India Private Banks Comparison: HDFC a Clear Winner Over ICICI

The Banking sector in India - even private banks - has seen some compelling valuations of late. Like me, if you are looking to identify the best pockets of value, (and looking at say HDFC Bank (HDB) or ICICI Bank (IBN), both of which trade publicly in the U.S.), additional perspective can be gained from a quick peer comparison against the most important metrics for analysing bank stocks. Let's see how the private banks peer comparison throws up the best and the worst managed in India. For good measure, I have deliberately included PSU State Bank of India as well as a few smaller banks. (Comparisons based on consolidated financial statements from respective annual reports.)

click to enlarge

Strong Capital Base

A strong capital base is the number one issue to consider before investing in a lender.

Almost all the private banks managed to raise adequate funds in 2007 and thus maintain Capital Adequacy ratios in FY08 well above the mandatory nine percent stipulated by RBI. None of the banks seem to be very highly leveraged either, with SBI being on the higher side. (An average bank has a Financial Leverage of 12x as compared to 2x or 3x for a non-financial company.)

However the NPA (Non-Performing Assets) levels tell a story as well. ICICI Bank (IBN) stands out with the poorest record on NPAs, and given the overall deteriorating credit quality scenario (due to the slowing economy), should give investors cause for concern. On the flip side, Yes Bank in particular, Axis Bank, and HDFC Bank (HDB) are managing NPA levels nicely.

The provisioning coverage ratio (Provision Expense/Gross NPAs) reveals much more. While HDFC Bank (HDB) lives up to its conservative image with a high provision cover of 241 percent, ICICI Bank (IBN) has the lowest provision coverage at ~54 percent, lower than even PSU State Bank of India. However the best record here belongs to the smallest, Yes Bank.

Return on Equity (RoE) and Return on Assets (RoA)

These metrics are the de-facto standards for gauging bank profitability. Generally investors should look for mid- to high-teen returns on equity. It is easy to boost a bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, which can be unduly risky over the long term. For this reason, it is good to see a high level of return on assets as well. For banks, a top RoA is in the 1.2 to 1.4 percent range

There are only three levers for boosting ROE: Net Margin, Asset Turnover and Financial Leverage. Again, among all the private banks, ICICI Bank (IBN) has the poorest record. As we can see, it is the dismal net margin (~5% ) that has resulted in such poor Return on Equity (~8%) and Return on Asset (~0.7%) ratios. Again, Yes Bank shines bright with the best RoEs and the best ROAs followed by HDFC Bank (HDB), closely followed by surprisingly, State Bank of India.

Efficiency Ratio

The efficiency ratio, or cost to income ratio, measures non-interest expenses, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (the lower the better).

Again, Yes Bank presents the best record on cost efficiency among the private banks. What is remarkable is the way Yes Bank has shown significant improvement in cost-efficiency levels over the years. From a high of 83% in FY06, Operating costs as a percentage of Total Income has progressively come down, year on year, to 29.5% in FY08. State Bank is the biggest surprise here, coming in second at ~36%, with Axis Bank following closely behind. Both HDFC Bank (HDB) at 48% and ICICI Bank (IBN) at 51% are way behind the others in this sector.

Net Interest Margins (NIM)

Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.

This is where HDFC Bank's (HDB) NIM record is unmatched. It's the reason why it is valued so highly. A consistently high NIM of over 4% for several years takes some doing, especially in the rising interest scenario that we witnessed in the last few years in India. What is also notable is how Net Interest Income as a percentage of Total Assets has improved over the years.

Axis Bank comes in a creditable second, followed by what is no longer a surprise, State Bank of India.

Strong Revenues

Historically many of the best-performing bank investments have been those that have proven capable of above-average revenue growth.

Yes Bank has been growing at a scorching pace for the last four years, albeit on a much smaller base. This shows in the overall growth track record of over 225 percent CAGR over four years. What is also commendable is that Interest Income as a percentage of Total Assets has been steadily rising. FY08 levels are at 7.72%, beating HDFC Bank's (HDB) 7.6%.

