By Mansi Kapur
September 20, 2012

FORTUNE — In May 2010, around 20 senior members of ICICI Bank’s international banking group gathered at its Learning Centre in Khandala, a hill resort near Mumbai, for a three-day huddle. This group typically contributes to a quarter of the bank’s balance sheet primarily by working with large Indian companies expanding overseas. But now it proposed another model: India is growing and it is reasonable to assume that any large company based in America or Europe should be thinking of India. Could ICICI talk to some of their CEOs or CFOs to figure how India fits in?

Over the new few months, the international business team met a hand-full of large North American companies. What emerged wasn’t a revelation, though it confirmed the hypothesis. All of them admitted to an Asia strategy; China definitely figured in it, and India was increasingly finding place. The group then picked up the latest Fortune Global 500, and spent more than 200 man hours scanning the director’s report of all the companies on in, looking for keyword ‘India’. They excluded seven Indian companies and 67 financial services firms featured. Of the remaining, more than 250 companies mentioned India as an existing or a potential market. Over the next six months, the international banking group met about 170 of those at their global headquarters.

The interactions revealed that these Fortune 500 firms were looking for two new additions to their banking consortium — a Chinese bank and an Indian one. “This isn’t for one-off deals. It is a strategic engagement with a local-at-heart bank which had substantial distribution strength,” says the head of the international banking group, Vijay Chandok. In the last two years, the bank has signed on 50 new clients.

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K.V. Kamath, ICICI’s former managing director and CEO was often quoted on his follow-the-customer approach that other private banks eventually adopted. Presentations to analysts during his tenure (1996 to 2009) described the international strategy as being the preferred banker for Indian companies building a business overseas, and also being the bank for non-resident Indians. “ICICI was only following the outbound flows earlier: Now it’s looking at inbound business as well,” says Chandok.

This shift is one of the many indicators of the change underway as incumbent MD & CEO Chanda Kochhar begins to stamp her imprimatur on the country’s largest private bank. Though she’s been with the bank for nearly three decades now—she joined as a freshly minted MBA from Jamnalal Bajaj Institute of Management Studies in 1984—many of her moves have surprised; she’s the first to admit that, with some degree of satisfaction. A banker compares her to Congress party president Sonia Gandhi, who was underestimated at first, till she demonstrated how astute she actually was. Kochhar smiles at the comparison.

If that pleases Kochhar, that’s because she constantly wants to stay ahead. Known to keep her cards close, Kochhar says she has “mapped out the specific road—in terms of size and scale, relative global position and profitability parameters—that the bank will take for next ten years in my mind.” Even her top team isn’t privy to the entire journey. “The next three to four years, of course, my team knows how we want to move,” she says. A former ICICI director who has known Kochhar for long says, “She’s one lady who knows what she is doing.”

The simplest way to describe what Kochhar is doing is to say that she has turned the ICICI model of banking on its head. From a bank that devotedly chased scale and market share, the ICICI of today speaks a very different language, literally. When Fortune India interviewed ICICI’s top management, irrespective of they did, conversations were strewn with words such as ROE (return on equity), ROA (return on asset), NIMs (net interest margins), and cost ratios and earnings quality. K. Ramkumar, executive director and head of human resources at ICICI says, “Earlier the asset strategy determined the liability strategy, now it’s the liabilities that decide how we lend.”

Kochhar says that her 100-day agenda when she took over was to explain why things needed to change. Though ICICI Bank had grown many times in size in the years prior to her ascension, its financial numbers weren’t encouraging. ROE was a low 7.7%, ROA less than 1%, the proportion of unsecured loans and wholesale deposits high, the proportion of Current Account Savings Account (CASA) low, while NIM was an abysmal 2.4%.

She had two options—to continue growing aggressively and sort these matters out later, or “pause a little bit”. She chose the more difficult alternative—the latter. How difficult it was became evident in the conversations she began having with employees, analysts, clients, pretty much everyone around who thought the DNA of the bank was changing. To her, it wasn’t: ICICI would continue to be a young, energetic and dynamic organisation that executed everything with great finesse. Significantly, the word ‘aggression’, the trait that hitherto had been most commonly associated with ICICI Bank, didn’t find any mention. It was a conscious omission.

