AROUND 25 SENIOR MEMBERS of ICICI Bank’s international banking group gathered at its Learning Centre in Khandala, a hill resort near Mumbai, for a two-day huddle in May 2010. This group typically contributed to a quarter of the bank’s balance sheet, primarily by working with large Indian firms expanding overseas. But now it was proposing another model: India is growing and it is reasonable to assume that any large company based in America or Europe should be thinking of India. Could ICICI talk to some of their CEOs or CFOs to figure how India fits in?
Over the next few months, the team met a handful of North American multinationals which confirmed the hypothesis. All of them admitted to an Asia strategy; China definitely figured in it, and India was increasingly finding a place. The group then picked up the 2009 Fortune Global 500 (FG500), and spent more than 200 man-hours scanning the directors’ reports of all the companies on the list, looking for the keyword ‘India’. They excluded the seven Indian companies and the 99 financial services firms featured in the FG500. Of the remaining, more than 250 companies mentioned India as an existing or a potential market. The international banking group met about 170 of those at their global headquarters over the next six months. As president of international banking Vijay Chandok says, he and his team travelled for an average of two weeks a month initially. “It was Europe one week, North America the next, and Asia after that.”
The interactions revealed that these FG500 firms were looking for two new additions to their banking consortium—a Chinese bank and an Indian one. “This wasn’t for one-off deals. It was a strategic engagement with a local-at-heart Indian bank which had substantial distribution strength,” says Chandok. In the last two years, ICICI has signed on 50 new clients, including top global firms. (The bank doesn’t share company names.)
K.V. Kamath, ICICI’s former managing director and CEO, was often quoted on his follow-the-customer approach that other private banks eventually adopted. Presentations to analysts during his tenure (1996 to 2009) described the international strategy as being the preferred banker for Indian companies building a business overseas, and also being the bank for non-resident Indians. “ICICI was predominantly following outbound corporate flows earlier: Now it’s looking at inbound corporate flows as well,” says Chandok.
This shift is one of the many indicators of the change under way as incumbent MD and CEO Chanda Kochhar begins to stamp her imprimatur on the country’s largest private bank. Though she’s been with the bank for nearly three decades now—she joined as a freshly minted management graduate from Jamnalal Bajaj Institute of Management Studies in 1984—many of her moves have surprised; she is the first to admit that, with some degree of satisfaction. A banker compares her to Congress party president Sonia Gandhi, who was underestimated till she demonstrated how astute she was. Kochhar smiles at the comparison.
Her reimagining of what ICICI does and how it works draws on how she wants the world around her to be—neatly ordered. Analysts say her answers on conference calls are precise and she never waffles. Those who have worked with her say she is highly disciplined and manages time extremely well, adding that she never overpromises. When her children (daughter Aarti and son Arjun) were young, she would often write notes on a particular subject if she thought the textbook chapter wasn’t “organised”. “If I’m playing the role of a mother, I better play it well; if I’m playing the role of a wife, I better play it well, and, if I’m playing the role of a CEO, I better play it well,” she says.
APRIL 27, 2012, 2:30 P.M., ICICI Bank Studios. Draped in a peacock-blue saree with golden motifs, Kochhar sits down to answer questions from five business news channels with a blazing logo of the bank behind her. The 3,000 sq. ft. studio was built on the ground floor of ICICI’s headquarters in Mumbai’s Bandra-Kurla Complex at a cost of Rs 1 crore two years ago, so that Kochhar wouldn’t have to trudge from studio to studio, talking to anchors each time results were announced. Today, she has good news to share. For FY12, net profits are up 26%, assets 17%, and total income 26%. Someone asks her a question about the quality of assets, and she says she’s “comfortable” with the mix. Another quizzes her on the international business, and she answers straight off. In barely 15 minutes, it’s all over, and after a brief few minutes of small talk with the TV crew who praise her performance, she’s off.
