ICICI Bank's K.V. Kamath: Global ambitions

How does a big bank in a big hurry look? A lot like ICICI Bank. Last year the bank added 10,000 retail customers every single day of the year, or a mind boggling 3.4 million customers, taking the tally of its customers to 10 million. When the year began, it had a presence in 600 cities across the country; before the year is rung out, it will be present in 1,000. Not impressed? Consider this: ICICI Bank leads in every single retail segment it is present in, be it mortgages, auto loans, personal loans or credit cards. Its share of total deposits grew by 18.82 per cent last year. And with Rs 1,06,593 crore in average working funds, it is second only to the public behemoth, the State Bank of India.

Is ICICI Bank gunning for the #1 slot? No, says its MD and CEO, K.V. Kamath. "Our growth strategy was driven by the tremendous potential we saw in the market. We saw scale as key to building a sustainable, profitable retail business," he says. In other words, Kamath's job #1 isn't growing the balance sheet, but the bottom line. But scale, he says, is still crucial because "only players of a meaningful size can aspire to compete internationally."

The stock market is appreciative of the distance the universal bank has travelled since it was created by merging the erstwhile financial institution with ICICI Bank. On the BT 500, it's the eighth most valuble company and currently has a market cap of Rs 26,460 crore. But it is yet to score significant improvements in areas such as quality of earnings and non-performing assets (NPAs), a large part of which is historical and includes lending to the ill-starred Dabhol power project. Those are some of the main reasons why despite its dazzling growth, it ranks a distant #24 on the BT-KPMG survey of India's best banks in 2004.

Another important thing that's happened in the industry is that a lot of the other banks have improved their balance sheets much faster than ICICI Bank has. And that explains why the bank's key performance figures, although good in themselves, seem poor in comparison. Its return on capital employed (ROCE) is a not-so-insignificant 20.9 per cent; its bad loans as a percentage of net advances, at 2.29 per cent, are lower than the industry average of 2.9 per cent (SBI's is 3.45 per cent). But the fact is, the higher-ranked banks boast of vastly smaller percentages. HDFC, #1 in the survey, has an NPA of 0.16 per cent and Citibank (#2), 1.4 per cent. The bank sees the situation changing in due course. Says Kalpana Morparia, its Deputy Managing Director: "The risk profile in retail, which is our thrust area, is very different from that of project financing. Bad loans show up in the first year itself besides which our credit scrutiny is stringent."

The bank is unlike others in the sector. It has insurance, general insurance and investment banking subsidiaries. It has a BPO company in ICICIoneSource. It runs a rather successful venture capital-cum-private equity firm in ICICI Venture Capital. It even has an IT services company (offshored services) in ICICI Infotech. All are professional companies with a tremendous upside that should directly benefit the bank. For instance, if ICICIoneSource were to list (BPO IPOs are becoming fashionable), the bank, which majority owns it, could make a tidy profit.

Also, it's one of the few private sector banks to turn social sector lending into a growth opportunity. It does warehouse receipt discounting (paying farmers against IOUs), lends against gold (helping low-income families turn asset into cash without selling it), and is also opening kiosks and ATMs to woo farmers. All that's helping the bank meet its social sector commitments, and tap into a new profile of customers.

"In retail, bad loans show up in the first year itself, besides which our credit scrutiny is stringent here" Kalpana Morparia/Deputy Managing Director/ICICI Bank

Retail Factory, Literally

Retail, then, is the clear growth driver at ICICI Bank. Retail portfolio grew by 75 per cent last year to Rs 33,423 crore and deposits by 41 per cent compared to the industry growth of 17 per cent. And in almost all the retail segments it is in, ICICI Bank is the leader. In mortgages it has a 28 per cent share, in auto loans it has 37 per cent, in personal and consumer loans, 29 per cent, and so on (see A Giant In A Hurry). In the case of auto finance, it is growing faster than the industry average, and in credit cards it currently has 26 lakh customers and Citibank, the erstwhile market leader, is likely to drop way behind ICICI Bank. According to a Venture Infotek Research estimate, by March 2005, Citi will have 28.6 lakh cards, compared to the latter's 40 lakh. Says Chanda Kochhar, Executive Director, ICICI Bank "Fast growth in retail is not because of sheer passion for numbers. Rather, it's the result of strategic thinking."