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“I clearly felt that we have to get to a 15% ROE, and more than 1.5% ROA. Now that may not have sounded like a very exotic vision, but underlying that was the need to get the bank set on a sustainable profitable growth journey.”

Her reimagining of what ICICI does and how it works draws on how she wants the world around her to be—neatly ordered. Analysts say her answers on conference calls are precise and she never waffles. Those who have worked with her long say she is highly disciplined and manages time extremely well, adding that she never over promises. When her children (daughter Aarti and son Arjun) were young, she’d often write notes on a particular subject if she thought the text book chapter wasn’t “organised”. “If I’m playing a role, then it has to be good. If I’m playing the role of a mother, I better play it well; if I’m playing the role of a wife, I better play it well, and, if I’m paying the role of a CEO, I better play it well,” she says.

APRIL 27, 2.30 PM, ICICI Bank Studios. Draped in a peacock blue sari with golden motifs, Chanda Kochhar sits down to answer questions from five business news channels with a blazing logo of the bank behind her. The studio was built on the ground floor of ICICI’s head-quarters in Mumbai’s Bandra-Kurla Complex at a cost of Rs 1 crore two years ago so that Kochhar wouldn’t have to trudge from studio to studio, talking to anchors each time results were announced. Today, she has good news to share. For fiscal 2011-12, net profits are up 26%, assets 17% and total income 26%. Someone asks her a question about the quality of assets, and she says she’s “comfortable” with the mix. Someone else quizzes her on the international business, and she answers straight-off. Then, in barely 25 minutes, it’s all over, and after a brief few minutes of small-talk with the TV crew who praise her performance, she’s off.

If there’s a stand-out feature of her three-year tenure, it’s that profitability ratios—metrics that investors use to value the bank—have consistently improved. Predictably, ICICI’s valuation has surged, and most of the large broking houses have a buy on the stock, citing a 30% upside over the next six months. Yet, the street still doesn’t entirely get what Kochhar is trying to do. Of the twelve quarters under her, the bank’s performance has beaten the street’s forecast eight times.

Insiders say the Kochhar who was part of an aggressive bank, is different from the one in charge today. For her part, she says that the difference is somewhat because of the altered economic environment, “But partly I think every person has a different role to play in a different position. A CEO has a different role to play, of chalking out strategy, while a person in senior management has a different role to play, of executing that strategy.”

The banker’s meets were the toughest. “So it was not very easy to sit in industry forums, where they’d say that the banking industry growing by so and so, I would see my peers growing by so and so, while our balance sheet was actually coming down,” says Kochhar. Between FY 2009 and FY2010, ICICI’s balance sheet contracted by Rs 37,100 crore.

This approach often meant knowing what not to do. It meant turning down opportunities for overseas buyouts at attractive prices. A senior executive from one of the bank’s largest clients, talks about a loan of Rs 1,200 crore plus, which had already been sanctioned, but not drawn, when the Reserve Bank of India hiked rates. Kochhar followed suit. The company’s senior management tried to reason with her saying that other banks were still lending at the earlier rate. When she didn’t relent, they asked if they could drop the loan altogether and borrow elsewhere, to keep their project cost under control. “She agreed to let the business go. Kamath would have never let that happen; he would have made sure the bank didn’t lose business,” says the executive. When told this, Zarin Daruwala, president, wholesale banking, smiled and added that one of the first things she did after taking over was to, “Add NIMs to the goal sheet of my team.” The aim was to drive home the point that margins are sacrosanct to every transaction.

Kochhar says that ICICI’s model needs to be built on basic banking; everything else is like “cherries on a cake”. “One should have the capability doing the large M&A transactions, the large big structured transactions, but they come and they go. When they are there, you are of course better off having the skills to participate in them, but you don’t build your basic cake on that basis. Your basic cake still gets built doing the regular housing loans, the regular working capital finance, the regular transaction banking income, etc. Otherwise the icing remains like a little bit of fluff.” In the course of her two interactions with Fortune India, she repeatedly used the word ‘boring’ to describe her kind of banking.