If there’s a stand-out feature of her three-year tenure as MD, it’s that profitability ratios have consistently improved. Predictably, ICICI’s valuation has surged—from Rs 58,897 crore to Rs 94,511 crore (a 60% jump, while the Sensex climbed 34% in the same duration)—and most of the large broking houses have a buy on the stock, citing a 30% upside over the next six months. Yet, the street still doesn’t entirely get what Kochhar is trying to do. Of the 12 quarters under her, the bank’s performance has beaten the street’s forecast eight times.
If that pleases Kochhar, it’s because she constantly wants to stay ahead. Known for keeping her cards close, Kochhar says she has mapped out in her mind the specific road in terms of size, relative global position, and profitability parameters that the bank will take for the next 10 years. Even her top team isn’t privy to the entire journey. “The next three to four years, of course, my team knows how we want to move,” she says. A former ICICI director who has known Kochhar for long says, “She’s one lady who knows what she is doing.”
The simplest way to describe what Kochhar is doing is to say that she has turned the ICICI model of banking on its head. From a bank that devotedly chased scale and market share, the ICICI of today speaks a very different language, literally. When Fortune India interviewed ICICI’s top management, irrespective of what they did, conversations were strewn with phrases such as return on equity (ROE), return on assets (ROA), net interest margins (NIMs), and cost ratios and earnings quality. K. Ramkumar, executive director (ED) and head of human resources and operations at ICICI, says, “Earlier the asset strategy determined the liability strategy; now it’s the liabilities that decide how we lend.” To be sure, the rethink had begun towards the end of Kamath’s term, but found an unwavering champion in his successor.
KOCHHAR SAYS HER 100-day agenda when she took over was to explain why things needed to change. Though ICICI Bank had grown in size in the years prior to her ascension, its numbers weren’t encouraging. ROE was a low 7.7%, ROA less than 1%, the proportion of unsecured loans and wholesale deposits high, the proportion of current account savings account (CASA) low, while domestic NIM was just 2.4%.
She had two options—to continue growing aggressively and sort these matters out later, or “pause a bit”. She chose the more difficult alternative—the latter. How difficult it was became evident in the conversations she began having with employees, analysts, and clients—pretty much everyone around who thought the DNA of the bank was changing. To her, it wasn’t: ICICI would continue to be a young, energetic, and dynamic organisation that executed everything with great finesse. Significantly, the word ‘aggression’, a trait that hitherto had been most commonly associated with ICICI Bank, didn’t find any mention. It was a conscious omission.
“I clearly felt that we have to get to a 15% ROE, and more than 1.5% ROA. That may not have sounded like an exotic vision, but underlying that was the need to get the bank set on a sustainable profitable growth journey,” says Kochhar.
The bankers’ meets were the toughest. “It was not very easy to sit in industry forums. I would see my peers growing by over 20%, while our balance sheet was actually coming down,” says Kochhar. Between FY09 and FY10, ICICI’s balance sheet contracted by Rs 37,100 crore.
Often, this meant knowing what not to do. Like turning down opportunities for overseas buyouts at attractive prices. A senior executive from one of the bank’s largest clients talks about a loan of more than Rs 1,200 crore, which had already been sanctioned, but not drawn, when the Reserve Bank of India hiked rates. Kochhar followed. The company’s senior management tried to reason with her saying that other banks were still lending at the earlier rate. When she didn’t relent, they asked if they could drop the loan and borrow elsewhere, to keep their project cost under control. “She agreed to let the business go. Kamath would have never let that happen; he would have made sure the bank didn’t lose business,” says the executive. When told this, Zarin Daruwala, president, wholesale banking, ICICI Bank, smiled and added that one of the first things she did after taking over in July 2010 was to “add NIMs to the goal sheet of my team”. The aim was to drive home the point that margins are sacrosanct to every transaction.
Insiders say the Kochhar who was part of an aggressive bank is different from the one in charge today. On her part, she says the difference is somewhat due to the altered economic environment, “But partly I think every person has a different role to play in a different position. A CEO has a different role to play, of chalking out strategy, while a person in senior management has a different role to play, of executing that strategy.”
