Chanda D Kochhar, managing director and CEO of ICICI Bank, spoke to Moneylife’s Sucheta Dalal and Debashis Basu on the Indian macroeconomic environment and the thrust areas for the lender. This is the first part of a two-part series
Sucheta Dalal & Debashis Basu (ML): There is a world of difference between the state of financial markets when you took over and now. You started out shrinking the bank and cutting back on retail, what is the strategy now?
Chanda D Kochhar (CK): Yes, at that time we had what we called the '4C' strategy. Each of the Cs stood for - consolidation, getting more CASA (current account, savings account) deposits, cost control, containing credit loss. As times changed, we had the option of changing '4C' to a 'G' and say that we are all for growth of the kind we enjoyed before 2008. Instead, what I have said is that we now have 5Cs. While keeping our eye on the first 4Cs, we are now going for credit growth as the fifth C. In that sense, our growth is still a measured growth. So if you talk of credit cards, it's not as if we are not adding new cards. We have consciously weeded out a lot of the credit cards that don't make sense for us from the loss point of view or transaction vis-à-vis operation cost. Mortgage loans are also growing. But again, we are not at the kind of market shares we had in the past, because we believe that the current rates of interest give only a certain return on investment, so we are calibrating our growth but also keeping in mind our final profitability as rates adjust.
ML: What are your thoughts about the real-estate sector today?
CK: Interestingly, mortgages have been very safe throughout economic cycles. The losses, if at all, are due to fraudulent documents. These are very different across different banks because it depends on what their processes are. For us, the loss rate is minimal and continued to be low even when the economy was in a downturn.
ML: Despite the job losses and the stories about young techies booking multiple flats at the same time?
CK: Actually, the young techies never booked six flats with a loan. While they may have wanted to do it, when banks decided to lend, only lend against cash flow. So if we thought that they had income only to book one house or at the most if they were living in one house and they had income enough to book a second, they got the loan only for that. Broadly, most people also continued to retain their job. So as long as they had their job, it didn't matter if they didn't get increments. They had their job and they were living in their home they wanted to continue to pay their installments and not lose their home.
ML: So which are the sectors that are doing very well?
CK: Actually the whole retail lending sector is very stable. Commercial vehicles are doing well, even personal loans and credit cards are doing well. In credit cards, we find that cards issued to your own customers are doing pretty well. We have pruned this business, but haven't got out of it; it's just that in case of new-to-bank customers, we don't want to be stuck with an unsecured portfolio where you really don't know how to trace the customer when there is a problem. On the corporate side again I am very bullish. What is happening is that projects have been finalised and commitments are being made and it's just that the drawdown of loans has been low. That is because corporates have either raised equities or they are first putting in equities or they are opening some long-term LCs, and so credit drawdown has been slow. But it will soon pick up.
ML: Mr Kamath used to say that for the first time since Independence, all sectors of the Indian economy are doing well at the same time…
CK: That is actually more true now. If you look at the trajectory of India's growth over the past 50 years, from Independence till about the late 90's it was the industrial sector that was mainly pulling India. In the 2000s it was the turn of consumer-led growth. But now both engines are driving the economy. And because of demographics there is a need for roads, ports, airports and so investments have also started happening to build new infrastructure. So one will keep feeding the other.
ML: Do you worry about things like regulatory risks, such as frequent changes in rules, change of rules with retrospective effect?
CK: What I would think is that all said and done, domestic regulatory changes in areas like banking are predictable and stable. In the current economic environment, it is global regulations, such as the kind of capital needed for different geographies that can cause uncertainty. Every regulator in a way is becoming more nationalistic and what you are doing in that country becomes of paramount importance. That means that our efficiency of usage of capital may keep coming down because none of them will take a holistic view of capital requirements; everyone is taking only their particular point of view.
(This is the first part of a two-part series).
In a monster bull market many stocks will rise despite poor performance. Here is a selection by ML Research Desk
The markets are showing no signs of retracement. Foreigners continue to be bullish about the Indian growth story and are pouring even more money in Indian equities. Mutual Funds are raising money by the fistful and retail investors are ready to jump even at these levels regretting what they have missed out. From frontline index stocks to little known micro-cap companies, all have seen a spurt in their market-caps with money from all quarters chasing them and desperate to be a part of the big Indian bull run. But is the buying beginning to look indiscriminate? Is it a case of rising tide lifting all boats, as the saying goes? One way to find that out is to examine whether the fundamentals are supporting such a euphoric rise in stock prices and if not which stocks are rising with the tide.
We decided to test this by screening our universe of stocks for stocks which are actually faltering on performance yet are rising with the overall market. But first the performance of the markets.
Starting 1st November 2005 till 14th March 2006 the Sensex gained a total of 2857 points (36%) while the Nifty rose 808 points (34%). Among other broader benchmarks, the CNX Nifty Junior gained 1483 points (31%) while BSE Mid-Cap and BSE Small-Cap were up 1250 points (33%) and 1246 points (25%) respectively. This in short reflects the strength of the markets and the interest of investors across the board irrespective of size.