Other private banks like HDFC Bank (HDB) and Axis Bank have maintained a very decent growth rate in excess of 40%. ICICI Bank has also clocked a growth rate of over 44%. However that growth has come at the cost of rising NPAs and declining margins and profitability.

Price to Book

Because a bank’s balance sheet consists mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also, many of the assets included in their book value are marked-to-market–in other words, they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.

Yes Bank is currently (Mar 30, 2009) trading at 1.12 Book Value, historically at its lowest levels in the last 4 years. Similarly on a price-to-earnings measure, it is quoting at 5x TTM earnings, again historically the lowest levels in 4 years. State Bank of India too is quoting at 1.05x Book Value.

It is significant to note that the two banks - Yes Bank and SBI - have the best RoE records, with 18.34% and 16.78% respectively. With low P/B relative to their peers but with the highest RoEs, Yes Bank and SBI are potential bargains, but we will want to do some gold digging. P/BV and RoE have a very strong correlation for Bank stocks as mentioned in -

1. Valuing Financial Services Firms Fig 216, pp 37-38 and
2. The Five Rules for Successful Stock Investing, Valuation -The Basics chapter, pp 130-131

While we need to dig deeper to make sure, it is promising to see that Yes Bank in particular, and State Bank too, have impressive records on some of the most important metrics for bank stocks, as we have seen from the above Indian private banks comparison.

Overall Verdict

There might be some big concerns on derivatives exposures and other contingent liabilities that are not reflected in this snapshot.

However, if you are to choose between the two U.S.-listed Indian banks, ICICI Bank (IBN) and HDFC Bank (HDB), HDFC Bank is the clear winner. It has grown at a similar 40% plus five-year CAGR to ICICI bank, maintaining high RoEs. In fact, it has the best RoA record, at 1.42%, among all Indian banks. Its NIM record is unmatched, and to its credit, it has proven conservative in managing and provisioning for NPAs.

Comments

[Boris Yeltsin:]

Interesting article, but wrong conclusion. Price matters in investing. HDFC's share price ratio is at an historic high versus ICICI, this will not last forever. HDFC will do fine over time, but a deeper analysis points to better value elsewhere.

ICICI's ROE is lower in significant part because of its large insurance business which generates accounting losses but has large economic value. And of course, you need to take into account ICICI's 2007 US$5bn equity raising which was designed to fund years of growth ahead, although this reduces ROE in the short term.

There is no doubt that HDFC has superior operating metrics on many counts, however this is much more than captured in the relative price differential. ICICI's new CEO is well aware of what needs to be done to restore confidence and market impressions of ICICI can only get better. It wasn't long ago that people were singing the relative praises of ICICI vs HDFC, given ICICI's subsidiaries, international business etc. Of course that's all out of fashion though now.

Ultimately, ICICI was very shrewd in raising US$5bn when its share price was almost 4x above the current price. Now the market cap of ICICI is not far off that US$5bn notwithstanding that the bank is far from insolvent with modest Assets/Equity by banking standards.

There has been plenty of well publicised bad news on ICICI which has helped to make it such a bargain now. I think time will show that, to twist Warren Buffett's words 'you pay a high [relative] price for a cheery consensus'.

Mar 31 10:34 AM

[Stone Fox C...:]

Good analysis Boris. Price is very important and IBN isn't a pure play bank with all of their subs. Both will be huge long term plays, but IBN looks to be the better investment at this level.

Mar 31 10:55 AM

[wobatus:]

Very good call. I looked and just a quick glance at the valuation metrics shows HDC much more expensive. Price counts.