Kochhar says ICICI’s model needs to be built on basic banking; everything else is like “cherries on a cake”. “One should be able to do the large M&A deals, the big structured transactions, but they come and they go. When they are there, you are, of course, better off having the skills to participate in them, but you don’t make your basic cake on that basis. Your basic cake still gets made doing the regular housing loans, working capital finance, transaction banking, etc. Otherwise, the icing remains like a little bit of fluff.” In her two interactions with Fortune India, she repeatedly used the word “boring” to describe her kind of banking.
It almost seems like she is trying to deglamorise ICICI, which has its own history. During the Kamath years, when he was trying to reinvent a development financial institution into a universal bank, the organisation produced a number of stars (Kochhar included) who would speak to the media, be visible at industry forums, etc. Kamath himself was larger than life, and many of his lieutenants ended up being CEOs at other banks (see ‘The School for Bankers’, Fortune India, November 2010). Consider that at one time, ICICI had 25 spokespersons. All this also served a business purpose. A corporate client who did not want to be named, talks about the lack of senior executives who can be approached. “Earlier there were 10 people I could call if I had some issue to discuss, now I have to find out whom I can talk to,” he says. The outside opinion is that Kochhar has killed ICICI’s star culture. Some even say she has centralised leadership.
Her response is nuanced. “I think all my team members are stars—they are fantastic in their respective businesses. But they may not be media stars. I think that’s not really what delivers quality work.” She adds that the decision to reduce the number of spokespersons to two—herself and N.S. Kannan, ED and chief financial officer, who handles the analysts’ calls during results—was well thought out. “I think it gets defocussed with 25 people talking to the media all the time. No other bank really does that; you are comparing just because you saw us do it in the past.”
The comparisons often also arise because the two people at the top (Kamath and Kochhar) have different personalities. Corporate clients say that in meetings, Kochhar has more questions on the profitability projections for the project, the return on investment, etc. “Kamath would not always bother with the minute numbers, he would always go for the bigger picture, and would often have a long conversation about the industry,” says a client. A senior executive of the bank, who has worked with both, agrees. “Mr. Kamath would have the knack of picking up a promoter and back him strongly, but with Chanda, it’s always promoters plus the numbers. She uses numbers as a back-up to her calls.”
NOW THAT THE bank has begun responding to the new approach, Kochhar’s challenge will be to grow the balance sheet without getting carried away by excesses—a sort of middle path. She believes that the economy, which boosted ICICI’s fortunes in the past, will continue to deliver. “Both consumption and investment are going to be the growth drivers in India for the next couple of decades.” In 2008, retail loans made up nearly 60% of the book. Today, they are about one-third, while contribution of loans to domestic corporates as well as overseas loans has been consistently increasing in overall advances. (See graph: Fresh Focus.)
This may not exactly please analysts in India or overseas. The top 20 banks in the world have their asset book leaning towards a particular business—ICBC of China is more a wholesale lender, HSBC’s strength is its global banking business, and Wells Fargo has a larger retail book. The most valuable private bank in India, HDFC Bank, has a high concentration of retail assets. Kochhar agrees: “That’s supposed to be the standard formula, but I think for us this is the right strategy. Being a universal bank diversifies your risks substantially and gives you the opportunity to grow.”
Her math: If India grows at 9%, then banking grows at 24% to 25%; if India grows at 7%, banks will grow at 18% to 19%. “What we have done now is that we have fixed our financial health in a manner that will allow us to grow a little higher than the industry average,” she says. So, if the industry grows at 24%, ICICI grows its domestic book by 25% to 26%, and at 18%, the bank grows at 20%. (See graph: On the Right Course.)