Her reasoning: Since initial investments are high in retail, fast growth and thereby economies of scale help ICICI make profits much earlier. And, today, the bank's incremental retail business is 30 per cent the size of the industry and its operating costs are said to be among the lowest. While the distribution network enables the bank to add numbers, Kochhar explains, stringent credit practices help control quality, and robust back office and use of technology help improve efficiencies.

Therefore, while distribution is decentralised, risk control is centralised. Credit is separate from sales, which means while the sales team is responsible for getting new business, it is the credit team, working on the basis of a central credit policy, which approves or rejects customer acquisitions. In the case of mortgages, there is a structured field investigation process to check on the legal documents and property valuation. All of that helps keep a close watch on retail credit quality, and explains why the bank's retail net NPA is 0.75 per cent.

If the bank is adding 10,000 new customers every day and if a customer does 70 to 75 transactions per year, then the bank must run an assembly-line like operation to process transactions. Incredibly, it does. It employs a hub-and-spoke model to improve efficiencies. It has set up a centralised back office and 18 regional back offices, or what Kochhar calls "factories", to do account opening, issuing of credit cards and ATM cards, cheque books, etc. Impressively enough, Kochhar and her team actually studied assembly line operations and shopfloor operations of manufacturing companies like Ford and Hyundai Motor to improve turnaround time. For instance, to process more than one crore cheques a month, which the bank does, the cheques are scanned at the regional hubs. That helps speed up the process without adding more employees.

Since processes are standardised, they are not just scalable but replicable across functions. For instance, earlier when a customer applied to open an account, a three-week waiting period was involved. In that time, his cheque book, atm card and pin number would arrive in seven separate envelopes, because the process was manual. Adopting a "straight-through" processing system lowered the waiting time to five days and reduced the mail load to one envelope. Starting a few months ago, customers are now given a pre-printed welcome kit when they open an account and the cards are activated the next day. Besides, every quarter, the bank projects the increase in customer base and transactions for the next quarter and accordingly increases its backoffice bandwidth.

Scale all the way

"Fast growth in retail is not because of sheer passion for numbers, but strategic thinking" Chanda Kochhar/Executive Director/ICICI Bank

ICICI Bank is not all retail. Its corporate assets are growing too. It is leveraging its balance sheet strength and strong corporate relationships to tap opportunities for fee-income businesses. It is also making it easier for customers to do business with it. For instance, some 70 per cent of an average corporate's finance functions can be done online with the bank, reducing time and cost. The bank says it already provides such it-based services to 37 of the top 100 companies by way of cash management. With the economy clipping and the top 300 corporates having lined up an estimated Rs 1,90,000 crore in investments over the medium term, the bank sees huge opportunities by way of fee income. The only problem is that almost all the aggressive banks are offering such services.

To diversify risk across geographies, the bank in the last two years has been increasing its global footprint and following the Indian corporate customers overseas, where it has set up seven representative offices or branches with applications put in for two more in South Africa and Bangladesh, and a subsidiary in Russia. Going forward, the bank's strategy is to consolidate its presence in existing markets, accelerate growth, sustain profitability and build a business model to withstand the pressures of a global rollout. M&As as a route for growth, though, is unlikely. Kamath sees little value in acquisitions given the bank's own reach and equity with customers. Instead, he wants to grow it organically to keep both costs and risks down.

Some bank watchers are sceptical of its fast-paced growth, saying that it may be compromising on asset quality. While that certainly is a risk, it is possibly not a very big one. As a JP Morgan research report on the bank notes: "Robust growth in core operating profits is likely to be the key stock price driver, given improving margins, fees and costs, and better balance sheet structure in terms of realisation and asset quality." (The bank's stock is quoting at Rs 360.)

In a bid to further strengthen its balance sheet, the bank securitised assets worth Rs 10,700 crore. How does that help? For marginally lower realisation, it takes a lot of risk off the bank's own balance sheet. With Basel II norms round the corner, the bank will have to access low-cost funds to protect its profit margins and cover for bad loans. Here it has some work to do. At present, its loan loss cover, which is the provision for NPAs, is a rather low 53 per cent. Its average cost of interest-bearing funds is also relatively high at 7.7 per cent.

That said, few will argue that the bank is in a much stronger position than it was, say, three years ago. As for growth, it has already proved that it can enter new segments and build market shares bigger than those of its competitors. If things stay on course, ICICI Bank may well emerge one of India's global banks.