Now that the merger of ICICI into ICICI Bank has been completed, what is the message you have for investors
Just to highlight the kind of challenges we had to face. We had to raise more than Rs 20,000 crore from the market to invest in government securities and maintain cash reserve ratio. We had to integrate employees of four different companies, which had somewhat different profiles.
ICICI Ltd was primarily a project financing institution with a specific skill set of people. ICICI Bank which was a relatively new bank incorporated in 1994, had an experienced set of commercial bankers.
We had two retail subsidiaries in which the skill sets ranged from startup level management graduates in the retail, marketing and servicing arena, all the way up to a whole lot of lateral recruits, who were from the major retail business banks like foreign banks.
This was also the first time that a development financial institution reverse merged into a bank which was two thirds in size. There was a whole host of regulatory issues that had to be dealt with.
NPA management has been a key focus area within ICICI and now within ICICI Bank. One of the best ways of managing NPAs is to isolate them into a separate category, for which we have put our best performing people. To ensure absolute focus at the top management level, one of the members on our board is primarily dedicated only to this
How has the merger affected the fundamentals of the bank
A: I will talk about two perspectives here. One is the credit or debt investors perspective - therefore the rating agency, regulators, etc. The other is from the perspective of equity shareholders. As far as the debt investors are concerned the merged entity offers superior credit quality.
The primary reason for this being that for any banking institution in India at least 30 per cent of your assets are virtually in the risk free category, since 25 per cent have to be invested in government securities and five per cent has to be maintained as Cash Reserve Ratio. So the solvency comfort and liquidity comfort is enormous.
Also the kind of growth that ICICI Ltd had embarked upon in the retail business and with the pooling of various retail businesses into the merged entity, we found that 10 per cent of the asset base was really retail. From a risk perspective, it was a far less riskier asset portfolio than what a corporate book would be.
With project finance, you have a lumpy concentrated exposure and therefore a greater risk. So it gave the necessary diversification even on the loan book side. Project finance which contributed the most to the non-performing loans ie 80-90 per cent in ICICI five years ago shrank to 23 per cent.
In addition, when we accounted for the merger, we did not just take all of ICICIs assets and pump them up into ICICI Bank. We appointed an independent accounting firm to assess the true value of the assets. So against the approximately Rs 50,000 crore loan book that ICICI had, we took close to 3,800 crore as a write down. So it built a whole lot of cushion into the bank.
The combination of the reserve requirement, retail diversification, significantly higher provisioning on ICICIs books and the corresponding shrinkage in assets all contributed to a much better risk profile of the merger.
As far as equity investors are concerned, the merger proved beneficial. All the issues that I mentioned on asset quality concern and provisioning are equally true for the equity investors.
If you dont make these kinds of significant provisions, then year on year, your profits get eroded because of the additional provisions that you make. So you have to take a huge one time hit upfront now, and therefore insulate your future profit stream from taking a further knock.
Although in the first year, the benefits of the merger will not be evident in the margins because we have to redeem ICICI loan liabilities, which are costlier than the cheaper bank deposits. But over the years it will become evident.
That coupled with the fact that as a banking entity, there is a much bigger opportunity of participating in the entire fee-based banking services which one could not leverage in an optimal manner as an NBFC.
Prior to the merger, the bank shareholders were not getting full benefit because the size was relatively smaller.
Now the vast network of branches, the technology platforms that we have built for offering services to the corporate sector like trade finance, cash remittance, forex remmitance, etc, retail distribution services, the branch network, ATMs and call centres can be leveraged for selling a whole lot of products and earning fee and commission income.
What kind of targets have you set for fee based income to be earned by the bank
A: We will be looking at it as the percentage that fee and commission income comprises out of the net operating income. Banks aspire to reach a 30 per cent plus level. We at ICICI, as a non banking entity, had under 20 per cent.
The accent is very much to try and target it to 30 per cent of our net operating income. Whether we reach it this year or next year, we will have to wait and see. But very clearly with that kind of target level, the overall return of the shareholders goes up because fee based income is a direct contribution to the bottomline.