One way to do that is to broaden the client list. The corporate bank has been increasing its clients by 10% every year, adding a number of mid-size and smaller companies. The coverage for each client is also better, says Daruwala. New client acquisition targets were set and if people didn’t deliver, “I took away accounts to make sure the message went through,” she says. Even though the average size of deals has become smaller, their number has gone up significantly in the last two years. More coverage not only reduces the underlying economic risk that corporate assets usually carry, but also positions the bank to capitalise on the upside when faster economic growth kicks in.
However, analysts express concern about the bank’s current corporate asset quality, as the exposure to high-risk sectors such as power and airlines is considerable. Power accounts for about 4% to 5% of its loan book. With coal linkages uncertain in the future, there is no certainty if the projects will even take off. Kannan says in the last two years, the bank has refused two out of three power projects because of their lack of creditworthiness.
The biggest change at the wholesale banking division has been the calibration of growth between assets and liability. “Our CASA determines how much we lend,” says Daruwala. This shift has resolved a key issue for the bank: over-reliance on high-cost wholesale deposits. The group finance director at a conglomerate says, “Last March, there was a bit of a liquidity issue and all banks, including SBI [State Bank of India], were calling up for deposits. ICICI was the only bank that didn’t make any calls.” He recalls how the bank has changed since the “dark days of December 2008, when no one in the market would touch the bank’s letters of credit”.
MEANWHILE, KOCHHAR'S ALSO TRYING to reimagine the retail business, which she once headed. Just after taking charge, she met Deepak Parekh, chairman, HDFC, and an ex-chairman of SBI. Among other things, she discussed the retail model she had in mind. Parekh says it was a “good gesture [for her] to meet old fogies” like him and they spoke about banking scenarios. “We meet off and on. Usually we talk about issues around asset management, insurance, client loans, and how to tackle the weak cases.” (Kochhar doesn’t take names, but agrees to having met experienced bankers.)
Although ICICI had a spread of 1,419 branches by March 2009—the largest among private banks—there was practically no banking being done at the branches. In its bid to grow faster than the industry, it had set up centralised teams that took care of liability and building assets. The branch staff primarily sold third-party products such as insurance and forwarded requests for loans and opening accounts to the centralised teams. This not only created a distance between the branch and the customer, but also caused the quality of service, assets, and deposits to fall.
Rajiv Sabharwal, ED and head of retail banking, ICICI Bank, says: “We saw that public sector banks enjoyed a very good relationship with customers, while private and foreign banks had speed, but not much of a relationship. So we decided to marry those two and create a different model.” The erstwhile retail structure was dismantled to build a model where the branch staff would be responsible for growing the asset book as well as building the deposit base.
A senior executive at a Mumbai branch talks about the intensive training that the staff went through in 2010, where they were taught the “fundamentals of how to sell a loan. Earlier we would be blank when a customer asked us a question about a loan,” she says. Selling of loans at branches also means that the quality of assets (a major concern) can be monitored, resulting in fewer bad ones. The bank’s net retail non-performing assets are less than a quarter of the March 2009 levels—from Rs 3,126 crore in March 2009 to Rs 725 crore on Mar. 31, 2012. Kochhar says the bank has sharply cut down on its unsecured loans (4% currently from 16% of the retail book three years ago), and future growth “will be through giving personal loans and credit cards to our existing customers”. Though she doesn’t admit as much, extending unsecured credit to existing customers has HDFC Bank written all over it.
A global investment bank’s analyst says, “ICICI has picked up a lot of systems and strategies from HDFC Bank for its retail business.” HDFC Bank leads the table for its low-cost deposits ratio, which keeps its cost of funds among the lowest in the industry. Soon after she took over, Kochhar set out monthly targets of opening accounts—about 120 in a month for a large branch—and “a lot of frontline people who were selling loans and credit cards were shifted to raising deposits at the branches,” she adds. Three years later, the low-cost deposit ratio of the bank is up by 54%, bringing down its cost of deposits closer to peers.
