Chanda Kocchar on ICICI Bank's journey and way ahead

A: If you talk of last 15 years for ICICI as a group, it has been 15 years of full transformation. In fact I can think of many major things that happened with the group in these 15 years.

It was almost 15 years ago that started our retail journey, so, the entire transformation into retail. It was just about 12-15 years ago that we diversified into non-banking financial services, so, our entire life insurance, non life insurance, securities business and so on. It was also our international foray, has all happened only in these last 15 years, the merger between the bank and ICICI parent and creating the combined entity.

So all this has in a way transformed us as an institution in these 15 years and all this has been underpinned by use of technology and achieving scale, size and diversity.

Q: You talked about the many milestones, as you pointed out there are several of them that you have been able to achieve in the last 15 years. Let me now talk to about you the future. I will come to the immediate future in a bit but let me talk to you about the future and you know I have been looking at various analyst comments while they talk about the performance of the bank and they talk about the future and this in the context of the valuation and comparing you with your peers and one view is that you have seen branch network go up about six folds in the last seven years while your business is up only two times. Also there is a view that perhaps your earnings could double over the next few years so in the context of valuation and growth potential what would you respond to these analyst comments?

A: First of all in terms of growth potential I would say that banks write the Indian economy but at whatever rate of gross domestic product (GDP) growth India sees banking would grow at least 2.5 times that. ICICI would grow at least 3-4 percent higher than the average banking growth rate.

However when you talk of profitability, one of the major milestones in the last few years has been the fact that our returns on assets (RoA) and return on equity (RoE) has actually doubled in the last four to four and a half year. About four and a half years ago, five years ago our return on assets was less than 1 which is now 1.8. Our return on equity was around 7-7.5 which is now 15. So doubling of RoA and RoE in five years again has been major. It has been a major milestone and a major achievement but clearly going forward one is also looking at further improvement in return on equity.

As far as valuations is concerned, I would think at this point in time there is a huge potential of actually valuation improvement because ICICI Bank is one of the very few banks that can today grow without having to access more capital. So we have everything that it takes to grow with a capital adequacy of 17 percent which is very high. So gives us enough room to grow, to grow profits which can increase valuations.

Second is that all the subsidiaries that we have created now are out of the investment mode. There are actually in the mode where they are generating huge returns on the investments that we have made and there is a potential to even harness that valuation.

Q: You said you could significantly improve your valuation. Explain to us what significantly better could mean in terms of return on equity for instance?

A: Today we are operating at a deposit mix which is 75 percent retail. We are operating at net interest margins (NIM) which is more than 3.3 percent, we are operating a RoE which is 15 percent and we have the ability to grow our business wherever we want to grow.

For instance, retail we are growing at 20-25 percent and all this at the back of such a healthy capital adequacy that from here on we can grow in the next few years without having to raise more capital which means all the profits that increase just go to increase RoE and do not dilute the equity holders and that is really big potential for valuation.

Q: Speaking of potential and speaking of the big levers that could provide this kind of upside to growth and you touched upon that, whether it is the securities business, the insurance business or the AMC business currently account for about 10 percent of your consolidated profits and value. What do you see the role of these businesses over the next 5-10 years?

A: When you look at consolidated profits now close to or a little less than 20 percent of the profits of the group really come from these businesses. So, it is very different again, till about seven years ago we were only investing money in these businesses, today they are actually contributing back.

However, the bigger upside as I said is the fact that the underlying value has actually not been fully valued and we hold 74 percent in a life insurance company that is the largest private sector life insurance company and similarly in general insurance.

So, the upside is huge. I don’t think one should put numbers at any point in time till one takes the step because every time the markets react differently but as I said there is a huge potential to actually unlock some of these investments.

Q: What could be the options that you could look in terms of unlocking value in some of these businesses?

A: Again we are in a position where we have multiple options available to us. So, if the ownership guidelines in insurance change and allow 49 percent foreign holding then we have the option of either offering a higher shareholding to our existing partners, we could have an option of having other foreign players depending on which way the rules are worked out. We could have an option of just listing and we are eligible for all of these options.

Q: What would be the most preferred option and have you begun conversations with the existing investors or potential investors in the hope that this bill will finally see the light of the day though it has been going back and forth since 1997?

A: No, we have not really begun discussions with any set of investors so to say. Of course with our partners we constantly talk about it because this bill has been talked about for very long but we haven’t decided which step to take because as I said it will all depend on which way the guidelines are working.

