Chanda Kochhar, managing director and chief executive officer of ICICI Bank Ltd., attends the Annual Bankers’ Conference in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

In Transition From Kochhar To Bakshi, Will ICICI Adopt A More Measured Growth Path?

Just short of completing a decade-long stint as the managing director and chief executive officer at ICICI Bank Ltd., Chanda Kochhar has decided to step down. Along with her exit came the announcement of a new CEO. Sandeep Bakshi, another ICICI lifer, takes charge as Kochhar steps down.

For investors, the switch will reduce the immediate uncertainty emerging out of an investigation into allegations of impropriety against Kochhar. The investigation will continue but its implications for the bank and its investors may be now limited.

“Though the board has said clearly that this move doesn’t necessarily affect the enquiry instituted by the board, we believe the outcome of the report to be submitted by the committee now has less relevance from a stock perspective,” said Suresh Ganapathy, analyst at Macquarie Research in a note soon after the news broke.

Instead, investors and analysts will now be watching to see if the bank tempers its trademark aggression under KV Kamath and Chanda Kochhar and moves towards a more measured growth path under Bakshi.

Chanda Kochhar’s Decade Of Growth

Kochhar took the top spot at the bank in May 2009 after her mentor KV Kamath decided to step down from an executive role. At the time too, ICICI was facing asset quality issues in its retail lending portfolio. The financial crisis of 2008 had led to an increase in defaults in the unsecured lending book of private sector lenders, including ICICI Bank which had rushed in to capture the changing consumer credit culture.

Kochhar came in and started to clean-up the retail book. But as India rebounded from the impact of the financial crisis, helped by easy fiscal and monetary policy, ICICI Bank, too, returned to growth.

At the start of the new decade, the focus of the government and of banks shifted towards infrastructure lending. ICICI Bank, an erstwhile development finance institution, jumped right in.

What followed was a period of high growth, low bad loans.

The first five years of Kochhar’s term saw the bank’s loan book nearly double. Deposits, too, showed an increase aided by the bank’s retail-focused strategy and rapid branch expansion. Kochhar, herself, won many accolades for her leadership at the bank.

After the growth, came the slowdown. The economy turned sluggish and policy risks hit large projects. ICICI Bank, along with other lenders to infrastructure sector, started to feel the pain of aggressive lending practices.

In October 2015, the banking regulator decided to conducted an asset quality review (AQR) across the sector, leading, eventually, to a spike in bad loans even across private banks like ICICI Bank. By March 2016, the gross NPA ratio had risen to 5.21 percent. As of March 2018, the number stood at 8.84 percent, one of the highest gross NPA ratios across private banks.

In the first quarterly results that ICICI Bank reported after Kochhar went on leave in June, the bank reported its first ever quarterly loss of Rs 120 crore. While the bad loan ratios did not jump much, the management’s decision to increase provisions impacted the bank’s profitability.

Will Bakshi Tread A More Cautious Path?

Some analysts expect Bakshi to tread a more cautious path than Kochhar did.

Macquarie, for instance, said that a recent meeting between Bakshi and the research house, had thrown up a focus on profitability more than growth. “His strategy is simple: Focus on operating profits and avoid lumpy corporate exposures,” Macquarie said in its report.

The bank going forward is likely to be cautious when it comes to project financing with return of capital absolutely essential and the overarching principle behind all decisions. 
Macquarie Research

To be sure, the bank had started to alter its strategy even under Kochhar.

It had reduced the concentration of large corporate exposures on its books and shifted focus towards lending to higher rated companies. It has also increased the proportion of retail loans on its balancesheet.

Share of retail loans in total loans has increased from about 37 percent in March 2013 to 53 percent at the end of June 2017. Home loans make up 53 percent of all retail loans. The proportion of domestic corporate loans has fallen to 27 percent now from 33 percent in 2013. The bank’s low cost deposits (current account and savings account) now make up 49 percent of total deposits.

“The bank would look to improve its coverage ratio on bad loans at the earliest to put this episode of corporate cycle behind and focus on getting the organization back on track,” said Kotak Institutional Equities in a note on Friday. It added that since Bakshi is an ICICI group insider, the transition may not lead to much churn at the top of the bank.

While a cautious approach to growth will be welcome, Gautam Chhugani, analyst at Bernstein thinks the bank should stop “driving forward while looking in the rear view mirror.”

In a note dated July 26 after Bakshi was appointed chief operating officer, Chhugani said that ICICI Bank should not cede market share of emerging business opportunities. That includes the opportunity to grab market share of the high-rated corporate lending business from under-capitalised public sector banks. ICICI’s incremental market share in corporate banking is now lagging some of its smaller peers, Bernstein pointed out.

Other emerging opportunities include the increase in lending to small businesses, where availability of data is making a wider set of businesses bankable.

Do not miss the opportunity to grow the good book while you clean up the bad book, Chhugani wrote.

Drive forward recognizing the changes in the current market structure. Don’t fall prey to the rear-view mirror again. Demonstrate market leadership – you have the capital to grow!
Gautam Chhugani, Analyst, Bernstein