On Mar 31 10:34 AM Boris Yeltsin wrote:

> Interesting article, but wrong conclusion. Price matters in investing.
> HDFC's share price ratio is at an historic high versus ICICI, this
> will not last forever. HDFC will do fine over time, but a deeper
> analysis points to better value elsewhere.
>
> ICICI's ROE is lower in significant part because of its large insurance
> business which generates accounting losses but has large economic
> value. And of course, you need to take into account ICICI's 2007
> US$5bn equity raising which was designed to fund years of growth
> ahead, although this reduces ROE in the short term.
>
> There is no doubt that HDFC has superior operating metrics on many
> counts, however this is much more than captured in the relative price
> differential. ICICI's new CEO is well aware of what needs to be
> done to restore confidence and market impressions of ICICI can only
> get better. It wasn't long ago that people were singing the relative
> praises of ICICI vs HDFC, given ICICI's subsidiaries, international
> business etc. Of course that's all out of fashion though now.<br/>
>
> Ultimately, ICICI was very shrewd in raising US$5bn when its share
> price was almost 4x above the current price. Now the market cap
> of ICICI is not far off that US$5bn notwithstanding that the bank
> is far from insolvent with modest Assets/Equity by banking standards.
>
>
> There has been plenty of well publicised bad news on ICICI which
> has helped to make it such a bargain now. I think time will show
> that, to twist Warren Buffett's words 'you pay a high [relative]
> price for a cheery consensus'.

Mar 31 05:24 PM

[bigtime99:]

Good analysis thank you. I've owned HDFC for 6 months. I bought it partially because it made the Barron's list of best managed foreign firms last year. I have been surprised at how well it has performed.

Mar 31 09:43 PM

[Zyx007:]

Good analysis Donald. I agree with your analysis, and own HDFC Bank.

I disagree with Boris's recommendation. While I agree that price clearly matters, but quality clearly much more so. Ignoring quality and only focussing on price may lead one to conclude that Citi is a better stock to buy compared to JPM. There is a real reason as to why ICICI Bank is trading where it is trading. Anecdotal comments based on what ICICI is doing on the ground don't give me much comfort that their long term ROE will improve in a meaningful fashion. It is a high Beta bank with a "cowboy" culture, clearly a model which is now dead. HDFC Bank will clearly outperform in the near to medium term, despite it being more expensive.

Mar 31 11:12 PM

[Subhankar:]

Good article, Donald. The peer comparison gives a clear perspective for decision making. There is no doubt that HDFC Bank has taken a more conservative (and safer) approach to their business, while ICICI Bank has a tendency of throwing caution to the wind for growth.

The two different strategies are reflected in the current prices in a bear market. In a bull phase, ICICI Bank may show a faster rise.

HDFC - the housing finance company and parent company of HDFC Bank - remains the pick of the top financial companies in India.

Apr 01 05:21 AM

[Boris Yeltsin:]

HERESY:

Well, now that you mention it, I would hazard that Citi would be a superior investment to JPM at current levels. I can buy Citi for US$13bn or JPM for US$100bn, while both have similar book values at around US$150bn.

"But Citi is a black hole!". Right? Well, do you fully understand JPM's massive derivative exposures? Perhaps you are smarter than me and can, but I suspect even JPM can not properly manage their huge exposures. And their Assets/Equity ratio is almost the same as Citi at 13x. Tier 1 lower at JPM. Five year average ROA almost the same. Jamie Dimon is very smooth but that only earns JPM a credit rating one notch higher than Citi.

No one should bet their life's savings on Citi, but in two year's time, yes, I bet its shares will appreciate by much more than JPM. Their recent board appointees were actually quite good. Sure, their old board members were seat-warming "yes men", but they are actually going in the right direction now. Citi may be trading at 1x post-crisis earnings. Bank of America may be even cheaper.

If you want quality, buy WFC, not JPM. They are better reserved and have a superior credit position.

You are not going to make above average returns by thinking like the crowd. And be careful owning too much HDFC, for when fear of the wild ICICI "cowboys" dies-down and fund-managers reweight from HDFC to ICICI, HDFC may even underperform significantly.