We ran our stocks database to first check out on the performance of companies at the operational level. From the 1100-odd companies in our regular tracking list we got 842 companies being profitable at the operational level. Many lossmaking companies have risen with the tide. But let's focus on those that are making profits. Being profitable is one thing and improving profitability that matches the rise in share prices is another issue.
Fundamental strength of companies is determined by their capability to raise the bar and clear it in terms of improving growth rates quarter after quarter. Companies that can consistently improve their growth rates are the ones that merit attention in the market and are likely to deliver value to investors. But then in a market like this, these kinds of arguments hardly matter.
We screened our list of 842 profitable companies to search for those that are showing a consistent decline in YoY growth rate of profits at the operational level. We then set this against their market performance since November 2005. Some 36 of the 842 have seen their growth rate in operating profit continuously decline over the last five quarters. Of these, more than 60% (22 companies) have actually seen their growth rates decline consistently on a basis and yet their market cap has been consistently rising.
More than 50% of companies with weakening fundamentals but rising market cap came from the mid-cap space. Among others there were three small-caps, four micro-caps, two large-caps and a mega cap company. Here is a brief analysis of why the stock prices of some of these companies are continuously rising despite the fact that their fundamental performance has been continuously weakening over a period of time.
The first on our list is OP Jindal promoted, sponge iron manufacturer, Monnet Ispat. Monnet has been consistently faltering in growth with operating profit declining by as much as 29% in the recently concluded December quarter. Monnet recently raised US$ 60 million through an FCCB to fund its expansion plans. Faltering fundamental, declining product prices and capacity expansion and yet the market cap? Up 74% between November 2005 to March 2005. Another steel major that appeared on our list was Tata Steel. As with Monnet, Tata Steel too has slipped in performance at the operational level with growth continuously on the decline. Its December quarter operating profit was down 11%. However its market cap rose 35%. What is keeping the markets interest in steel stocks alive is the expectation of a pick up in demand especially from the Chinese market. Tata Steel is India's largest integrated steel manufacturer with captive mines for iron ore and coal. However, declining product prices have hit the company hard.
One of the best examples of a speculator driven stock in a market like this is that of 3i Infotech. Its performance has been on a constant decline with operating profit growth deteriorating with every passing quarter. Yet its market cap has gone up 53%. From as high as 63% YoY growth in operating profit for QE June 2005 its growth came down to 25% in the December quarter.
Market participants struggling under SEBI’s autocratic rules have been left smarting as the market regulator proposes unprecedented doubling of salary for its employees with retrospective effect
Market regulator Securities and Exchange Board of India (SEBI) has proposed to almost double the salaries of some employees, with retrospective effect from November 2007, according to some media reports. Not surprisingly, this has come as a rude shock to various market participants, including intermediaries and investors, who are facing the brunt of SEBI's shoddy attempts at changing the investment landscape in the country.
A series of ill-conceived initiatives on the part of SEBI to improve the regulatory framework in the securities market has left participants in the lurch. Intermediaries in the mutual fund industry have been left gasping for breath after SEBI removed the entry load on mutual funds, effectively taking out the incentives for distributors. This was followed by a whole set of regulatory changes that have altered the structure of the industry.
The result is that half the independent distributors in the country have either been wiped out or are struggling for survival. It is hardly any surprise then, that intermediaries are cursing the regulator for even considering such a fat pay-day for its employees. An intermediary remarked on the Moneylife website, "On the one hand, distributors are struggling for livelihood as small investors are no more interested. On the other, we have this Diwali bonanza for employees. This is (the kind of) justice (we get) in India."
The fact that SEBI has proposed to implement the salary hike with retrospective effect has raised eyebrows even higher. This is an unprecedented payout for a government organisation that is supposed to work for the benefit of investors. There are fears that SEBI's move will now be followed by similar proposals from other government institutions. No doubt, if this proposal goes through, others will look to line up for fat paycheques for their own employees.
Already, SEBI has among the best perks in the business. Officers from the income-tax and enforcement directorate are queuing up for job opportunities in this glamorous organisation. Why will they not, when it offers all kinds of benefits in terms of housing, travelling and what not. Investors are particularly incensed as all this comes against the backdrop of poor quality of work done by SEBI officials in the past few years.
An investor, Amit Bhargava, told Moneylife, "I fail to understand why the tax payers be burdened with this excess expenditure on the salaries of officers who have miserably failed to perform and as per my own experience are working against the interest of the investors and harass them when complaints are made. Such officers/organisations need to be punished rather than gifted with such retroactive salary hikes that even make the salary of the cabinet secretary look small."
Moneylife had earlier pointed out how SEBI went against the very grain of its existence to implement an 11-times hike in its arbitration fees that could actually deter investors from seeking justice. Such and more moves from the regulator have not gone down well with the investing public. SEBI's decision to reward itself with such opulence in the light of the work done has shocked investors to the core. We wonder how the powers-that-be at the finance ministry are going to react to this proposal.