WHILE KOCHHAR INSISTS THAT growth will be balanced across businesses, the international banking strategy could potentially be a game changer. “I see us as the first movers here, and I think there’s a huge advantage,” she says. Chandok explains that the bank is looking at multiple relationships with global firms. “If we’re engaging with a U.S.-based multinational for funding its project in India, we can not only cater to the local requirements of the U.S. as well as Indian operations but, say, if the firm has banking requirements in Asia, we could potentially pitch for that business too from our Hong Kong office.”
Engaging with top global companies doesn’t just enrich the overall asset quality. Such relationships go a long way towards entrenching the bank in the global economic system. Kochhar says getting global firms to add a bank to their set of relationships isn’t easy. She’s been leading ICICI’s pitch, meeting a number of CEOs of FG500 companies. “These meetings are very helpful because even if India is on everybody’s map, till they really understand our technological capabilities and the size and scale, it’s difficult for them to presume what Indian banks are capable of,” she says.
But here too, her approach comes through. Not only will the international business have some kind of India linkage, Kannan says, “Kochhar has put her stamp when it comes to drawing very firm boundaries on margins.” Net margins for the international book were less than 0.5% two years ago. Now they are around 1.4%. “If we approach Chanda with a proposal for a billion-dollar bond issue to expand our international book and our bond spreads are, for example, around 3.5%, the first question she asks is that if you are raising at Libor plus 3.5%, can it be deployed at Libor plus 5%?” says Kannan.
ALTHOUGH ATTITUDES HAVE SHIFTED at ICICI, it would be naïve to think that Kochhar is not driving hard. About a year ago, she started talking publicly about making ICICI one of the 20 most valuable banks in the world (it’s currently ranked 69, according to Bloomberg) by 2015. That’s not going to be easy. Punit Srivastava, ED, Daiwa Securities, a global financial firm, says: “Valuation depends on the bank’s ability to deliver a return that is more than its cost of equity, which is typically around 14% to 15%.” This is where ICICI loses out because its ROE has been lower than 10% in the last few years and only this year it has risen to 11%, giving it a valuation of about 1.2 to 1.3 times the book. In comparison, HDFC Bank’s ROE is around 20%, which gives it a valuation of three and a half times its book. Even Axis Bank, which has a similar loan profile to ICICI, gets a valuation of two times book, because its ROE has been in the higher teens. In fact, the ROE of the top 20 banks in the world hovers around the 20% mark.
Kochhar says the bank will achieve 15% as it ends the current financial year. Then, the combination of profits growing faster than the top line and a higher capital base (ICICI is leveraged only 10 times compared to most others, which are around 16 to 17 times, meaning it won’t have to raise capital for the next two or three years) will push returns higher, re-rating the valuation. Kochhar says it’s the profitability and returns that she is driving and rankings are just a consequence. At a meeting in Lucknow, an employee asked her what will happen if the bank doesn’t get to the top 20 by 2015. She replied, it wouldn’t matter as it would get there by 2017. “I won’t put too much importance to a number in ranking in a particular year.”
But the question some continue to ask is: How fundamentally has ICICI changed? A senior employee with decades of experience says banks don’t and shouldn’t fluctuate in their basic approach. They shouldn’t be seen as aggressive one day, scaling back on another, and then looking towards something else as the season changes. “While it is all very well to pat our backs because we have shown ourselves to be this nimble, flexible organisation, those qualities are not necessarily good for a bank. It has to be consistent, predictable, and have an image that is stable.”
A senior ratings analyst with a global firm, based in Singapore, who has tracked the bank for 15 years, articulates the doubt when he says, “Historically, ICICI has been an aggressive organisation. Even if it has behaved differently for the last three years, a question remains—will the numbers hold up?” Essentially, he’s asking that if the tide changes, will ICICI go back to its old ways of hard-driven growth? If there are cues in the way that Kochhar drives her top team, the answer is a resounding ‘no’. Having had to correct the excesses of heady days, for one, she may find it difficult to go back to ways she has had to denounce.