On Mar 31 11:12 PM Zyx007 wrote:

> Good analysis Donald. I agree with your analysis, and own HDFC Bank.
>
>
> I disagree with Boris's recommendation. While I agree that price
> clearly matters, but quality clearly much more so. Ignoring quality
> and only focussing on price may lead one to conclude that Citi is
> a better stock to buy compared to JPM. There is a real reason as
> to why ICICI Bank is trading where it is trading. Anecdotal comments
> based on what ICICI is doing on the ground don't give me much comfort
> that their long term ROE will improve in a meaningful fashion. It
> is a high Beta bank with a "cowboy" culture, clearly a model which
> is now dead. HDFC Bank will clearly outperform in the near to medium
> term, despite it being more expensive.

Apr 01 07:39 AM

[Jagan:]

Fundamental of investing is reward is based on the risk. Form the above discussions it is clear that IBN and C are risky because it is a bear market. But I think we are entering the Bull market. So I would invest in IBN or C not in HDFC or JPM because I am a risky investor-:)

Apr 01 07:38 PM

[Donald Francis:]

Thanks everyone for your valuable comments. Appreciate that the article merits discussion/debate from opposite viewpoints -makes for a richer perspective.

Boris - valid points. Agree that ICICI may make for faster gains in a reviving/bull market, given that it is cheap, and on the hopes that the situation will not turn any worse from here on. The case I make is that ICICI is available cheap for a reason -infact several reasons -which are cause for big concerns. If FY2008 was bad, FY2009 is going to be worse -given likely higher NPLs and its lower provison coverage. Rising interest costs throughout FY2009 wouldn't make for any better margins either. Getting Invested in ICICI, knowing the dismal picture and in all probabilities a much worse picture for FY2009, is ill-advised. And we haven't even examined the exposure to derivatives and forward exchange contracts. ICICI Bank is in some trouble, and it will take some doing for the management (no doubt with a good, if aggressive, track record so far) to steer the group to safety. It shouldn't happen that in the chase for high returns, investors end up losing. On the other hand HDFC Bank, the very fact that even in the bear market, it hasnt cracked below 2.5x BV, shows that its a safe bet. ofcourse, its exemplary record vouches for that safety net. Historically it has traded much higher than current levels, too.

ZYX007 -Your point is well taken. Price matters, but not at the cost of quality. Relevant more in these times when financial instituitions are in trouble everywhere, and a bank's asset quality or the lack of it, contingent liabilities, etc. are very difficult to assess with any certainity. I would play safe, yes.

Subhankar - You have articulated it nicely in "The two different strategies are reflected in the current prices in a bear market. In a bull phase, ICICI Bank may show a faster rise." You have the last word:)

Apr 02 03:07 PM

[hasmukh:]

There is no comparison.ICICI Bank is all hype with very poor fundamentals,rather no fundamentals.Just raise money from stock market & keep the rolling going on.How long would the public be fooled is a question mark.

Apr 04 01:40 PM

[Boris Yeltsin:]

There are a few problems with some of the above analysis which readers should be careful with:

1) HDFC is trading at 3.8x book by now vs 0.93x for ICICI. This is a huge difference, even accounting for HDFC's higher ROE and superior provisioning. HDFC is currently priced for nigh on perfection at 20x PE, a 1% dividend yield, and a market cap almost 20% above ICICI's, notwithstanding that its consensus forecast 2009 earnings are over 30% lower than ICICI's.

2) ICICI needs to be valued on a sum of the parts basis given its significant subsidiaries, which account for up to 40% of the value of the group. A simple ROE comparison is not meaningful given the accounting of the life insurance earnings at ICICI Prudential; free cashflows over time are what matters. There are a range of still well-capitalised insurance players that would gladly buy further stakes in ICICI's insurance assets if ICICI were to ever seek to / need to sell.

