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FEB. 25, 2007
 Cover Story
 BT Special
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Trading with ASEAN
In the recent Indo-ASEAN summit, ASEAN was, for the first time, on the defensive. India has agreed to bring down its negative list of imports to 490 items in the free trade agreement with the 10 ASEAN nations. But India’s step towards free trade was not matched by the ASEAN nations, as more than 1,000 items still figure in the negative list of the ASEAN. In 2005-06, India’s total trade with ASEAN was at $22 billion (Rs 99,000 crore), against just $7 billion (Rs 31,500 crore) in 2000-01.

Exchange Deal
Indian markets are on a roll. Global stock exchanges and financial institutions’ interest in the Indian stock exchanges goes to show the long-term growth potential of India Inc. The year has started on a positive note. The NYSE and three global financial institutions have each picked up a 5 per cent stake in the NSE. The deal will open exciting vistas in global co-operation for the NSE, and at the same time could improve the fortune of smaller exchanges in the country.
More Net Specials
Business Today,  February 11, 2007
When Attack Is The Best Defence
Growth is the burning objective for both HDFC Bank and ICICI Bank. And both are advancing at a scorching pace. The game plan of each, however, couldn't be more different.
HDFC Bank's Aditya Puri: Focussing on high margins in each of the business segments
In the solemn world of commercial banking, where suits and ties, convention and conforming to a fault are the norm, it's difficult to tell one banker from another. Aditya Tapishwar Puri and Kundapur Vaman Kamath are two refreshing examples of bankers who don't quite fit the mould-and who are as different from each other as black and white. The 56-year-old Puri, for instance, is unlikely to be spotted at an evening cocktail do (unless of course it's the BT Best Banks Award ceremony), preferring instead to head home for an evening walk along the Worli Sea Face in Central Mumbai. Fifty-nine-year-old Kamath, for his part, is a habitual networker, and is often heard in public forums articulating his vision for ICICI Bank or his views on the state of the economy. A career banker, Puri is a chartered accountant by qualification; Kamath is a product of IIM Ahmedabad. Prior to that, Puri earned a bachelor of commerce degree from Punjab University; Kamath did mechanical engineering from Karanataka University. Puri left his cushy Citibank CEO post in Malaysia to start HDFC Bank from scratch in 1994; Kamath, who started his career with ICICI Ltd (then a development financial institution) did an eight-year stint with the Asian Development Bank in Manila after which he returned to head ICICI Ltd in 1996. He went on to head ICICI Bank when ICICI Ltd was merged into it five years ago.

ICICI Bank's K.V. Kamath: Betting big on volumes and market share
When you have such distinctive personalities leading the charge at two of the country's most respected and fastest growing banks, it's perhaps unsurprising that the banks in question-HDFC Bank and ICICI Bank-are following very different strategies for growth. To be sure, growth is the single-minded objective for both, but the game plan to achieve that growth couldn't be more different. For instance, right from start, HDFC Bank's focus has been margin-led growth. ICICI Bank on the other hand is obsessed with volumes and market share. In the 13th BT-KPMG study on India's best banks, HDFC Bank takes pole position, thanks largely to consistency of performance over the past few years. ICICI Bank has emerged as the fastest-growing bank in the survey. As far as scores go, HDFC Bank tallied 2,487.50, edging out ICICI Bank which follows close behind with 2,453. Whilst both banks ran neck-and-neck on parameters like operating profit growth and fee income to total income, what tilted the scales in HDFC Bank's favour was the quality of earnings ranking, where it comes in fourth, as against ICICI Bank's 33rd position.

