In the first week of March, the top brass of ICICI Bank Ltd, India’s largest private sector lender, camped out at Kumarakom Lake Resort in the backwaters of Kerala. Barring a few directors, the entire board was there for the bank’s annual offsite—the first after Chanda Kochhar took over as chief executive officer and managing director in May.
Ahead of the offsite, McKinsey and Co. made a presentation to senior executives of the bank. The consulting firm was candid, pointing out that ICICI Bank had not been growing and was losing market share while State Bank of India, or SBI, the country’s largest lender, had been aggressively expanding its balance sheet. Also, the relatively smaller HDFC Bank Ltd and Axis Bank Ltd—two of its peers in the private sector—have been playing catch-up aggressively on very efficient platforms. SBI’s market share of assets had risen from 15.9% in fiscal 2007 to 18.4% in fiscal 2009 while ICICI Bank’s share has declined from 9.7% to 7.2%. HDFC Bank raised its market share from 2.6% to 3.1% and Axis Bank from 2.1% to 2.8%, during the period.
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From around Rs4 trillion in 2008, ICICI Bank’s asset base declined to Rs3.8 trillion in 2009 and further down to Rs3.56 trillion in the first three quarters of the current fiscal. Since the bank had to set aside money to provide for its bad assets, the return on equity (RoE )—a key financial parameter to judge a bank’s efficiency—is low. If one excludes treasury gains and focuses only on net interest and core fee income, ICICI Bank’s average RoE in the past few years has been 7.5% against SBI’s 17%, HDFC Bank’s 20% and Axis Bank’s 19%.
On the first day of the offsite, group companies made presentations to the board on their growth plans. The focus of the next day was on the Indian economy, the banking sector, competition and ICICI Bank. A confident Kochhar laid down a road map for growth. Is the worst over for the bank?
The current avatar of ICICI Bank came into existence in 2002 after a 1955-born development financial institution was merged with its eight-year-old banking subsidiary. The merger was a compulsion as the financial institution was crumbling under huge asset-liability mismatches. After the government stopped giving subsidized funds, the institution was borrowing short and lending long. Rising interest rates and tight liquidity that hit the financial system in the mid-1990s also affected its asset quality. When K.V. Kamath took over the reins in May 1996, his twin concerns were the increasing asset-liability mismatch and rising stressed assets.
Kamath stitched up a string of mergers with non-banking firms and banks in the run-up to the creation of a one-stop shop for all financial products. Thousands of agents sold mortgages, car and consumer loans, but in the absence of adequate retail deposits, the bank’s dependence on high-cost wholesale deposits grew, raising its cost of funds. The high-growth business model also forced it to raise equity from the market frequently. Between fiscal 2004 and 2008, when the global financial system was awash with liquidity and low interest rates, a growth-hungry ICICI Bank borrowed short and lent long. So, when the rate cycle suddenly changed and the financial system was hit by an unprecedented liquidity crunch in late 2008, the bank found it difficult to sustain its business model. It also had to borrow aggressively to tide over the liquidity crunch.
If Kochhar wants to raise the RoE, the bank needs to make much higher profits. Its net profit declined from Rs4,158 crore in fiscal 2008 to Rs3,758 crore in fiscal 2009 because it had to set aside a huge amount of money to provide for bad loans. In the past two years, it has made provisions worth around Rs8,000 crore. Had the quality of assets been better and there had been no requirement to make such provisions, its net profit would have been much higher.
In the past one year, its stock has risen some 256% against a 110% rise in the benchmark Sensex index and 184% in the Bankex, the Bombay Stock Exchange’s banking index. Quite a few things are going well for ICICI Bank. The proportion of low-cost current and savings accounts has gone up to 39.58% from 26% in March 2008. The dramatic rise is on account of redemption of high-cost wholesale deposits (the bank does not need them as it is not growing its loan book). Another contributing factor is the expansion of its branch network. From 1,249 branches in March 2008, its network increased to 1,626 in December and another 475 branches would be added by the end of March, helping the bank mop up more low-cost deposits. Its level of net non-performing assets as a percentage of total loans is also not very high—2.37% in December. There are concerns about restructured corporate loans, but the volume of such loans is not very high compared with its overall corporate loan book of Rs90,000 crore (including overseas loans given primarily to Indian corporations). So why hasn’t it started expanding its balance sheet? Corporate loans apart, Kochhar also wants to grow mortgages and auto loans, but it won’t be a cakewalk as competition has intensified after ICICI Bank decided to go slow in this space. Also, I don’t know how much more the bank would need to provide for its Rs10,000 crore consumer loan book. Another clean-up may be necessary before ICICI Bank relaunches itself on the growth path.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Email your comments to firstname.lastname@example.org