3) The fact that HDFC's share price hasn't fallen below 2.5x book does not prove the bank's safety, only its high price. Otherwise why bother to perform any fundamental analysis whatsoever - you could just rely on high prices to assure yourself of safety... Ultimately, if there is a meaningful recession in India HDFC will certainly not be immune, especially with provisions of only just over 1% of total assets (the extra provisioning vs NPAs will not count for much, only HDFC's comparable Tier 1 level, which is on par with ICICI's, will matter). Banks are inherently highly leveraged - and HDFC more so than ICICI based on Assets/Equity.

4) If you look back to January, you will find that some senior management of HDFC were sellers of their own shares at prices lower than the current levels. I suspect they are not as convinced of their bank's invincibility as some of the enthusiastic supporters at Seeking Alpha...

Apr 06 12:11 PM

[Snehal Dani:]

Very interesting read of point and counter point on the valuation of HDFC Bank and ICICI Bank.

However, in the process, other gems cropping up in the analysis like Yes Bank and State Bank are getting ignored.

There may be doubts on the asset quality of ICICI bank or richness of valuation of HDFC bank but neither Yes bank nor State Bank suffer from either of those doubts. Both are available at fair valuations.

Over a period of last decade or so, due to their pioneering role in the Indian Banking in new generation pvt. sector banking space, both HDFC bank and ICICI bank command so much of mindspace of the investors that the other two equally or even more worthy gems are being ignored and sidelined.

Snehal Dani.

Apr 07 02:37 AM

[Donald Francis:]

Some of the facts cited in the comment, don't seem to be entirely correct and/or convey the full picture. For the sake of investors, these need to be clarified more

1. There is a sale of 600 nos by 1 Director in March 2009. However what should have been mentioned in the same breath is that some 4 directors including the MD bought double that number, a few months back. The insider trading details can be checked out here
www.corpfiling.co.in/C...

2. We are comparing consolidated financial statements. (bears out as subsisdiaries are being discussed) HDFC Bank's provision stands at 1.6% of Assets, double that of ICICI Bank's is at 0.85%. While Tier I Capital Adequcies are comparable, the lower NPA provisioning cover of just 0.54% by ICICI Bank (industry average is close to 2%), in a rising NPL scenario can only point to shoring out the balance sheet.

3. Agree the ICICI Prudential subsidiary is a major constituent and should be considered while evaluating on a sum-of-parts basis. However to do any justice based on a discounted free cash flow basis, at this point, is just too far-fetched -because positive free cash flows are far far away. Infact ICICI Prudential is the biggest drain on ICICI Consolidated figures. Here's why -an excerpt from AR 2008

"ICICI Prudential Life Insurance Company incurred a loss of Rs.13.95 billion in fiscal 2008 mainly due to higher business set-up costs in the initial years of rapid growth, non-amortisation of acquisition costs and reserving for actuarial liability in line with the insurance company accounting norms. These factors have resulted in statutory losses for the life insurance business since the company’s inception, as its business has grown rapidly year on year. The impact on consolidated profits on account of the loss is Rs.10.31 billion."

4. HDFC is quoting at 2.91x Consolidated book vs ICICI's 1.1x Consolidated book. Yes it is richly valued for its impeccable record and performance. A

On Apr 06 12:11 PM Boris Yeltsin wrote:

> There are a few problems with some of the above analysis which readers
> should be careful with:
>
> 1) HDFC is trading at 3.8x book by now vs 0.93x for ICICI. This
> is a huge difference, even accounting for HDFC's higher ROE and superior
> provisioning. HDFC is currently priced for nigh on perfection at
> 20x PE, a 1% dividend yield, and a market cap almost 20% above ICICI's,
> notwithstanding that its consensus forecast 2009 earnings are over
> 30% lower than ICICI's.
>
> 2) ICICI needs to be valued on a sum of the parts basis given its
> significant subsidiaries, which account for up to 40% of the value
> of the group. A simple ROE comparison is not meaningful given the
> accounting of the life insurance earnings at ICICI Prudential; free
> cashflows over time are what matters. There are a range of still
> well-capitalised insurance players that would gladly buy further
> stakes in ICICI's insurance assets if ICICI were to ever seek to
> / need to sell.
>
> 3) The fact that HDFC's share price hasn't fallen below 2.5x book
> does not prove the bank's safety, only its high price. Otherwise
> why bother to perform any fundamental analysis whatsoever - you could
> just rely on high prices to assure yourself of safety... Ultimately,
> if there is a meaningful recession in India HDFC will certainly not
> be immune, especially with provisions of only just over 1% of total
> assets (the extra provisioning vs NPAs will not count for much, only
> HDFC's comparable Tier 1 level, which is on par with ICICI's, will
> matter). Banks are inherently highly leveraged - and HDFC more so
> than ICICI based on Assets/Equity.
>
> 4) If you look back to January, you will find that some senior management
> of HDFC were sellers of their own shares at prices lower than the
> current levels. I suspect they are not as convinced of their bank's
> invincibility as some of the enthusiastic supporters at Seeking Alpha...