It almost comes across that she is trying to deglamourise ICICI, which has its own history. During the Kamath years, when he was trying to reinvent a development financial institution into a universal bank, the organisation threw up a number of stars (Kochhar included) who would speak to the media, be very visible at industry forums, etc. Kamath himself was larger than life, and many of his lieutenants ended up being CEOs at other banks (See issue dated XX). Consider that at one time, ICICI had 25 spokespersons. All of this also served a business purpose. A large corporate client, on condition of anonymity, talks about the lack of senior executives who can be approached at the bank. “Earlier there were ten people I could call if I had some issue to discuss, now I have to find out whom I can talk to,” he says. The outside opinion is that Kochhar has killed ICICI Bank’s star culture. Some even say she has centralised ICICI’s leadership.

Her response is nuanced. “I think my entire teams are stars, they are fantastic in their respective businesses. But they may not be media stars. I think that’s not really what delivers quality work.” She adds that the decision to reduce the number of spokespersons to two—herself and CFO N.S. Kannan, who handles the analysts calls during results—was well thought out. “I think it gets defocused with 25 people talking to the media all the time. No other bank really does that; you are comparing just because you saw us do it in the past.”

The comparisons often also arise because the two people at the top (Kamath and Kochhar) have different personalities. Corporate clients say that in meetings, Kochhar has more questions on the profitability projections for the project, the return on investment etc. “Kamath would not always bother with the minute numbers, he would always go for the bigger picture, and would often have a long conversation about the industry” says a client. Daruwala, who has worked with both, agrees. “Mr Kamath would have the knack of picking up a promoter and back him strongly, but with Chanda, it’s always promoters plus the numbers. She uses numbers as a back-up to her calls.” But both have had the interests of the client and the bank at heart.

Now that the bank has begun responding to the new approach, Kochhar’s challenge will be to grow the balance sheet, without getting carried away by excesses—a sort of middle path. She believes that the economy, which boosted ICICI’s fortunes in the past, will continue to deliver. “Both consumption and investment are going to be the growth drivers in India for the next couple of decades.” In 2007, retail loans made up two thirds of the book, today they are about one third, while contribution of loans to domestic corporates as well as overseas loans has been consistently increasing in overall advances.

This may not exactly please analysts in India or overseas. The top 20 banks in the world have their asset book leaning towards a particular business—ICBC of China is more a wholesale lender, while HSBC’s strength is its global banking business and Wells Fargo has a larger retail book. The most valuable bank in India, HDFC Bank, has a high concentration of retail assets. Kochhar agrees: “That’s supposed to be the standard formula, but I think for us this is the right strategy—being a universal bank actually diversifies your risks substantially and gives you the opportunity to grow.”

Her math: if India grows at 9%, then banking grows at 24% to 25%; if India grows at 7%, banks will grow at 18% or 19%. “What we have done now is that we have fixed our financial health in a manner that will allow us to grow maybe a little higher than the industry average,” she says. So, if the industry grows at 24%, ICICI grows its domestic book by 25% to 26%, and at 18%, the bank grows at 20%.

One way to do that is to broaden the clients. The corporate bank has been increasing its client base by 10% every year, adding a number of mid-sized and smaller companies. It’s not just the client base, but the coverage for each client is also much better, says Daruwala. New client acquisition targets were set and if people didn’t deliver, “I took away accounts to make sure the message went through,” she says. Even though the average size of deals has become smaller, their number has gone up by 50% in the last two years. More coverage not only reduces the underlying economic risk that corporate assets usually carry, but also positions the bank to capitalise on the upside when a faster economic growth kicks in.

Analysts however express concern about the bank’s current corporate asset quality, as the exposure to high-risk sectors such as power and airlines is considerable. “They have loaned about 4-5% of their book to power. With coal linkages uncertain in the future, there is no certainty if the projects will even take off, ” says one from a foreign broking house. This resonates with what a former public sector bank chairman says: “While a large portion of the balance sheet may have been de-risked, ICICI still has a lot of work to do over the next couple of years.” Kannan says in the last two years, the bank has refused two out of three power projects because of the creditworthiness of the companies.

