Mumbai: After losing more than 22% in past two weeks, ICICI Bank Ltd, the country’s largest private sector lender, bounced back on the bourses on Tuesday, gaining 8.42% to close at Rs543.85 after the bank management, the banking regulator and India’s finance minister launched a collective rescue operation, saying the bank’s health is fine and there is no worry on any front.
“ICICI Bank has sufficient liquidity, including in its current account with the Reserve Bank of India (RBI), to meet the requirements of its depositors,” a central bank statement said. RBI is monitoring the developments and has arranged to provide adequate cash to ICICI Bank to meet the demands of its customers even as some depositors withdrew cash from some branches.
Still healthy: Chairman and CEO of ICICI Bank K.V. Kamath. Abhijit Bhatlekar / Mint
Before the RBI statement, ICICI Bank’s chief executive officer and managing director K.V. Kamath issued a release highlighting the bank’s more than adequate capital and liquidity and finance minister P. Chidambaram followed it up, saying ICICI Bank’s statement should reassure every depositor.
Kamath sees a definite pattern in the “baseless and malicious rumours” to destabilize the bank. According to him, certain participatory note holders are selling the bank’s stock and capital market watchdog Securities and Exchange Board of India, or Sebi, is looking into it.
Edited excerpts from an interview:
You’re saying the bank is safe, sound and solvent and there are “baseless and malicious rumours” about the bank’s health. Who is spreading these rumours?
I don’t know. It has got something to do with the capital markets. The pattern is quite clear to me. I would like the authorities to look into it. When it first happened two weeks back, we drew Sebi’s attention to it. It has spread through web, short text messages and word of mouth. We have also seen that visual media are being used, essentially to say that something has happened at some branches and people are rushing to the branch, etc.
I clearly see an agenda. The initial agenda was probably market-driven… I don’t know what’s the ultimate agenda.
Do see involvement of any corporate house in spreading such rumours?
I don’t know. The whole thing is a shorting exercise…
Any response from Sebi?
They are looking into it.
Who are the sellers in the market?
We are still gathering data. I would leave that to the regulator. The P-Note holders could be selling (the stock).
As we talk, people are queuing up at some of your branches across the country to withdraw money. The stock is also falling.
We have a capital adequacy ratio of 13.4%. We raised capital a year and a half before we were required (to do so) and we had raised it in abundance. The stock movement is important from the sentiment angle and a trigger for the real world where you deal with your customers. So, this is beyond destabilizing the stock price.
Look at my financial capital, human capital and technology capital. If any body critically examines all three and tell us we are unsound on any one of these, I am willing to take up the challenge.
I believe some of your employees too, are withdrawing money.
I can probably say that this is baseless.
Is it correct that some of your senior managers are leaving?
We have not asked any senior manager to quit. None of the directors has ever expressed any desire to quit. We have more than 30 senior general managers and may be a couple of them have left in last few months. To me, that’s a normal movement. If people get better opportunity they leave.
There seems to be a perception problem about ICICI Bank. You need to put up advertisements in newspapers and issue statements saying everything is fine. Even the banking regulator has to step in and say there is no problem.
I think what it shows is clearly that it is possible in today’s context to use a host of things to cause challenges to stability. This is the message. It has nothing to do with my strength per se. The perception is created and then feed on rumours and innuendoes, challenging the bank. Between 2003 and now, the technology available has changed dramatically. This is a challenge which everybody will have to understand.
How much money has been withdrawn in past few days?
You are well capitalized—a net worth of Rs47,000 crore and 13.4% capital adequacy ratio. This means you are solvent but what about liquidity?
I would only refer to the RBI statement.
How much exposure do you have to Freddy Mac and Fannie Mae, Fortis NV and Lehman Brothers Holdings Inc.?
It’s not fair to discuss each and every individual exposure, but I must say we have $83 million exposure to Lehman and we do not have any exposure to Fortis, Freddy and Fannie. Our UK subsidiary’s balancesheet is about 8% of our total size. The investment portfolio is about $3.5 billion and 98% of these assets are of investment grade.
Let me tell you only 18% of the UK book has exposure to US assets. Apart from $3.5 billion, we also have about $1 billion in cash and cash equivalents. Why do we hold these exposures? Under local regulations, these are liquid assets which we need to hold. They are not part of our lending programme. Besides, the UK arm has a lending book of $4 billion with zero non-performing assets (NPAs).
So, this $3.5 billion is at the centre of controversy.
What’s their quality?
As I have said, 98% of $4.5 billion worth of investments are in papers of investment grade and above. In fact, 90% of that are of A- grade and the rest BBB grade. If somebody says it’s all US papers and will go burst, I’d say that the exposure to US papers is only 18%.