Apr 07 11:34 AM

[Donald Francis:]

Mr Dani,

Yes Bank and SBI point to good valuations. But those are of interest perhaps only to investors in the Indian market. Only ICICI and HDFC are publicly traded in US.

Otherwise, the debate/discussion would have been far richer, I agree with you.


On Apr 07 02:37 AM Snehal Dani wrote:

> Very interesting read of point and counter point on the valuation
> of HDFC Bank and ICICI Bank.
>
> However, in the process, other gems cropping up in the analysis like
> Yes Bank and State Bank are getting ignored.
>
> There may be doubts on the asset quality of ICICI bank or richness
> of valuation of HDFC bank but neither Yes bank nor State Bank suffer
> from either of those doubts. Both are available at fair valuations.
>
>
> Over a period of last decade or so, due to their pioneering role
> in the Indian Banking in new generation pvt. sector banking space,
> both HDFC bank and ICICI bank command so much of mindspace of the
> investors that the other two equally or even more worthy gems are
> being ignored and sidelined.
>
> Snehal Dani.

Apr 07 11:41 AM

[Snehal Dani:]

Yes, you are right Francis.

You have done excellent job on the study and please accept my congratulations for the same.

Snehal Dani.


On Apr 07 11:41 AM Donald Francis wrote:

> Mr Dani,
>
> Yes Bank and SBI point to good valuations. But those are of interest
> perhaps only to investors in the Indian market. Only ICICI and HDFC
> are publicly traded in US.
>
> Otherwise, the debate/discussion would have been far richer, I agree
> with you.

Apr 09 10:30 AM

[Boris Yeltsin:]

I think it is fair to say that ICICI has woken up to its issues, even if it has been priced for a dangerous slumber. See recent interview below:

ICICI Bank Says No To Growth
Naazneen Karmali, 04.15.09, 3:20 AM ET

MUMBAI -- ICICI Bank, India's second largest bank, with $75 billion in assets, is set to get its youngest-ever chief executive on May 1, Chanda Kochhar, 48. When she takes the helm, she'll also become one of India's most prominent female CEOs.

Kochha started working at the bank in 1984, her first job after B-school. She succeeds veteran banker K.V. Kamath, who repositioned ICICI from a staid corporate lender to India's fastest-growing retail bank on the back of a consumer spending - and lending - boom. But India's economy has lately slowed, and so too the consumer finance market.

Dogged by increasing delinquencies on both the retail and corporate lending side, Indian banks, like those elsewhere, have turned into reluctant lenders. ICICI Bank has taken its hits; rumors about its stability sparked off a near-run on the bank last September, prompting the Reserve Bank of India to issue a statement that the bank had enough liquidity. Kochhar spoke to Forbe's Mumbai Bureau Chief, Naazneen Karmali, about ICICI's new mantra: profit above growth.

Forbes: How do you feel about taking over as chief executive of India's second-largest bank in the present environment?

Kochhar: Honestly, it feels great! This is the time when the world is looking to India for growth. No doubt the banking sector has to play an important role in delivering that growth. I don't allow the environment to overwhelm me. If I do, then I will be shutting myself to positive signals. I'd rather be looking out for the light at the end of the tunnel.

