of the retail business like housing, auto loans, etc., has been growing simultaneously in the last three years, there has also been growth on the corporate side and international side. So, three engines of growth have been firing instead of just one engine six-seven years ago. Now our business mix is 35% retail, 25% international, and 40% domestic corporate.
What’s the retail business strategy?
Our focus is more on secured retail business like housing and car loans. While we will do some unsecured loans—credit cards and personal loans—we will do it primarily with existing customers. In the past, we were happy to go and get a new customer and do only a credit card and personal loan, but now we are saying that for an unsecured relationship, it works well only when you have much larger relationship with a customer.
We are operating at between 8% and 10% market share in many of these businesses compared to the 30% or 33% perviously. In that sense, we are clearly balancing market share with profitability. Even at 8% market share, if it is more profitable than 30%, we will do that.
You aren’t excited about international business any more.
At one time, international (business) was 28%; it has got little adjusted now because the Indian economy is growing faster than the global economy.
So you have repositioned yourself as a predominantly corporate bank?
No, I think we have repositioned ourselves as a more universal bank which is actually growing all the parts of the businesses, rather than having only one major driver of growth...
What is the plan for the overseas subsidiaries?
They are an integral part of our business because through them we offer one more market to our customers. Secondly, the quality of assets is very stable there. The only issue is we have a lot of capital in these subsidiaries because we had put capital when these businesses were growing at 50-60%. These businesses will not grow at a rate (at which) they were growing in the past. So, over a period, it will be better for us to bring back some capital. .
Rural banking is still a soft underbelly for you.
No, while we have not spoken much about it, the fact is that in the last one year, we have focused on rural business again. We have a dedicated group which works towards rural and agriculture lending. In fact, more than 1,200 branches are dedicated to rural and agriculture out of close to 3,000 branches. Actually, the rate of growth in these businesses in the last one year has been fast—it’s just that the base is still small.
We believe that rural India is going to be the next driver of growth. You cannot make money overnight there as you have to set up infrastructure there; the value of transactions is lower—you need a few years before you can really make all those businesses profitable.
You lost money in the rural business in 2004-05 and that’s why you were inhibited, but HDFC Bank and even Axis Bank Ltd are more aggressive on the rural front.
It’s actually not true. In December, we opened 101 rural branches in one go across Rajasthan, Chhattisgarh and four other states. These branches are in the remote areas where no branches are present. We are doing electronic funds transfers in some districts like East Godavari in Andhra Pradesh. In the last two years, we have built up financial inclusion accounts next only to State Bank of India; today we have 12 million no-frill accounts.
We have done a whole lot of ground work; maybe we haven’t spoken about it.
Has growth in the metros saturated?
No, it’s not saturated, but the rate of growth in the rural areas is going to be much faster. The urban model will continue, but this is going to be additional growth. Most of the loans will be secured through land, property, crops, seeds, etc. We will continue to open more branches, specially in rural areas and unbanked areas.
Do you feel threatened by the new banks that will set up shop soon?
The Indian banking industry has always been full of competition and there is enough room for growth. Yes, when new players come in, there are some disruptive practices, but that’s part of the business. Big banks like us have enough opportunity to grow and have strength on account of the scale that we have. We will have to constantly look at our productivity, products pricing, customer service, etc., but it is finally good for the industry.
What is your outlook on bad loans? Is the worst over?
We have seen a substantial improvement in our quality of assets. We have corrected whatever we had to correct in our composition of assets. From here onwards, of course, it all depends on what happens to the economy and none can say that there will be no additions to NPAs or restructured assets. But our quality of underwriting has been good, the composition of assets has been well diversified, and our structuring has been tighter. There will be NPAs, but the scene is not alarming.
How did you manage to offload the Kingfisher Airlines Ltd account?
Out exposure was differently structured, fully secured. So it was not difficult to sell. And the buyer (of the loan) will be able to recover money as it is backed by collaterals.
Has the economy bottomed out?
I actually feel the worse is over, but we have to put in some hard work to ensure that we move up. Some actions have been taken, but the one big thing we have to do is to bring back the investment cycle by ensuring projects get completed on time. Today, no one is thinking on the next round of investments because they don’t know when the cash flows of their existing projects will come out and, therefore, they cannot estimate the time for the next project. So we have to create more stability and certainty around the environment to implement projects and get them to generate cash flows, and that will bring the confidence back.
So, high cost of funds is not the villain?
Cost of money has implications, but more important than that, we need to ensure faster clearances, etc., for projects to take off.
Some banks have responded to the Reserve Bank of India’s policy rate cut, but you haven’t.
The issue is how the cost of funds and lending rates have moved. In April last year, we were one of the first banks to move. We reduced loan rates by not just tinkering with product rates, but by reducing the base rate ahead of others, because we thought transmission is important. Our base rate is among the lowest even today.
With the consolidation phase now over, what will be the key focus for the bank at the next stage?
We would now grow a little higher than the industry average as we have that financial strength and confidence to grow. If the industry is growing at 16%, we will grow at 20%, and our growth will be diversified across retail, housing, car loans, new projects, working capital loans, and so on. We have doubled our return on equity (RoE) in the last three years, from 7.8% to 15% in last quarter. We aspire for an RoE of around 18%.