How much mark-to-market (MTM) losses you’d need to make?
We are closing the book today for the second quarter and cannot make a forward looking statement. All I can say is that there is no impairment which will be of any degree of strain on our balance sheet.
Will you hold them till maturity and avoid MTM losses now?
In any case, we don’t need to book any loss right now. We will hold them to their respective maturities. Part of the investment book is classified as available for sale and another part as held to maturity. Even there is no need to sell now those papers which are available for sale and book losses. We will continue to monitor underlying quality (of the papers) and those banks and institutions to whom we have exposure.
What about your exposure to $2.2 billion credit derivatives?
We have no exposure to non-India credit derivatives right now. We have sold them. Also, you must note that the MTM provision will be in the profit and loss account of the UK subsidiary and so there will not be any impact on ICICI Bank’s profitability.
Of course, as a parent we are responsible enough to continue to put in enough capital in our subsidiaries. We have sufficient capital and there is no worry on that front. The UK subsidiary’s capital adequacy ratio is now 17.5 % against the regulatory requirement of 14%.
Do you need to inject capital in your UK arm immediately?
Over the past few years, we have been injecting capital almost every quarter or six months as it is growing. UK continues to have a very strong deposit inflow. About 30% of the deposits are term deposits and we have not seen any deposit withdrawal there. We would not need to infuse unusually high capital to take care of the MTM provisions. All I can say is that UK has a set capital raising plan, which we have been meeting every quarter and there will be no strain on that.
What about your Canadian arm? Is it safe?
It is sitting on whole lot of cash. It does not have any exposure to US.
MTM provisions may not affect your profitability but your balance sheet will be affected and to that extent your net worth will go down.
Yes. But we are sufficiently capitalized. We can fund each one of our subsidiaries.
Is there any problem for your insurance subsidiary in India as far as capital infusion goes?
We have surplus capital and to that extent we have no challenge in terms of meeting the capital requirement of our life insurance subsidiary. I see other alternatives are also developing as we go along. We may see change in government policy in terms of foreign direct investment in insurance ventures in next few weeks. Also insurance companies’ market access is being considered.
It seems that your domestic book is equally affected because of economic slowdown.
We started applying the brake to our retail assets, gently, over a year back. We saw two things happening. With the interest rate cycle remaining high, customers’ ability to borrow as well as repayment was impacted. We also decided to focus on low-cost current and saving accounts and reduce our dependence on wholesale deposits. Over the last one year, collection of certain types of unsecured credit became a challenge. In line with that, we followed the policy of slowing down the asset growth. We see the NPA peaking this quarter. I can’t say beyond this as that will be a forward looking statement.
Are NPAs alarmingly high? In double digits?
It’s low, in single-digit.
Your net profit in first quarter was Rs728 crore. What is expectation in second quarter?
I can’t make a statement but all I can say is that I don’t think there is any need to worry on this front.
Is there a problem in risk management in ICICI Bank?
Every time we took a course correction, people thought that we have gone on a limb. Initially, when we had said from a single-product project finance company we want to become a retail company, people thought we were going on a limb. The same thing happened when we went international. This time, there is a global banking problem and people are saying ICICI Bank has a problem.
Each business has a cycle and we have to ride the cycle. The corporate business had a cycle between 1998 and 2003 and we rode that cycle. It is again becoming an opportunity today.
We did not dismantle the corporate lending desk that we had. Similarly, we are not dismantling the retail lending business. We will accelerate the business when the time is appropriate – when interest rates stabilize and we get a good mix of savings and current accounts with out wholesale deposits.
Are you taking too much of risk and operating like a hedge fund?
We don’t work like a hedge fund. We work like a bank which tries to mitigate risks in its portfolio.
When we were a single product company, we were told that we were taking too much risk. We have seen corporate, retail and international businesses and the next step that we will take in expanding credit in rural India will also face challenges. At this point, we believe that it is appropriate to be careful on retail growth.
What about international business?
We will continue to grow. We will be cautious and look at leverages. There is an opportunity there and we will cash in on the opportunity with caution.
Is it the most difficult time in your career?
There have been several such occasions. There was a time when we had a double-digit NPAs and more than 20% of the balance sheet was restructured assets. Our strive to become a bank was also very difficult. Then, in 2003 when there was a run on some of the bank branches in Gujarat and Maharashtra and it was a difficult period. Globally, banking is going through a difficult time now and I look at this in that perspective.
This is one of the four difficult periods that we have had.
Any change in your plan to step down in April 2009?
Nothing changes. I articulate a strategy and stick to it.