Focus on retail; borrowers will pay home, car EMIs: Kochhar

The bad news is that the worst of non-performing loans (NPLs) and restructured loans is not yet behind for the banking industry. The consolation, if any, is that the macro-environment may not deteriorate here on. That is ICICI Bank CEO Chanda Kochhar's big picture view of the economy and the banking industry.

Now in her fifth year behind the wheel at India's largest private sector bank, the 51-year old Kochhar has managed to get her company back on the growth path even if meant reducing speed and allowing rivals to narrow the once formidable lead it had.
And the stock market appears to be taking notice, albeit grudgingly. ICICI Bank shares are down roughly 8 percent so far this calendar. That compares with a 2 percent and 14 percent decline in the shares of its closest peers HDFC Bank and Axis Bank respectively.
Kochhar, currently ranked 65 on the Forbes Power Women list, took charge 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 eroded its asset quality, forcing a drastic change in its loan book mix which was then three-fourths retail. The bank has been cautiously rebuilding itself since then, and is now once again betting on retail as its main growth driver.
Considering that companies are shedding jobs, freezing salary hikes and even delaying salaries in some case, will the retail strategy pay off for ICICI Bank? More importantly, it was an aggressive retail focus that brought the bank down on its knees five years back.
But Kocchar is more confident of the bank’s battle plan this time around.
"While there is some anecdotal evidence of some job losses but on the other hand there is also evidence that many of the IT companies are actually increasing their recruitment and so on," she said in an interview to Latha Venkatesh of CNBC-TV18.
"So broadly what we have seen in our portfolio since our retail portfolio is mainly secured—housing and car loans—that segment of the population has not really seen job losses in a big way. Their incomes continue to stay and therefore they continue to pay their EMIs because they don't want to lose their home and cars," she said.
The other big priority for the bank is to ensure that costs are under control, and don’t exceed 40 percent of the income. ICICI Bank has already got there, but the challenge will be to maintain that level, considering there is not much scope for improving on it.
"I don't think we can squeeze much more from the existing cost," Kochhar admits.
"We have brought the cost to income ratio down to below 40 percent. From here on our focus will be that we maintain the ratio at sub 40 percent levels," adding that her bank will be among the most efficient banks even if the red line is not crossed.
And while the economy may be stabilising, banks will continue to see additions to their bad assets and restructured loans.
"...because every positive or negative impact on the macro comes with a lag on the corporate asset quality side," she says by way of explanation.
"So the positives also have to finally translate into action for each project, then they have to translate into projects taking of, then they have to translate into cash flows being generated from the projects which are stuck today and then only will you see the positive impact on asset quality," she says.
And the tricky part for banks is that they can never be sure of where the nasty surprise may spring from.
"I would not say that in general there would be one big sector that will come in for restructuring or NPLs, I think the situation today is more company specific, it is more group specific and therefore the situation could be different for different companies," says Kochhar. Click on next page for the interview transcript
_PAGEBREAK_ Below is an edited transcript of the interview on CNBC-TV18 Q: What is your main strategy? How come you achieved this rather stupendous effort?
A: Our strategy in the last four years has been to redo the balance sheet components in a way that they become much stronger, whether it is the deposits side or the asset side.
Talking specifically on NPAs, there are three important things that we did. One is we reduced the composition of very high risk assets, which is the personal loans, credit cards which had become more than 10 percent of the balance sheet. They are now less than 2 percent of our balance sheet. Secondly, we kept proportions of small and medium enterprise (SME) and some of the other high-risk assets at very low controllable levels. Thirdly, our level of monitoring and taking quick action in respect of even our larger exposures was much tighter. Q: I was wondering if there is a human element involved as well. 2001 or 2002 when you became the big ICICI Bank to 2008 was Kamath's leadership style and then it is yours. Which is the most distinguished characteristic of your style?
A: I think the basic thing that I believe is and therefore, I do not know whether you call it a change or not, but this strategy of an organisation has to be relevant to the times, to the environment. So, in a way I reoriented the strategy keeping in mind the environment and having done that in a way I actually kept intact the basic DNA of the organisation which is efficiency, dynamism and speed of execution. I believe that that DNA which is a very efficient and execution-oriented organization, has remained intact, but at one time the organisation implemented a strategy which was thought to be correct for that environment. Currently, it is implementing a strategy which is thought to be correct for this environment.