The biggest change at the wholesale banking division has been the calibration of growth between assets and liability. “Our CASA determines how much we lend,” says Daruwala. This shift has resolved a key issue for the bank: its over reliance on high cost wholesale deposits. Ask Daruwala for her liability strategy and she says she doesn’t have one. “Wholesale deposits are not on my priority list. I’ve set the rates and my team just follows them. It happens two three levels lower.” The group finance director at a conglomerate says, “Last March, there was a bit of liquidity issue and all banks, including SBI [State Bank of India], were calling up for deposits. ICICI was the only bank that didn’t make any calls.” He recalls how the bank has changed since the “Dark days of December 2008, when no one in the market would touch the bank’s LCs.”

Meanwhile, she’s also trying to reimagine the retail business, which she once headed. Just after she took over as boss, she met Deepak Parekh, chairman HDFC, and an ex-chairman of State Bank of India (Kochhar doesn’t take names, but agrees to having met highly experienced bankers) and amongst other things, discussed the retail model she had in mind. “There is a whole lot of learning that you get by actually meeting people who have experience. Because experience tells you both, what was done in a better way, and what needs to be done,” says Kochhar. Although ICICI had a spread of 1,419 branches by March 2009 — largest amongst private banks — there was practically no banking being done at the branches. In its bid to grow faster than the industry, it had setup centralised teams that took care of building assets as well as the liability. The branch staff primarily sold third-party products such as insurance and forwarded requests for loans and opening accounts to the centralised teams. This not only created a distance between the branch and the customer, but also caused the quality of service, assets, and deposits to fall.

Rajiv Sabharwal, executive director and the head of retail banking says: “We saw that public sector banks enjoyed a very good relationship with customers, while private and foreign banks had speed, but not so much the relationship. So we decided to marry those two and create a different model.” The erstwhile retail structure was dismantled to allow for a model where the branch staff would now be responsible for growing the asset book as well building the deposit base.

A senior executive at a Mumbai ICICI branch talks about the intensive training that the staff were put through in 2010, where they were taught the “fundamentals of how to sell a loan. Earlier we would be blank when a customer asked us a question about a loan he wanted,” she says. Selling of loans at branches also means that the quality of assets (a major concern) can be monitored, resulting in fewer bad loans. The bank’s net retail non-performing assets are less than a quarter of the March 2009 levels—from Rs 3126 crore in March 2009, to Rs 725 crore, in March 31, 2012. Kochhar says that the bank has sharply cut down on its unsecured loans (4% currently from 16% of the retail book three years ago), and future growth “will be through giving personal loans and credit cards to our existing customers.” Though she doesn’t admit as much, extending unsecured credit to existing customers has HDFC Bank written all over it.

An analyst with a global investment bank says, “ICICI has picked up a lot of systems and strategies from HDFC Bank for its retail business.” HDFC Bank leads the tables for its low-cost deposits, which keeps its cost of funds amongst the lowest in industry. Kochhar set out monthly targets of opening accounts—about 120 in a month for a large branch—and “a lot of frontline people who were selling loans and credit cards were shifted to raising deposits at the branches,” she adds. Three years later, the low-cost deposit ratio of the bank is up by 54%, bringing down its cost of deposits closer to peers.

While Kochhar insists that growth will be balanced across businesses, the international banking strategy could potentially be a game changer. Chandok explains that the bank is looking at multiple relationships with the global firms. “If we’re engaging with a U.S.-based multinational for funding its project in India, we not only can cater to the local requirements of the Indian operations, but say if the firm has projects in the Middle-East, we could potentially pitch for that business too from our Dubai office.”

Engaging with top global companies won’t just enrich the overall asset quality, such relationships go a long way in entrenching the bank into the global economic system. “If you look at global deals, they will have the likes of a Citi, a JP Morgan or a RBS on board,” says a banker. He adds that these relationships are long-standing and that most multinationals prefer banking with familiar names. “Coke in India doesn’t bank with any Indian bank. In fact, salary accounts for multinationals such as Coke are actually enough to sustain some American banks in India,” he adds. But Kochhar says getting the global firms to add a bank to their set of relationships isn’t easy. She’s been leading ICICI’s pitch, meeting a number of CEOs of Fortune 500 companies. “These meetings are very helpful because even if India is on everybody’s map, till they really understand our technological capabilities and the size and scale, it’s difficult for them to presume what Indian banks can be capable of,” she says.

