The Kamath ICICI Bank has to watch out for

He calls himself the "navigator". The vehicle, he says, is ready, the co-travellers are on board and the destination is predetermined. "I only look at the book and drive," he grins. The book Kasargod Ramachandra Kamath is referring to is that of Punjab National Bank (PNB), till recently India's third-largest bank, after the State Bank of India (SBI) and ICICI Bank.

If Kamath—who took over as Chairman and Managing Director of PNB in October last year and, at 54, is the youngest chief of a public sector bank (PSB)—has his way, he would like to see that book grow 20-25 per cent over the next three years. By 2013, he aims to drive PNB to a total business (that is, deposits plus advances) of Rs 10,00,000 crore (ten lakh crore). SBI, as of 2009-10, had a business worth Rs 14,36,020 crore.

The navigator has made good progress since taking over and, by March 31, 2010, PNB had driven past the former #2, ICICI Bank—at least on the total banking business front. In many ways, Kamath finds himself in a position that's not too different from the one his namesake Kundapur Vaman Kamath was, early in the decade. Just as K.V. Kamath, as Managing Director and CEO of ICICI Bank (he's now Non Executive Chairman) was gunning for growth, Punjab National Bank's Kamath, too, is looking to build volumes and gain in size.

"We will definitely go after it (growth)," avers Kamath. But he's quick to add: "We will not sacrifice profitability just to reach some number."

So how significant is PNB's lead of a little over Rs 52,000 crore in total business? Kamath is not celebrating publicly but it's clear that the #2 position means a lot for him and the bank. "I am very much excited by our performance rather than by comparisons," says Kamath, who was Chairman and MD of Allahabad Bank before he took over at PNB.

The #2 position means a lot to ICICI Bank, too — which is why it refuses to accept that it's been relegated to third spot. The largest private sector bank, which has 48-year-old Chanda Kochhar at the helm, was quick to put out a terse reply to challenge PNB's claim. "ICICI Bank continues to be the second-largest bank in the country by assets," says a company spokesperson, adding that ranking by assets (which, for a bank, is mostly the money it has lent out) than by total business makes more sense in today's business environment.

The bank refused to participate in this feature.

For PNB, second place is a place it's enjoyed for most of the 30 years of its existence post-nationalisation. Until October 24 , 2001 when ICICI Bank, then a fledgling private sector bank, merged ICICI, the gigantic development financial institution, into it.

For the next two years (2002 and 2003), PNB managed to keep a nose-length ahead on the business front. But, by 2005, fuelled by its CEO's growth ambitions in the consumer banking arena, ICICI Bank cut loose to break away from the Delhi-headquartered bank (with a total business of Rs 1.91 lakh crore against PNB's Rs 1.63 lakh crore). The gap kept growing, and was the widest in 2008, when ICICI Bank had a book of Rs 4.7 lakh crore against PNB's Rs 2.86 crore.

PNB tried plenty to catch up. In 2003, the 24th chairman of the bank, S.S Kohli, acquired one of Kerala's old private sector banks, Nedungadi Bank. More recently, PNB also courted Delhi-based development financial institution IFCI for a merger, but that didn't work out.

If PNB has been able to come close to ICICI Bank on the business side, that's because its phenomenal growth push in the past two years coincided with the global credit crisis that compelled ICICI Bank to withdraw into consolidation mode by shrinking its balance sheet. Even as PNB's business grew by 52 per cent over the past two years, ICICI Bank's shrunk by 18 per cent as it began reducing its exposure to unsecured loans and credit cards, two areas where non-performing assets were rising.

Critics of PNB love to point out that its sudden emergence is largely because of the flight of deposits as well as retail lending from private sector banks (which charge, or at least are perceived to charge, higher interest rates) to public sector banks (PSBs) during the financial crisis. The advocates of PSBs, however, counter that a bank's fundamental objective is to provide safety and security to depositors, and if the PSBs have succeeded in building such an image, they're obviously doing something right.

The Assets Debate: Who is the Real #2?
On the assets front, ICICI Bank is still comfortably ahead (see graphic on left), although here too, the past two years have seen a de-growth of 10 per cent, against a smart 50 per cent spurt in the assets of PNB. In the yearended March 31, 2010, Punjab National Bank's total assets grew by a snappy 20 per cent to Rs 2,96,633 crore. ICICI Bank saw a deceleration of close to four per cent to Rs 3,63,400 crore over the same period.

