Mumbai: In a significant strategic shift that is already having an impact, ICICI Bank Ltd has decided to go slow on its retail assets expansion after three years of accelerated growth in the segment.
As a result, consumer loans, mortgages and auto loans, which collectively accounted for about 69% of ICICI’s total loan book two years ago, have now come down to 58%, and are set to go down further.
The shift stems from India’s second largest private sector lender believing that there is a bigger opportunity in corporate loans.
Chanda Kochchar, joint managing director and chief financial officer of ICICI (Photo by: Bloomberg)
While some banking observers see this as ICICI, an aggressive consumer lender, developing cold feet in the retail segment, influenced by growing non-performing assets, or NPAs, in such loans, Chanda Kochchar, joint managing director and CFO of ICICI, said it is not possible to keep growing at the bank’s previous scorching pace, especially as its base becomes larger.
“The growth rate of consumer credit will come down from 35-40% to 12-15% this year,” Kochchar said in an interview with Mint.
According to her, the bank’s growth in consumer credit will be in sync with the industry, but its growth for corporate credit will be higher than the industry, or more than 20%.
ICICI’s focus now will be on retail liabilities instead of assets. In other words, the bank will aggressively mop up retail deposits and not go for retail loans. As retail deposits cost less than wholesale deposits, this should bring down the cost of deposits and add to the profitability of ICICI.
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The bank has already pushed up the share of current and savings accounts of its total deposits to 26% from 22% of its total deposits by focusing on retail deposits.
A bank does not pay any interest on current accounts and pays 3.5% on savings accounts.
“Three years back, our corporate credit book was growing at 5%,” said Kochchar. “(For the) last two years, the growth was around 12-15%. Now, we could grow at even 25%. The high consumer spend in the last few years created huge demand, and Indian firms now want to invest big money. By our estimates, there is about $700 billion (Rs29.9 trillion) investment in the pipeline. If you include the working capital requirement of Indian firms and the money required for overseas acquisitions, banks’ corporate loan book should grow between 20% and 25% this year.”
Kochchar also challenged the market perception about growing NPAs in consumer finance in ICICI Bank.
“Yes, the total value of NPAs in consumer loans is growing, but this is because our portfolio of unsecured loans is growing,” she said. “Earlier, unsecured loans were 13% of our total retail loans and now they have gone up to 18%. But, the losses are moving within the accepted level.”
The net NPAs of ICICI stood at 1.49% in March, up from about 1% a year ago.
According to Kochchar, while the bank’s retail assets will grow in line with the industry, its corporate assets will grow at a rate higher than the industry and its overseas operations will grow at an even higher rate, as much as 30%.
Four-and-a-half years after opening its first office overseas, ICICI Bank’s overseas book is now worth $28 billion or one-fourth of its overall business, and the largest by any Indian bank.
“With presence in 19 countries and relationship with 100 commercial banks, our overseas business will grow at least by 30%. Anyway, we were involved in 75% of the outbound M&A (mergers and acquisitions) deals last year,” claimed Kochchar.
She said ICICI Bank’s credit delivery in overseas offices is faster, quicker and more complete and more than 70% of its retail customers overseas are non-Indians. “We have built solid retail franchises in the UK and Canada. Our ‘Internet only’ deposits have mopped up $7.5 billion retail deposits,” Kochchar said.
ICICI Bank has cut its operating expenses in the quarter ended 31 March, and analysts have attributed cost cutting as one of factors that contributed to the bank’s profitability.
Kochchar, however, prefers to describe it as “cost controlling” instead of cost cutting. “We have not retrenched a single employee. As of now, we have 40,000 people on our rolls and another 3,000 are being appointed. When the economy slows down, you’d need to realign your cost structure as, otherwise, you will be uncompetitive,” she said. According to her, the Indian information technology industry has already done it and it will happen across all industries. ICICI has been paring employees’ bonuses and has become less liberal when it comes to giving raises.
The bank’s plan to float a non-banking finance company to hold stakes in its life and general insurance ventures and mutual fund firm has come a cropper with the banking regulator denying its nod to this, but Kochchar seemed unfazed.
“The plan was to infuse capital in insurance firms through the new company which would have been taken to the market, but we can do it directly by taking them to market,” she said. “As of now, they are not in desperate need of capital, but we will take them to market at the right time.”
According to her, the bank’s investment banking arm, ICICI Securities Ltd, will enter the market first, sometime later this year, and the insurance firms over a period of time.
“Taking I-Sec to market makes sense as there is a benchmark for investment banks’ public offers, but no insurance firm has yet gone to the market and, hence, there is no benchmark. We will take I-Sec to market later this year,” she said.
Kochchar also said that Indian firms’ exposure to complex and structured derivatives and their mark-to-market losses are not as serious “as it is made out to be”. Marking to market is an accounting practice of valuing one’s exposure to a financial asset in accordance with its market price.
Many Indian banks, including ICICI, have sold such derivatives to their corporate clients as a hedge against currency fluctuations, but many such deals have gone wrong on account of the dollar’s weakness against the Japanese yen and the Swiss franc.
“About 85% of such transactions were done by large corporations and they will not renege the contracts,” Kochchar said. Besides, the contracts will mature over a period of time and nobody knows the dollar’s future movement against global currencies.
She also said ICICI Bank has done “some provisions” for such losses in the fourth quarter and they are “adequate”, but the bank has not disclosed this as such disclosures dent its negotiating power.
“If the firms know that we have provided for their losses they will not pay us. We have done some provisions after consulting our auditors,” she said.
According to her, the bank’s mark-to-market losses on account of its exposure to credit derivatives have also come down.
“It all depends on the spread. We had booked losses worth $170 million on account of widening of spreads last year but now the spreads have started tightening and till now we have a saving of about $31 million. By the end of this quarter, we could end up saving more,” she says.
While announcing the bank’s March quarter results last month, its managing director and CEO K.V. Kamath literally took the back seat and Kochchar did all the talking. Kamath’s third term as MD and CEO of the bank is coming to an end in April and, around the same time, the bank’s chairman N. Vaghul’s term will also expire.
Bank insiders predict Kamath will now become the chairman and Kochchar will be elevated to the post of MD and CEO, perhaps as early as September.
Kochchar declined to talk on this, saying: “It’s up to the board (of the bank) to take a decision on Kamath’s successor.”