Q: One of the outstanding features of ICICI Bank's performance in the recent quarters, especially in the most recent quarter, has been the cost-to-income ratio. Generally, the control on costs. Do you think you can squeeze more out of that?
A: To be fair, I don't think we can squeeze much more from the existing costs. We have brought the cost-to-income ratio down to below 40 percent. From here on, our focus will be that we maintain the ratio at sub-40 percent levels. Which means that while in absolute numbers the cost would grow but the cost should grow at a pace lower than the revenue growth.
If we maintain the cost to income ratio at sub-40 percent we will still be one of the most efficient banks across the world may be. Q: One of the faster growing areas for you in the recent quarters has been secured retail assets. But now we are beginning to hear anecdotal evidence of job cuts. Therefore, even salaried guys not being able to pay EMIs. Do you think that retail can be your winning horse or do you think that will falter?
A: I still believe that retail will continue to be our winning horse. While there is some anecdotal evidence of some job losses, but on the other hand, there is also evidence that many of the IT companies are actually increasing their recruitment and so on.
Broadly, what we have seen in our portfolio since our retail portfolio is mainly secured—housing and car loans—that segment of the population has not really seen job losses in a big way. Their incomes continue to stay. Therefore they continue to pay their EMIs because they don't want to lose their home and cars. Q: Let me come to the other big sector: corporate. Which as you pointed out you all have voluntarily slowed in because of the slowdown? The decay story in the economy in certain parts is not over, we still see it in infrastructure. You are exposed to the same sectors as the public sector banks are. If the non-performing loans (NPL) or the slowdown were to spread over to even the large corporates say in power or roads, do you think there is a danger of higher NPLs in the quarters to come?
A: If you talk about NPLs and restructured assets for the industry as a whole I think the worst is not yet behind us. I still think that the banking industry would see additions to NPLs, would also see additions to restructured assets. So clearly we will see those additions.
But I would not say that in general there would be one big sector that will come in for restructuring or NPLs, I think the situation today is more company specific, it is more group specific and therefore the situation could be different for different companies. However, the short answer to the question is that there will still be additions to non-performing assets (NPAs) and restructured assets. Q: Are there any green shoots at all? We got those eight core sector numbers, which came with an 8 percent growth in September; exports are clearly ticking higher. Are you getting any positive vibes from industry at all?
A: On the macro environment, the worst is behind us. While the worst may be behind us, the uptick will be very slow and gradual.
As far as the NPA and restructured assets are concerned, why I still believe there will be additions, because every positive or negative impact on the macro comes with a lag on the corporate asset quality. The positives also have to finally translate into action for each project, then they have to translate into projects taking of, then they have to translate into cash flows being generated from the projects which are stuck today and then only will you see the positive impact on asset quality. Q: You were growing at a frenetic pace and at one point in time when you all did your previous public offer, I almost thought in two-three years you will catch up with State Bank of India (SBI), that was the pace at which you were growing, but now you have clearly slowed vis-à-vis your own peers, I am not talking about SBI at all in terms of size. If you grow at the same pace and your competitor like HDFC Bank grows at its current pace then in three years they will be your size. So, when do you shift from second gear to fourth gear?
A: In a way we have already shifted from second gear to fourth gear. Our current pace of growth at the retail assets has been much higher than the industry average – in excess of 25 percent. In that sense, we have the capability both in terms of balance sheet strength after having consolidated the position as well as in our other capabilities of distribution network etc to press the accelerator even faster whenever we would think it is the right time in the environment.
Retail is growing at excess of 25 percent but since you asked this question related to DNA, I must say that even when I took over I always said that while we continue to remain a growth organisation, I would just broaden the definition of growth. Growth does not mean only growth in assets or growth in balance sheets.
Infact when I took over in 2009, while actually we cut the balance sheet for two years by 10-15 percent a year but I said we are still a growth organisation because in those times the relevant growth for us was growth in deposits, growth in branches, growth in commercial banking business because we had to get to basic banking businesses.
We grew branches at 33 percent per annum even in those times. Commercial banking business we grew at more than 65 percent per annum even in those times. Again, you find a strategy that is relevant to that environment and therefore, even your definition of growth is what is relevant to that environment, we have grown our CASA deposits substantially, we have grown our secured retail assets substantially and we have grown our NIMs substantially, we have grown our branch network substantially. So, that is what is adding to the strength in the balance sheet.

