A week ago when ICICI Bank announced its third quarter earnings, it thrilled investors on many counts. The bank’s earnings were higher than street estimates, asset quality improved in an uncertain macro-economic environment, the pace of credit expansion was way past average industry growth, capital base remained strong, and the subsidiaries especially the life insurance arm displayed a robust performance. The news was so good that most brokerages ended up issuing ‘buy’ recommendations of the bank’s shares to their clients. The stock gained as much as 10 per cent since the earnings announcement about a week ago, highest among large private banks.
This is a far cry from three years ago when the bank’s earnings were under stress due to rising bad loans and people started withdrawing deposits because of the misperception that the bank could collapse because of exposure to sub-prime assets.
Tough measures
That’s when Chanda Kochhar, managing director and chief executive of ICICI, decided that if the bank were to have any chance of a sunny future it would have to undertake some bold decisions—primarily, moving from a strategy of aggressive growth to no growth at all. “I had to make them (team members and colleagues) see that this was part of a bigger long-term strategy. So, consolidation for a period of two years was really in a way building the foundation for a growth period that we will start thereafter. We decided on no growth so that we can start growing in a much more profitable and sustainable manner,” she told Business Standard in a recent interview.
It wasn’t necessarily a popular strategy, but a critical one to adopt and Kochhar found support from her predecessor and mentor KV Kamath, presently the chairman of ICICI Bank and Infosys. “A particular strategy may work in a given environment. But if the environment changes, the strategy needs to change. The course correction does not necessarily show up immediately. It takes a few quarters for that to happen,” Kamath said.
The strategy worked like a charm as many of the bank’s vital statistics have improved, some dramatically (see graph) demonstrating yet again why Kochhar is one of the most respected business leaders around. For instance, the bank has halved its net non-performing loans, strengthened its capital adequacy ratio by over 300 basis points, and improved the share of low-cost deposits to 43.6 per cent from 27.4 per cent three years ago.
Yet, the question on everyone’s minds is where does ICICI go next? Is it ready to embark on a much-needed, new growth trajectory, one that it is best known for in the past but has been consciously avoiding for the last three years? A couple of quarters ago, Kochhar had hinted that the process of consolidation was nearing its end and the bank will begin to grow its businesses in a measured manner. Now, she appears even more confident notwithstanding the uncertain macro-economic environment. "The growth momentum has first come on the corporate side, and now we are building the momentum in our retail book," she said.
Signs of the build up towards a growth strategy have already begun to appear. The clampdown on unsecured retail advances also appears to be over as the bank has started offering credit cards and personal loans on a selective basis to clients who already have a banking relationship with ICICI Bank. The unsecured retail loan portfolio of the bank as of December-end has narrowed by nearly 35 per cent from a year ago. The bank expects its loan portfolio to expand 18 per cent in the current financial year, a few notches above the industry growth forecast of 16 per cent.
Work to be done
Yet, despite the bank’s stellar performance, Kochhar may still have to wait for a few more quarters before she can shift into higher gear, feel industry experts. There are a few areas, they point out, that need attention. While the bank has been able to reduce the rise in bad loans, its restructured loan portfolio has been expanding with many of its corporate clients opting to reschedule their repayment tenure. In October-December, net addition to the bank’s restructured portfolio was around Rs 500 crore. The bank expects to recast another Rs 1,300 crore loans in the current quarter. In other words, the net restructured loan portfolio, which decreased from Rs 5,300 crore as of March, 2010 to Rs 1,970 crore at the end of March, 2011, has again expanded to Rs 3,070 crore as of December, 2011.
Kochhar, however, said that even though there may be some additions to the bank’s restructured portfolio, the overall asset quality continues to remain stable. She added that the bank’s exposure to stressed sectors like telecom, aviation, and power was not significant. Also, the year-on-year credit expansion of 19 per cent was aided by depreciation of the Indian rupee in the second half of last calendar year. The bank’s top management admitted that demand for project finances was still low and the growth was primarily driven by working capital funding.
Also, the share of low-cost, current account savings account (CASA) deposits improved in the last quarter primarily because of one time flows related to National Highways Authority of India’s bond issuances which made that figure look better than it actually is. (The CASA ratio was at 41.7 per cent as of March, 2010 and improved to 45.1 per cent at the end of March, 2011. It was at 43.6 per cent as of December-end.)
The deregulation of savings deposit rate has prompted mid and small-sized private banks to offer higher interest rate on savings account. But ICICI Bank and other large banks have not increased their rates as they feel that this account is of transactional nature and difference in rates is unlikely to result in depositors migrating from one bank to another. Yet, analysts felt that attracting savings deposits at a lower rate could be a challenge. Also, higher rates offered in term deposits currently are unlikely to encourage borrowers to keep their surplus money in savings and current account deposits.
Another worry: the bank’s operating expenses have also been rising as it expanded its branch network and hired new employees. The cost to income ratio increased to 43.5 per cent for nine months ending December, 2011 from 41.1 per cent a year ago. ICICI Bank has now started exercising controls on its operating expenses. In
October-December quarter, the ICICI’s headcount was reduced by 1,300 people as it refrained from hiring new employees to improve productivity. “We are constantly on a productivity improvement drive and we will further tighten the numbers until we reach the desired level of productivity. We believe that every organisation should simultaneously grow and keep improving productivity. So, from time to time, we do not replace attrition rather (we) push the system to new productivity highs,” the bank said.
So, while ICICI Bank has staged a commendable comeback and is champing at the bit to expand aggressively, it may have to cool its heels for a few more quarters before doing so.