Even though she downplays it, the move could be one of Kochhar’s masterstrokes so far. Despite a difficult year, foreign direct investment into India during the financial year 2011-12 have been the highest in last three years, $36.5 billion, while in the March registered the highest ever monthly FDI at $8.1 billion. “I see us as the first movers here, and I think there’s a huge advantage,” says Kochhar.

But it is in the parameters that she’s set for the growing the international business that her approach to banking comes through. Not only will the international business have “some kind of India linkage,” says Kannan, “Chanda has put her stamp when it comes to drawing very firm boundaries on margins.” Net margins for the international book were less than a half a percent two years ago, now they are around 1.4%.“If we approach Chanda with a proposal for a billion dollar bond issue to expand our international book and our bond spreads are for example around 4%, the first question she asks is that if you are raising at Libor plus 4%, can it be deployed at Libor plus 5.5%?” says Kannan.

While attitudes have shifted at ICICI, it would be naïve to think that Kochhar is not driving hard. About a year ago, she started talking publicly about getting ICICI to be amongst the 20 most valuable banks in the world (it is currently ranked 69, according to Bloomberg) by 2015. That’s not going to be easy. Punit Srivastava, a banking analyst at Daiwa Securities, says: “Valuation depends on the bank’s ability to deliver a return that is more than its cost of equity, which is typically around 14-15%. This is where ICICI loses out because its ROE has been lower than 10% last few years and only this year has risen to 11%, giving it a valuation of about 1.2 times the book.” In comparison, HDFC Bank’s ROE is around 20%, which gives it a valuation of three and half times its book. Even Axis Bank, which has a similar loan profile to ICICI, gets a valuation of two times book, because its ROE has been in the higher teens. In fact, the ROE of the top 20 banks in the world hovers around the 20% mark.

Kochhar says the bank will achieve of a run rate of 15% as it exits the current financial year. But that’s just step one. The combination of profits growing faster than top line and a higher capital base (ICICI is leveraged only 10 times as opposed to most other banks which are around 16- 17 times, which means it won’t have to raise capital for the next two or three years) will push returns even higher, rerating the market capitalisation. Even though the plan seems to be chalked out to the minutest detail, Kochhar says that it’s the profitability and returns that she is driving and rankings are just a consequence. At meeting in Lucknow, an employee asked her, what happens if we don’t get to top 20 by 2015? She replied, it doesn’t matter, we’ll get there by 2017. “I won’t put too much to a number in ranking in a particular year.”

All very well. But the question some ask is about the way in which ICICI will play the game in the future—like a hungry organisation that swallows everything that comes its way, even if it cannot digest it, or like an organisation that focuses on key parameters like margins and profitability. Vineet Gupta, vice president and senior ratings analyst with Moody’s Investors Service in Singapore who has tracked the bank for 15 years, articulates the doubt when he says, “Historically ICICI has been an aggressive organisation. Even if they have behaved differently for the last three years, a question always hangs around—will the numbers hold up?” Essentially he’s asking that if the tide changes, will ICICI go back to its old ways of hard driven growth? If there are cues in the way that Kochhar drives her top team, the answer is a resounding no. Having had to correct the excesses of heady days, for one, she may find it difficult to go back to ways she has had to denounce.

In fact, it is imperative that the bank doesn’t change all over again. Although the change in strategy and direction that the bank had to take three years ago was necessary and proved to be beneficial, it raised questions on the bank’s identity and basic character. A senior employee with decades of experience under his belt says that banks don’t and shouldn’t fluctuate in their basic approach. They shouldn’t been seen as aggressive one day, scaling back on another and then looking towards something else as the season changes. “While it is all very well to pat our backs that we have shown ourselves to be this nimble flexible organisation, those qualities are not necessarily good for a bank. A bank has to be consistent, predictable and have an image that is stable.”

This feature originally appeared in the June 2012 issue of Fortune India.


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