_PAGEBREAK_ Q: That is a tick on every metric that you spoke but that is much better than your own previous performance, but you look at yourself compared to your peer groups, they may be smaller than you but still broadly your peers – whether you look at CASA, RoA, RoE, NIMs, growth, everything that you referred to, fee income as a percentage of assets, in any metric you are not the industry leader. Now, if you have to choose which metric will you grow and become the industry leader?
A: If you look at RoA, we are amongst the top which is as good as leadership. You look at NIMs, but break that up into domestic and international, our domestic NIM is almost right up there. You look at CASA and look at where we are coming from, we are coming from a base of 21 percent or so.
I think we are right up there. We want to emerge as leaders in creating a sustainable, profitable business model and that is what we are creating. Each item that I spoke about is growing at pace that is faster than many others and is giving us a very comprehensive, sustainable, profitable model which will sustain us profitably for many years to come. Q: You would still be measured by investors looking at each metric. So, if you have to choose which metric you will grow next, will it be overall balance sheet growth, will it be NIMs?
A: From hereon, the metric to focus on as far as growth is concerned will be the balance sheet size because we have increased NIMs, we have increased deposits, we have increased CASA ratios and all these items that we have grown were with the objective of saying that they should then enable us to grow our balance sheet in a more profitable manner.
So, the focus will be on growing the balance sheet without sacrificing on these parameters that I spoke about. Q: Where you are industry best is actually cost to income. When growth comes, will you have to give up a bit on that?
A: That is why I am saying that I am very clear that as we grow the balance sheet we don’t want to sacrifice on any of these parameters and so, they should remain. It is only then that our growth will be sustainable and profitable. Q: The big development over the past few days has been the possible big entry of foreign banks into the private banking space. Near national treatment, near private bank treatment is what the Reserve Bank of India (RBI) appears to be promising to the foreign banks with the latest rules. What is your sense? Are you going to see a spate of mergers and acquisitions (M&A) or even some M&As when the foreign sector gets more liberalised?
A: My broad reaction is that this approach is very good, because it creates a level playing field across all players and while creating level playing field it gives market access to everybody. So, I would not quibble about saying, oh that brings in competition.
Secondly, foreign banks have been present in India, and not just being present, but growing and giving competition for decades to the Indian banking industry. So, I do not think the Indian banking industry is not used to competition as the industry has been growing. You would finally see the stronger players emerging, whether some of them are part of the foreign banking structure, some private banking sector and some public sector banking structure, it may give some more fillip to M&As, but all that is good for the market. So, it is just creating a more competitive market environment. Q: I am trying to make you think as a foreign banker would. I am sure they are not going to be very candid and tell us, yes we will do M&A and drive up the prices of those stocks. Do you think that would be the case? There are quality issues, culture issues, in spite of this inorganic growth would be temping, do you think that if you are in their shoes?
A: If anybody is in their shoes they have to first make up their mind about the business model, how comfortable they are about the obligations that come with it. If they are comfortable about that then doing an M&A makes sense, because once you have set a business model and are comfortable with that, an M&A reduces the time to market. The bigger decision is to understand the obligations that come in and build in capabilities to meet those obligations. Q: One of the private bankers was cribbing and correctly than when Indian banks go to certain foreign countries and I think you mentioned Canada you do not get immediate access to all the ATMs of that country. Whereas in India you put up one ATM of foreign bank and immediately at a cost you have 50,000 ATMs from which your depositors can withdraw money. Do you think we are kinder?
A: I would put this in that middle bucket which I have said that you get some restricted access, but you do not get the full access, whereas in India we do not discriminate, that is exactly the point. So, at least to those set of countries which give us either limited access or almost no access at all we are giving a better treatment to those foreign banks here. Q: So, do you want RBI to insist on reciprocity more?
A: Yes.

_PAGEBREAK_ Q: If that happens would you expand more globally?
A: We are actually present in 18 countries outside India, so our presence is quite well-established. About 25 percent of our balance sheet is still out of the international operations, so I do not think we have really restricted our growth. We have created our business models to suit the regulatory requirements of each country. Q: You will soon have foreign banks that will only offer investment banking or only offer cash management or derivative products for foreign exchange management. Would you like that? You are saddled with priority sector, branch banking and banking the un-banked and somebody comes and takes away creamy activities. What would be an official response from ICICI? Is differentiated licensing okay?
A: We should not create licensing structures that create imbalance in this equation, because then that creates regulatory arbitrage and so, that should not happen. But if we talk of differentiated licensing in the form of saying that there should be smaller banks which could focus on certain geographies, do exactly what the larger banks are doing, but with a geographical focus, but not at all creating regulatory arbitrage. Q: Is it going to become difficult two years down the line? More foreign banks add subsidiaries, Tata, Birla having bank licenses.
A: Should competition scare the existing large players? I do not think it should because of two reasons. One is that in a growth economy in any case there is a lot of business for everybody. The second is banking is not that easy a business, that you come and you start and you start disrupting the existing players. It is a business of investment.
It is a business of long-term. You need to first invest in creating infrastructure, products, build in a large amount of capital, risk management practices, talent base and all that and all that takes time. So those who are able to really put in all the time, money, effort and create a great organisation will be able to participate in the growth of the Indian economy, those who are not will not really find it that easy. So let the competition come, but there is lot of room for the efficient capable players. Q: What is the kind of growth? You admitted that growth will be the next mantra for ICICI. What is the target you are looking at? Will you be a 20 percent growth bank in two years, a 25 percent growth bank in three years or four year? What mental targets have you given yourself?
A: We will grow at least 2 or 3 percent higher than the industry. In the current scenario this is a better target than putting a growth rate, because you do not really know how the economy will pick up and therefore, what would be the banking industry's growth rate. So, if you set a target for yourself irrespective of how the economy shapes up, you are going to be in trouble. Q: Two to 3 percent over industry you have always managed, but you still get bracketed within the industry with private banks and public sector banks. Will you be able to grow faster than your sector that is the private sector banking space?
A: In some businesses we would. If you look at secured retail business we are growing faster actually, but if you club the unsecured and personal loans then those are products we have consciously calibrated growth and kept it small. So yes, in those segments which we decide to grow. But in total terms we may not decide to focus on certain segments. Q: I am talking balance sheet. Balance sheet-wise would you want to benchmark and say, no I will grow faster than private sector peers maybe in two years, maybe in four years?
 
A: I would go by what I think is the right thing to do, the right segments to focus on and in those segments I will definitely grow faster. But just because I need to target a certain growth rate, because others are at a certain growth rate and push ourselves in businesses which we think we do not want to be in, I do not think that is the correct strategy to follow.