Farewell Mr.Kamath and Welcome Ms.Kochhar

ICICI Bank finally nails down its succession plan. Outgoing CEO K.V.Kamath (who will now be its non-executive Chairman) is to be replaced by Ms.Chanda Kochhar, currently Joint MD & CFO.

Kamath has been instrumental in turning ICICI, the erstwhile public sector project finance outfit into a private sector full service commercial bank and then in hoisting it as India’s second largest bank (balance sheet size) until recently, when the impact of the bank’s overseas bond portfolio facing massive erosion triggered a run on the bank. Depositors panicked and pulled out deposits that almost eroded the bank’s substantial deposit base. Among Indian banks, ICICI Bank had one of the largest exposures to overseas assets. According to statements tabled in Parliament, ICICI Bank suffered mark-to-market losses of $264 million in the credit derivatives segment. The bank had about $2.2 billion worth of exposure to credit derivatives while the largest bank in the country, State Bank of India (SBI), has an exposure of about $1.1 billion. Though the bank has not directly invested in the US market, it has taken a beating due to the depreciation in value of securities witnessed in the global markets.

In comes Ms.Kochhar at a time when a collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies is having a ripple effect around the world. She is going to have a tough time ahead because she has to lift a troubled bank out of a mess created not just by itself, but the global financial world.

But if she is lucky enough to have the bailout and economic stimulus tailwind propelled by central banks and governments around the world, she has the caliber to see the bank through its crisis.

Let’s welcome her to the hotseat. And farewell Mr.Kamath !

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The crooks beat me by a wide margin

It takes a lot to build a reputation. To ruin it, takes not more than a few split seconds or just some fast spreading SMS rumors. ICICI bank realized it lately when some small town sub-broker (bent on shorting ICICI stock) viralled mass SMS saying the bank is in trouble.

Result – stock price plummeted (Friday it fell by 27%) and depositors withdrew their funds. What began as a trickle in some remote Tamilnadu town soon spread across the country catching the bank unawares.

The bank management did everything possible – it’s CEO gave repeated assurances, got even FM and RBI / SEBI to make public statements in support of its inherent strength, stuck notices on ATM counters - to arrest the damage. But it seems the drain of deposits and goodwill has been massive, or so it seems after the seriousness of purpose with which it is going after the offenders – that includes a Tirupur sub-broker of Motilal Oswal and a mass SMS portal and a free research site (with disabled stock tip links)!

Talk of Web 2.0 empowerment! Like guns, the crooks use it first… Email? Spammers run amok. Bulk SMS? It’s the fiefdom of hole-in-the-wall operators and pranksters. Now a small town sub-broker giving India’s second largest bank a run for its money - quite literally! Wish I could do something positive – say, build my business – by unleashing its power. But that I’ve found is not as easy. The crooks beat me by a wide margin! All that I could manage was to reduce my exposure to ICICI bank. May be silly. But, they say only the paranoid survive. Who is not afraid…?

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Parsing the crisis

T.T.Rammohan squeals in Business Standard

On risk management and quality of leveraged assets

“The top investment banks have vanished as a class [not] because they were highly leveraged: In financial institutions, leverage or the ratio of debt to total assets, can be misleading as a measure of financial risk. The management of asset risks is equally important. A financial institution can be highly leveraged but if its assets are of high quality or are highly diversified, the institution is not exposed to high risk….

Investment banks may have had a leverage of more than 20:1 but some high-profile banks in Europe today have even higher leverage. What counts is leverage after adjusting for the risks of various assets. The European banks in question would not be allowed to operate if their leverage was not in conformity with regulatory norms. ….The trouble with the investment banks was not so much leverage as poor asset quality and heavy dependence on short-term funds.”

On short selling

“Short-sellers were right on Lehman, so short-selling should not be banned: Yes, short-sellers were right in sensing that Lehman had more problems than it had disclosed. But, in times of crises, it makes sense to ban short-selling because a fall in share prices sets off a vicious spiral that pushes an institution quickly into bankruptcy. A fall in the value of equity causes leverage to rise, which causes the debt rating to fall. This, in turn, prompts demands for higher collateral, which forces distress sale of assets, which erodes equity value. Before you could say ‘Hank Paulson’, the firm is gone. In financial crises, as in times of war, the normal rules of information must stand suspended and this applies to price discovery [enabled] by short-sellers.”

Splendid. Wonder how well K.V.Kamath’s defense goes down with people!

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what it takes to discipline

So it takes huge 6.07% fall in quarterly profits to discover self discipline….
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K.V.Kamath on moderation

K.V.Kamath is not so much known for his wit as much he is for his aggressive growth strategies. But lately I think he seriously tries to humor people.

I was reading this. Here Kamath says "Systematic liquidity is comfortable. We will have to watch carefully before taking any decision to either raise or lower interest rates. Systematic demand is still slack; it does not warrant any tinkering in interest rates."

I often hear bankers saying “lower interest rates and they will come” about credit offtake. Kamath gave that chicken and egg story a spin on its head by saying just the reverse. He is also pinching on the reward points for his top of the line credit card customers (self a victim). Normally ICICI bank is one of the first banks to cut interest rates to grow its loan books. Perhaps he’s not his usual self these days after ICICI bank had to deal with its $100 million MTM provisioning woes on CDNs and CLOs.

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I say this "Mr.Kamat, all bad times do pass. This one too will". Hope he continues to be generous with his customers and be his normal self.

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