Strengths and weaknesses of the two banks.
Strong balance sheet
Expanding international and rural business
Well-established subsidiaries in life and non-life insurance and AMC business
Strong bench-strength
Frequent capital dilution
Lesser share in low-cost deposits, still to fix liability mix
Large retail portfolio may breed NPAs going forward
No promoters, shareholding quite scattered
Large share of low-cost deposits, higher net interest margin
Better quality of assets, NPA of 0.4 per cent
Free float available, FIIs can buy its stock
Higher profitability
Marginal international presence
No next line of leadership
Not very aggressive in M&A space, growing only organically
Possible takeover target

While HDFC Bank maintained its best bank status for the fourth year in a row, ICICI Bank has pole-vaulted from 13th position in the 2005 ranking to the runners-up slot in 2006. A section of market analysts feels it's unfair to stack up the two banks against each other, as ICICI is more than three times HDFC's size, which makes it difficult to compare their growth rates. HDFC Bank has a balance sheet size of Rs 89,700 crore in March 2005-06, while ICICI Bank has a balance sheet size of Rs 2,82,400 crore. The former has a market capitalisation of $7.1 billion (Rs 31,950 crore) while the latter has a market cap of $19.8 billion (Rs 89,100 crore).

"We want to explore opportunities in overseas markets to fund India Inc's acquisitions abroad"
Harish Engineer/Country Head (Wholesale Banking), HDFC Bank
Put such numbers in front of Puri, and the Managing Director of HDFC Bank will most likely tell you: "It is the relevant size that matters, and not just size." What Puri means is that his bank is amongst the leaders-either #1 or #2 in many segments, be it car loans, credit cards or personal loans. "We will not sacrifice margins for market share, but neither will we be in a business if we are not amongst the top three players," adds the MD.

For his counterpart at ICICI Bank, size is almost an obsession. "For a country growing at 8-10 per cent, creating financial intermediaries of size becomes an absolute critical requirement," Kamath had told BT recently. Puri agrees that "a country like India requires at least some banks with scale." But he's quick to add that "managing a domestic business and an international business is very different."

Whilst Puri's vision is to make HDFC a world-class Indian bank, ICICI Bank has been aggressively chasing international growth. Today, 18 per cent of its business comes from foreign shores, and the target is to take it to 25 per cent by 2010. It's not as if Puri has ruled out overseas forays, what with huge potential waiting to be tapped on the cross-border lending and as well as advisory fronts. Harish Engineer, Country Head (Wholesale Banking) at HDFC Bank, says: "We have recently set up a capital market group to explore opportunities in the international market especially in areas like resource mobilisation for Indian corporate sector." "We want to set up a focussed international business," adds Puri, who is now eyeing rep offices or branches in countries like the US, Canada, South Africa, Singapore, Hong Kong, Bahrain and Indonesia. "We are also studying the subsidiary model in countries like the UK."

"We have become larger than any other Indian bank present in the UK and Singapore"
Chanda Kochhar/Deputy MD (International), ICICI Bank
Puri might just be taking a good look at ICICI Bank's UK subsidiary, which runs the largest foreign banking operation with a focus on non-resident Indian remittances and internet banking services for local UK customers. "In just two and a half years, in some geographies like the UK and Singapore, we have become much larger than any other Indian Bank, which were present in those geographies for decades," says Chanda Kochhar, Deputy Managing Director at ICICI Bank. ICICI Bank is already reaping the fruits of successful international operations with the bank mobilising $2 billion (Rs 9,000 crore) through a bond offering; these funds will be deployed for India Inc's march in overseas markets. Engineer adds that HDFC Bank too is extremely keen to borrow overseas, and thereby also play a role in funding India Inc's overseas acquisitions and capacity expansions.

Whilst ICICI Bank may be a step ahead on the overseas front, the two are running in tandem back home with their strategies, not just in the cities but in semi-urban and rural India too. HDFC's game plan is two-pronged: To offer a better customer experience in the densely banked areas even as it explores new territories. For the next phase of its growth, HDFC Bank is working with Cisco in a bid to provide the next-generation customer experience. The bank has been working on this project for the last two years and most of these new measures would come into play in 90 to 120 days. "We are integrating technology, product offering and front-end customer contact to address customer needs," says Pralay Mondal, Country Head (Credit Card & Two-wheeler) at HDFC Bank. Puri is quick to remind you that future growth at HDFC Bank-like its current growth won't be at the cost of margins. "That will allow us to take care of any shocks," he says.