Q: So, once the guidelines are out and I am assuming that this will be a done deal because that is the sense that we get from the government, from the finance minister, how soon would you be able to move on this front and take one of the multiple options that you are currently exploring?

A: If it is any of the foreign shareholders that is much quicker. If it is listing then it takes a little bit of time because you have got to prepare accounts and so on in that manner, but again if it is listing it actually need not wait for any change in the guidelines.

So, what we are doing is we are in a way keeping the company ready to be able to take any step depending on the guidelines. However, as I said if it is a foreign shareholding it can happen very fast, if it is listing maybe a couple of quarters.

Q: Once again, of the two which would you prefer or would you explore perhaps if the guidelines do change come the winter session of parliament and of course the foreign direct investment (FDI) ceiling is relaxed that would be the easiest and the most preferred option for you?

A: I would think that it is also going to be more fair for our partners to wait till the time the guidelines are out because a guideline that has been talked about for so many years and if we think that it is actually going to happen we should wait and see in what form it happens and then mutually decide as two partners what are the steps we want to take.

Q: Let me move away from that and talk to you about the current debate which is on as far as interest rates are concerned and I want to understand where you stand and which camp you belong to because the markets have been reacting in anticipation that perhaps we could see a surprise coming in from the Reserve Bank of India (RBI) as early as the policy in December largely on account of the noises that are coming in from North block nudging the RBI into action as far as interest rates are concerned. However, the noise coming from the RBI seems to suggest that it is too early or to premature to celebrate as far as the battle against inflation is concerned. So, maybe you are going to have to wait longer. What is your base case as far as the possible interest rate cut is concerned?

A: I am not going to guess what is the step that the RBI is going to take but if I break these elements of inflation, interest rate and so on and so forth RBI has said that they are looking at the inflation rates not just of 2015 but up to January 2016. We must keep in mind that the inflation rates are actually going to be a little volatile because after January of 2015 the base effect is going to go away. So, in fact it could take the inflation numbers a little higher. So, that is a very clear formula that they have indicated.

On the other hand if you ask me, I would think that this is in a way a very opportune time because the commodity prices are low and oil prices being low is actually a big boon for India. I think it gives a very comforting time. I also think that a whole lot of focus on inflation has to come from addressing the supply side constraints as well and finally that is the structural way in which inflation can be controlled in India.

I am hoping that a little bit room from the commodity prices, a little bit room from actually supply side steps being taken should all give monetary policy that leeway to be able to bring down interest rates.

Q: By when?

A: That question only the regulator can answer.

Q: This fiscal year do you believe that there will be enough leeway for him to act on rates in this fiscal year?

A: Towards the end of this fiscal year one should see some amount of movement happening in that direction.

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Q: Let me ask you about the economy and as you pointed out that the fortune of ICICI Bank in a sense is linked to the fortunes of the Indian economy. While sentiment has changed the mood is definitely a lot better, much more confident but we are not really seeing that result into a pickup as far as credit off take is concerned. Even if you look at your own corporate book for instance the kind of growth that you would have liked that perhaps is looking a bit cautious at this point in time. What is your own sense about how long it is going to take for the investment cycle to really turnaround?

A: Of course the sentiment has changed and the mood is very positive even from the foreign investors who are very keenly and eagerly looking at India. It is not just the mood, there are also some other on the ground changes that are quite positive. The simpler environment approvals have actually started to come. So, one has seen that actually coming in.

Some amount of movement of files, decision making has become faster. I think we have a great boon in the form of commodity prices easing. The current account therefore is clearly under control and then you have seen that the rating agencies outlook has also turned more and more positive.

Q: They are not talking an upgrade just yet.

A: Yes but the outlook has turned positive is what I said. Some of the smaller steps as I would say, giving an indication towards labour laws, the entire policy towards the construction sector and FDI there, FDI in defence all these are very concrete steps. Directionally we seem to be moving entirely in the right direction.

For new investments to come back what is really very critical is that the existing projects that are stuck need to start generating cash flows. So, that is what we have to now see and wait for. Till coal is really available and till gas is really available and the power projects start producing, cash flows are not going to get released. So, the investment cycle will actually happen only after that.

So, as I view it first we would see an increase in working capital demand as production starts going up and then only will you see an increase in investment cycle demand.

Q: So, at least another 6-9 months you would think so?

A: Yes I would think so, for the new projects definitely yes.

Q: As far as growth is concerned, growth rate is concerned what are you working with over the next couple of year for the economy?