How do you reassure the investor that there is transparency in the processes
Let me start at the grassroots level. For all the reporting that we do, we have various board committees that look into it. The management itself consists of professionals. In addition to that, we report quarterly numbers which are audited. There is no requirement in the Indian or the US laws (we are also a US listed company) to present audited numbers.
In addition to that, our US GAAP auditors come in. Once the audit committee goes through all of this, it gets presented to the board and then gets widely disseminated to the public. In addition, we have RBI inspectors coming in at least once in a year. We are rated by three domestic rating agencies - Crisil, Icra and CARE and by two international rating agencies S&P and Moodys. Moodys has rated us higher than the sovereign rating. The ratings have been confirmed every year.
How is ICICI Bank managing its NPAs
NPA management has been a key focus area within ICICI and now within ICICI Bank. We believe that NPAs require complete managerial focus. One of the best ways of managing NPAs is to isolate them into a separate category for which we have put our best performing people.
We have primarily broken NPAs into three areas.
One is NPAs which are large, or assets which require very close monitoring. Second is NPAs that are relatively smaller in value but large in number, that get handled out of the various zonal offices, but have a centralised person at the corporate office monitoring them.
When we acquired Bank of Madura, we got many small NPAs that Bank of Madura had. That is the third area. To ensure absolute focus at the top management level, one of the members on our board is primarily dedicated only to this.
How are you going about your asset sales
We are not necessarily undertaking sale of NPAs because the market for stressed assets is yet to come into India. One hopes that now with the introduction of asset reconstruction companies and with foreign money coming into the country, we will actually see a development of the secondary market.
We had to raise Rs 20,000 crore for our SLR requirement.
Close to Rs 5000 crore was raised by actually selling the assets. There is too much liquidity in the banking industry, which in turn has a need for assets. All of these assets are not available in the primary market and they were able to buy some of the assets from us.
This makes sense for us because a sale of assets in some cases raises your gains depending upon the stage at which you sold your assets, the interest rate scenario at that time, it helps in freeing up your capital to allow you to take another exposure, etc. One of the ways to give superior returns to your share holders is to utilise the capital that they have given you in a very efficient manner and asset sales can be a very good tool for doing that.
Which are the sectors wherein you plan to increase exposure
We are planning to keep it stable or reduce it in absolute terms, although on a portfolio basis it will shrink because retail will grow. We are doing that primarily through securitisation.
We will certainly not be looking for additional exposure in textiles. Assets that we will look at, maybe taking marginal incremental exposure, are the ones propelling the services industry.
We have a fair amount of exposure in infrastructure such as the steel and power sector. We will just manage that exposure now. We are not seeing any great opportunities in these sectors.
How much of your high cost debts has been paid off Are you raising new debt and what are the other financing options that you are looking at
In the current year, about Rs 23,000 crore of ICICIs liability is going to get paid off, of which Rs 7,000 crore has already happened. As far as the bond issue is concerned, as you are aware under the tax laws, investment in bonds issued by entities like us allows tax rebate under section 88 to the retail investor provided we use the proceeds for infrastructure finance. We believe that we might have some requirement in funding in the infrastructure sector.
We got feedback from investors keen on investing in such bonds. With this in mind, we approached Sebi as to whether we could do bond issues although we had become a bank, and we have currently filed our prospectus with Sebi. This is a mother prospectus. We have created this concept of doing a one time umbrella prospectus with Sebi, so that everytime there is an issue, we only need to file updated terms and conditions.
Where will the future growth come from for ICICI Bank
The future profit and loss account growth is net interest margin, spread primarily from the retail business, fees and commission from retail and corporate business.
We are also working out solutions for our NPAs. We also have our subsidiaries, the insurance sector - both life and non life - which offer a very good opportunity to us.
We are establishing ourselves in the international arena and have offices in London and New York. We hope to grow and have a larger international presence, which means we will also be servicing the NRI community. We are also participating in the trade finance between India and other countries.