Here's how ICICI Bank under MD & CEO Sandeep Bakhshi is reimagining banking

For 63-year-old Sandeep Bakhshi, the Managing Director and Chief Executive Officer who turned ICICI Bank around, there are some basic rules of banking: seize current market opportunities, optimise capital, and strike a balance between risk-return metrics.

He has followed those rules religiously over the past few years, when he has been at the helm of affairs. He has used the insights emanating from them to build a 360-degree customer-centric approach to tap opportunities across segments, leverage technology, build partnerships, and simplify processes.

Thanks to these efforts, there has been a significant shift in ICICI Bank’s orientation away from a corporate-focussed banking model towards one that is more retail. While the share of vehicle loans, rural banking, and SMEs in the loan mix has more or less remained consistent over the last five years, this may reflect the higher risk perception associated with them. However, Bakhshi swiftly seized the significant opportunity presented by business banking. His laser-focussed approach, guided by a philosophy of risk and return, has rewarded the bank and its shareholders with one of the highest returns in its history.

The bank has climbed to the top of the big bank league in terms of growth, asset quality, and returns. Thanks to this, the country’s second-largest private bank has emerged as the joint winner in the Bank of the Year category in the BT-KPMG Best Banks and NBFCs Survey 2022–23.

Bakhshi is now busy recalibrating the business model in response to changes in the operating environment. He has to contend with the Reserve Bank of India’s (RBI) decision to increase risk weights on unsecured loans to deter excessive lending in the personal loan and credit card segments. Then, on the liability side, there has been a dip in the current account and savings account (CASA) deposits across the sector. This has translated to an increase in competition for these low-cost deposits, as banks look to shore up their books and get ready to increase corporate lending ahead of a likely boom in the corporate sector.

Analysts, too, feel that the challenges for the bank may emanate from outside. “We believe the challenges will be more systemic than bank specific,” says Ajit Kabi, Research Analyst at LKP Securities.

Needs of the economy

The bank seems well aware of the restrictions. Anindya Banerjee, Group Chief Financial Officer at ICICI Bank, reiterates that the bank’s objective is to cover the whole spectrum of opportunities available in the market. “We are focussing on risk-calibrated business growth. The banking business ultimately reflects the needs of the economy; our growth will depend on whatever is needed in the economy,” says Banerjee.

And in keeping with the broader trends in the economy, the bank’s retail business has been growing around 20%, while corporate banking has been growing in the low teens. SME and commercial banking have been growing closer to 30%.

Besides, over the past five years, the retail mix has increased significantly, from 48.4% to 54.3% of total loans. This surge in retail share has come even as the share of domestic corporate loans has marginally decreased from 23.9% to 21.7% during the period.

Within retail, personal loans and credit cards have led the way, with their portion of the loan mix almost doubling since March 2019. Personal loans constituted 9.4% of total loans, while credit card loans stood at 4.1% as of December 2023. The secured mortgages, commanding a substantial share of 32.5%, have grown from 30.4%.

With the increase in risk weights expected to impact the retail segments, the bank is trimming and calibrating growth rates. It is closely analysing risky geographies, categories of loans, as well as increasing pricing and reducing sourcing payouts to distributors. As a result, the growth rate in the unsecured component is likely to moderate. But there is some comfort on the credit card front. Here, there are fewer providers of scale. So, customers have few options.

The personal loans market is very competitive anyway, with the entry of public sector banks, especially the State Bank of India. Currently, interest rates for mortgages or home loans are around 8.75%, while personal loans are offered at around 11%. Over the years, this difference in interest rates between secured home loans and unsecured personal loans has diminished because of intense competition with NBFCs and fintech firms entering the fray, making it essential to focus more on assessing the customer’s creditworthiness because of the unsecured nature of the loan.

“The delinquency from retail loans (especially unsecured) might cause pain in the future. However, the underwriting process will be tested during downturns,” says Kabi of LKP Securities.

Besides, it must contend with the impact of the merger of mortgage giant HDFC Ltd with HDFC Bank. This offers HDFC Bank a low-cost platform to provide mortgages. Experts suggest that HDFC Bank and SBI are the top two players, and though ICICI Bank is a relevant player, it is smaller than the two.

There are other areas of concern as well, like vehicle loans, whose share in the bank’s mix has dipped from 9.5% to 7.6% despite the overall rise in retail. This has been attributed by many to the stress in the rural economy.

That brings us to the bank’s star performer: the business banking portfolio, which the bank classifies as transactions with small businesses. Its share has more than doubled from 3.2% to 7.4% in the last five years. The base of business banking was low, but the bank found new opportunities here. “Since 2017-18, the bank has undertaken a three-pronged change in its approach towards the business banking segment. Firstly, we expanded the number of branches capable of serving small SMEs. Secondly, we have also revamped our underwriting process. Thirdly, we have offered digital solutions to enable convenient banking for SMEs,” says Banerjee of ICICI Bank.

CASA Play

Elsewhere, Bakhshi’s focus on building a robust granular deposit franchise confronts some structural challenges. The bank’s CASA ratio—which helps it remain competitive, especially in the cutthroat home loan market—has declined, dropping from 49.6% in March 2019 to 39.6% by December 2023. Meanwhile, the share of term deposits, which are relatively higher cost, has gone up from 50.4% in March 2019 to 60.4% in December 2023 at the cost of CASA deposits.

This decline mirrors a broader trend, as the CASA ratio across the banking system has also receded over the past year. “As deposit growth has intensified among banks, quality liability growth would be a key monitorable for the bank, given the competition from PSU banks. Nevertheless, the deposit growth (18.7% YoY in Q3FY24) till now was strong and above industry growth rates,” says Kabi.

“We will continue to focus on a healthy funding profile as the underpinning of our growth,” says Banerjee, the bank’s CFO. In keeping with Bakhshi’s rules, the bank will adjust the asset or loan mix based on the emerging funding profile.

 

@anandadhikari