It's a tough time for banking in general and ICICI Bank in particular. How do you propose to deal with the headwinds and what are your priorities?

One has to conserve capital and liquidity. I'd like to use this time to restructure certain parts of the balance sheet. We don't face capital constraints, so we could be tempted to grow. But this isn't the time to be taking risks. For example, in the past we've been relying on wholesale deposits, which was the correct strategy when interest rates were falling. Now with interest rates turning volatile, we should increase our current and savings accounts base and pay off our wholesale deposits.

Your bank's spectacular run of growth was propelled mainly by the boom in consumer credit. With that faltering, what's your plan B?

We may actually not grow for a year. But at the end of one year, we'll be in a healthier position. It's time to inculcate a different mindset in our people. This change is not for the sake of change, but one that is warranted by the current environment.

Saying no to growth sounds like a new mantra for ICICI Bank. How do you propose to bring about this change?

We need to steer the drive, energy and passion of our bankers in a different direction. I've already brainstormed with my senior team to make them understand why this change is necessary. At the start of each year, we do an exercise called aligning organization performance where this was discussed. Now the message has to percolate down.

Is rebuilding the bottom line, rather than relentlessly pursuing the top line, going to be the future focus?

Building the bottom-line is important. We can improve our net interest margin without increasing the loan book. We’ll focus on cutting costs aggressively and step up collections. We'll become as efficient as we can on provisions and focus on credit quality.

You are exposed to several troubled companies, from sinking retailer Subhiksha to pharma firm Wockhardt. Were these wrong calls?

Our exposure as compared to other private banks wasn't very different. We do stand out only because we're much bigger. Our calls didn't go wrong. The companies got into trouble due to other factors. For example, Wockhardt's foreign exchange bets landed them into trouble but their core business is stable.

Your international portfolio, where you lent to Indian companies expanding overseas, seems to have its trouble-spots too. What's your strategy to beef up your offshore balance sheet?

Once again you can't say these were wrong calls. We were proactive enough to be part of the globalization plans of Indian companies. What happened was a once-in-a-century event. Several other banks were following our strategy but they pulled back when the environment changed. Fortunately, we'd not restricted ourselves only to the global business of our Indian clients so we have access to their domestic cash flows. That said, we aren't growing our international portfolio either. Some deals may happen but the funding will be different. Bond issues and inter-bank borrowings are no longer an option.

ICICI Bank has always been beset by rumors that it isn't too big to fail. Why do depositors have so little faith in the bank?

This is the price we've paid for being different and being the first to do things. This has made people skeptical about us. When you do things ahead of the curve, people find it difficult to understand you and tend to assign the biggest downside to you. The quarter ending December 2008 was tough for us. But our deposits have increased in the last quarter and are back to the pre-September levels.

Your bank's stock has nearly halved in the past year and ICICI is no longer India's most valuable bank. Is this a status you aspire to regain?

As 30% of our business is overseas, we're perceived as more international than other Indian banks. That worked to our advantage in the past, but today investors are discounting us for that reason. Only performance will help us regain our status. We have to wait for a while to show the true worth of our international portfolio.

What are the lessons for Indian banks from the global financial crisis?

Our lending method in India, which is cash-flow based, is the safest approach. Since our loans are based on the borrower's ability to repay and not on the asset value, it doesn't matter if house prices go down. It's important to monitor the leverage levels of companies banks lend to. Indian banks learned this lesson in the 1990s, when many of them were stuck with bad loans made to highly leveraged entrepreneurs.

What's your view on India's slowing economy?

India's GDP growth was driven by three factors-investments, exports and domestic consumption. Exports aren't going to revive anytime soon. Investments will pick up gradually. Domestic consumption continues to remain strong and this alone can give us 5.5% growth.

Are you still investing all your savings in your bank's stock?

Absolutely, I always do!

Apr 15 05:52 AM