No threat to retail portfolio despite slowdown: Kochhar

ICICI Bank , India's number two bank by assets, is betting on a renewed focus on its retail loan book to expand its profit margins as well as bottomline this financial year. In an interview to moneycontrol.com, Chanda Kochhar, managing director and chief executive said that she expected retail loans to account for nearly 40% of the overall book, up from 35% last year.

Kochhar took charge at the helm in May 2009 as the bank was passing through one of its worst crises. A string of defaults in its personal loan and credit card businesses severely damaged its asset quality, forcing a drastic change in its loan book which was three-fourth retail. The bank has been cautiously rebuilding itself since then, and is now looking to step on the gas.

"Whatever reduction we wanted to do on the unsecured retail side is complete, our growth rates in fact on the secured loans are becoming faster," said Kochhar.

Kochhar sees housing, car/commercial vehicle loans on the retail side, and project finance on the wholesale side as the key growth drivers this year, as ICICI Bank aims to expand its overall loan book by 20%.

The big bet appears to be clearly on the retail book, as it will have to grow 35% for ICICI Bank to achieve its target of 20% overall loan growth, and retail share at 40% of the expanded loan book. Last year, retail loans grew less than 10%, much slower than those of its rivals like HDFC Bank and Axis Bank.

Kochhar has her task cut out. There will be stiff competition from rivals eyeing the same segment for what appears to offer profitable growth. Besides, outlook on the economy has got gloomier after the shocking March quarter GDP growth of 5.3%. Industry watchers feel this could hurt demand for retail credit, and even lead to defaults on some of the existing loans. Already, demand for homes and automobiles have been slackening over the last few months.

Kochhar feels the concerns may be overdone.

"Currently we are seeing that people's jobs are remaining intact, people's increments are taking place, so the earnings and the cash flows are strong and therefore the repayments on the retail side are really very stable. I as of now do not see a threat to the quality of assets on the retail side of the portfolio, at least the secure retail side of the portfolio," she says.

ICICI Bank shares have consistently underperformed peers and the benchmark Bank Nifty for the last four and a half years (stock down 30% vs 1% decline in Bank Nifty). The margin of underperformance has narrowed considerably this calendar (stock up 22% vs 25% rise in Bank Nifty) so far. But investors appear to waiting for the bank's strategy to start reflecting in the numbers, before making up their mind.

According to an investor presentation on the ICICI Bank website, FY10 was the year of positioning the balance sheet for growth, FY11 for resuming balance sheet growth, and since then, acceleration balance sheet growth.

ICICI Bank's asset quality improved (less loans going bad and so less money having to be put aside for them) significantly in FY12, leading many analysts to concur that the worst is behind for the bank, even if it may not possible to repeat the performance, given the slowing economy.

Kochhar and her cockpit crew may have pulled ICICI Bank out of a steep dive and almost brought it on the level, but she is not switching off the seat belt sign yet.

"Hereon, I am expecting stable asset quality. I do not envisage some big shocks on account of NPAs but I cannot say that year on year we will continue to reduce provisions as we have done in the past," she says.

Net interest margins (difference between interest earned and interest paid out) have improved three quarters in a row and Kochhar expects a further improvement this year, as the bank looks to keep trimming its bulk deposits and shore up retail deposits instead.

Kochhar is not hopeful of a meaningful decline in interest rates this financial year.

"The correction or the reduction in the effective lending rates has been slower than what I was expecting at the beginning of the year and that's because the cost of funds for the banks, the rates on deposits have not yet come down. So while I do expect that there would be some correction more that would take place during the year, I do not know whether it will be as sharp or as much as what I had expected it to be at the beginning of the year," she says.

What is Kochhar's stance on the debate on whether or not high interest rates are hurting economic growth?

"Of course, lower interest rates are a further enabling factor for investments to take place and for people to buy more homes or invest more in homes and cars," she says, adding ".... but I think that's not the most important factor that determines the pace of growth. I think what is definitely required for investments to take place is first, a more conducive investment environment."

Read the transcript on the next page.