"We have been changing the mix of the liability. Our asset mix is also undergoing change"
V. Vaidyanathan/Executive Director (Retail), ICICI Bank
It appears ICICI Bank doesn't have any such qualms, as it goes about aggressively chasing retail growth with the 300-million strong middle class as its target customer base. Yet, one way the bank is spreading its risks is by moving away from the big cities, into smaller towns and villages with a low-cost franchisee model (as against putting up higher-cost branches). Also fuelling the rural thrust will be acquisitions, like the recent one of the old private sector Sangli Bank, which has close to 200 branches in Maharashtra, most of them on the rural sugar belt.

In the meanwhile, HDFC Bank has lined up products for the rural masses. "We are witnessing exponential growth in mini-metros and beyond as well as in products like two-wheelers, auto and tractor loans, kisan card, gold loans and educational loans," says Mondal. But acquisitions may not be its cup of tea. In the past, HDFC Bank did take a close look at Centurion Bank, Lord Krishna Bank and Global Trust Bank (which have since been acquired by Rana Talwa's Sabre Capital, Centurion Bank of Punjab and Oriental Bank of Commerce, respectively). "Any acquisition must increase our market share, or add to our geographical coverage or reduce cost and add to scale," says Puri. HDFC Bank made its last acquisition, of Times Bank, in 1999-2000.

"We are integrating technology and product offering to address customer needs"
Pralay Mondal/Country Head (Credit Card & Two-wheeler), HDFC Bank
If ICICI Bank trails HDFC Bank on the quality of earnings and quality of assets fronts, it may be because it still has to get its liability mix right, thanks to the legacy it inherited from ICICI before it was merged into bank. Even today, a substantial portion of its liability continues to be corporate deposits, whereas for the banking system it is quite the reverse. HDFC has no such issues and in fact has the highest share of casa (current account and saving account) in the Indian banking system, at 55 per cent. ICICI Bank's casa share is in the 20-25 per cent region. "ICICI Bank is still a bank in transformation. We are not done yet," points out V. Vaidyanathan, who heads the largest retail portfolio in the country. "We have been changing the mix of the liability over the years. Our asset mix is also undergoing change," adds Vaidyanathan.

On Dalal Street, both stocks are perennial investor favourites, although HDFC Bank enjoys a superior price-earnings ratio (P-E), of 21 on 2007-08 earnings as against a P-E of 18 for ICICI Bank. "It's purely the fundamentals that give HDFC Bank a better p-e than ICICI Bank," explains Kashyap Jhaveri, Banking Analyst at Emkay Share and Stock Brokers. There are those analysts who argue that it is HDFC Bank's vulnerability as a takeover target that gives it a better P-E, a theory that Puri is quick to dismiss. "We have got a better margin, a lower default rate, and less risky strategy," he quips. Adds Manish Karwa, Banking Analyst at Motilal Oswal Securities: "HDFC Bank's return on equity is better; also foreign institutional investors can buy stock as free float is easily available."

Banking experts say both banks needs a robust management in a market where talent is difficult to hold on to. Recently HDFC Bank lost two key people, Neeraj Swaroop to Standard Chartered Bank and Samir Bhatia to Barclays Bank. ICICI Bank has been able to build around its core team of Deputy Managing Directors Nachiket Mor and Chanda Kochhar, and Executive Director Vaidyanathan and Shikha Sharma, MD of the insurance subsidiary. "The bench-strength results in better strategy formulation and execution for the bank," believes Vaidyanathan. Clearly both banks have their areas of strength, which are enabling them to chase long-term growth. And there's ample room for both to grow in a booming economy in their own inimitable ways.