What should help ICICI CEO Kochhar, though, is the recently-announced merger with Bank of Rajasthan, whose 463 branches can be used to help ICICI Bank increase its share of current account, savings account (CASA) deposits, which are lower-cost deposits (in contrast to higher-cost bulk deposits). On the business front too, the amalgamation of Bank of Rajasthan will bring a cool Rs 23,000 crore into the ICICI Bank kitty.

So, to get back to the argument, who is the real #2? Or, rather, should it be total business, or total assets, that determines the winner? Or should it be some other parameters, like market value, total revenues, or net profits, or a combination of all these?

To be sure, it's pretty much a mixed bag when you bring in other parameters. Consider top line, for instance, where ICICI Bank is ahead by some Rs 4,000 crore, at Rs 25,706 crore. In terms of absolute net profits too, it pips PNB at the post, with a bottom line of a little over Rs 4,000 crore (PNB's net profit is lower by around Rs 100 crore).

Sheer profitability, however, is a different story, with PNB's net interest margin, or NIM, at an impressive 3.5 per cent. The norm for NIM—an indicator of how profitable a bank is—for Indian banks is 2.0-2.5 per cent, and ICICI Bank's NIM is closer to that norm, at 2.6 per cent. On the efficiency front, too, PNB emerges trumps with one of the lowest cost to income ratios of just under 40 per cent (the corresponding figure for ICICI Bank is 42 per cent).

In terms of returns to long-term investors, PNB is the winner, with the stock appreciating 195 per cent over the past five years. ICICI Bank's stock gained 95 per cent over the same period. PNB's per share earnings are also distinctly superior to those of ICICI Bank (Rs 144 as against Rs 36).

From the customer point of view, PNB has the second-largest network in the country, with 4,670 branches, more than double ICICI Bank's reach. Of course, ICICI Bank will gain some more branches once the merger with Bank of Rajasthan is formalised and it also reaches out to more customers via the Internet than PNB does. The comparisons can go on and on, but may be a bit futile after a point.

That's because at a fundamental level, ICICI Bank and PNB are two very different banks. ICICI Bank has positioned itself has a universal bank with arms that straddle insurance (life and non-life), mutual funds, private equity and securities. PNB, on the other hand, is virtually a pure banking play that revolves around corporate banking.

ICICI Bank, which is just 16-years-young, has for most of its life had an urban focus with the target client being the upwardly mobile cityslicker. PNB, like any true public sector bank, has had a semi-urban and rural focus, with farmers and lower income groups being key customer bases.

Both banks have carved out dissimilar growth paths. ICICI Bank is largely a story of inorganic growth, right from the merger of ICICI Ltd in 2001, to the acquisitions of Bank of Madura, Sangli Bank and last fortnight Bank of Rajasthan. PNB, for its part, is a virtual pure organic play, with small-sized Negungadi Bank being its only acquisition. Also, ICICI Bank has been conscious of developing an international profile, with 25 per cent of its book coming from overseas markets.

For PNB, overseas operations account for less than three per cent of the book. "There is a fundamental difference between a private sector bank and a public sector bank, the latter perhaps playing a larger role on fronts like priority sector lending," says Vinod Wadhwani, Director, Ambit Corporate Finance Ltd.

Who is the real #2, therefore, depends on which lens you look through. Says D. Ravishankar, Director at credit ratings agency Brickworks Ratings India Ltd: "If you consider both banks as pure banking plays, PNB scores because of the higher quantum of its total business." And then there's the other perspective: "In a more mature universal banking model, one can argue that total business may have limited relevance and total assets could be a more correct depiction of the size of the bank," points out Wadhwani.

Even if total business is the way to go, one swallow does not make a summer; PNB will have to hang on to its lead in the years to come, even as it goes after ICICI Bank on the assets front, too. ICICI Bank's Kochhar has projected a 15-20 per cent growth in assets the current year, which, if achieved, may keep it ahead of PNB some more time.

But then, the beauty about rankings is that they're rarely permanent. Globally, for instance, the world's largest bank in terms of assets, Royal Bank of Scotland, is threatened by BNP Paribas.

Similarly, the Chinese bank Industrial & Commercial Bank of China has displaced marquee names like Citi, JP Morgan and Bank of America in terms of market capitalisation. Whichever parameter you use, at the end of the day it's performance that matters—and that takes care of the rankings and comparisons.