A: I definitely think that the growth rates should improve and it is actually very easy to say that they could improve by 1 percent a year and still you get decent numbers. Frankly it would all depend on how fast we act because if I count on the tip of my fingers I can count so many low hanging fruits which can all add up one-one percent to the GDP.

So it all depends on how fast we move. You just take the existing 20,000 mega watts of power capacity and make it working the production of power and its multiplier effect can add 1 percent to the GDP as per my calculation.

You take a large amount of these natural resources related companies access to mines and therefore the production and all that calculate that, that can add another one percent to the GDP.

So in my view there is a lot of potential to add. We add that quickly we can add 2 percent in a year. We move a little slowly we can add 1 percent in year. But clearly we are on the upward direction.

Q: So 8 percent, 8 percent plus over the next few years back to that kind of the growth rate?

A: Yes, I would think 8 percent in the next few years is possible if all of this falls in to place.

Q: Let me now ask you about the other issue which has been giving the government as well as the Reserve Bank and bankers like yourself cause for concern and that is the non-performing loan (NPL) issue. Let\\'s just look at the quarter gone by as far as ICICI Bank is concerned because more than half of your gross slippages has really come from the existing restructured pool of assets. Is this a one of you believe or are you likely to see more pain on account of this and has the problem in that sense as far as NPL in terms of creation of new NPLs is that likely to sort of stem at this point in time.

A: I don't think that this is the end of additions to restructuring or additions to non performing assets (NPAs) but I definitely believe that at least new additions to either restructuring or NPA this year should be less than the new additions that happened last year. So in that sense it is a little bit of a improvement on the curve but it is not the end of additions to NPA.

The other thing is that as you rightly pointed out some of the addition to NPA is really the deterioration from restructuring to NPA and this is because when some of the companies were restructured may be one year or two years earlier we all made assumptions that the economy will recover much faster than what it has. In the absence of that the companies have not been able to recover as per our assumptions and they have turned into NPA. So clearly this is an indication of two things that is, one, the recovery has been slower so far than what we expected. But at the same time the fact that at least new creation of problems the rate of that is coming down.

Q: How would you respond to analysts who say that this unanticipated or higher than anticipated NPLs that we actually saw coming in for you in the quarter gone by is really the big risk as far as ICICI Bank is concerned?

A: They have to look at the entire portfolio and clearly for them it is easy to estimate or may not be easy but it is possible to estimate that there would be some slippages from restructured to NPA. As I would in fact put it, is that this is really a lesser of a risk than having new problems come up. So, these are things that were anyway under watch, they were expected to improve and it is not such a great thing that they have not improved and they are actually deteriorating further but these are not surprises in that sense. That is the difference, these are not surprises, these are not things that just cropped as being bad suddenly. Even when you look at therefore impact on profits, even provisioning and all that anyway starts the moment the account is restructured. Then you have some additional provisioning when its NPA. The answer to your question therefore is that these are actually not surprises. These are further deterioration of problems that actually existed.

Q: You feel fairly confident that new additions are going to be significantly lower in comparison to what we have seen?

A: New additions to restructured and NPAs are going to be lower than last year. However some deterioration from restructured to NPA will still continue, it is not a one off, it will happen.

Q: Swachh Bharat is the prime ministers pet project or one of his pet projects and you were out at Churchgate cleaning up Churchgate along with your team, is this going to be a sustained effort on the part of ICICI Bank and your team? Lot of companies like TCS have decided to put in money into building toilets and so on and so forth are you going to take that route as well, are you going to be one of the companies that pitches in to the Swachh Bharat campaign from a monetary point of view as well?

A: Before I really actively started doing my bit for the Swachh Bharat campaign I was thinking of how I can make it sustainable and meaningful rather than a one time effort. Therefore when I really kickstarted it from my end I basically said that we really have a full one year plan where every day one branch of ICICI Bank will clean the surroundings outside their own branch. In that manner every day you get one new branch involved you have got actually this message and this consciousness spread all over India. Then of course I have chosen 8 leading ladies.

Q: Arundhati Bhattacharya of State Bank of India makes it to the list, Anu Aga of Thermax is on that list, Vidya Balan is on the list who are the others who are on the list?

A: Anamika Khanna is on the list, Chitra Ramkrishna is on the list, Swati Piramal is on the list, Rama Bijapurkar is on the list, Kirthiga Reddy is on the list. So, you have banking, IT, designing, art, health and medical you have leading ladies across diverse fields in India.