How ICICI's non-banking business portfolio contributes to its profits

Think ICICI and most times it is the country's biggest private bank alone that comes to mind. But the ICICI group is, in fact, a financial supermarket, offering the full range of financial services - life insurance, general insurance, private equity, mutual funds and securities. Set up between 1993 and 2000, these subsidiaries, however, were of little account even five years ago, contributing hardly anything to the group's bottom line. Instead, ICICI Bank often helped them stay afloat. Today, they provide 22 per cent of the total profit.

When Chanda Kochhar, 53, took over as CEO and Managing Director of ICICI Bank in May 2009, the global financial meltdown was at its worst. Every bank faced mounting non-performing assets and related problems. How Kochhar put ICICI Bank back on the growth path has been well documented, but the success of the once-struggling subsidiaries during her tenure is less known. Despite the persisting downturn, they have all put their worst behind them. "The non-banking subsidiaries have now moved from the investment phase to the growth phase," says Kochhar. "They are generating returns and giving back dividends to their parent."

Experts agree with her, maintaining that the culture of the group has changed. Under the redoubtable KV Kamath, Kochhar's predecessor, the culture - especially in the mid-2000s with the economy in high-growth mode - was entrepreneurial, geared towards aggressively generating more business. "Everybody was busy exploiting opportunities without focusing on profit or de-risking the business model," says a former ICICI official. But with the downturn, there was no option but to consolidate. Under Kochhar, the emphasis, both for the bank and the subsidiaries, has been on profitable growth, preservation of capital, use of technology for distribution, cross-selling and building domain expertise.

One vital step Kochhar took was to place handpicked individuals at the head of four of the five subsidiaries. (The exception was Nimesh Shah, 43, CEO and MD of ICICI Prudential AMC, who has held the position since July 2007.) Kochhar had no choice - there were a number of resignations after she succeeded Kamath, leaving at least a couple of the subsidiaries headless. Shikha Sharma, heading ICICI Prudential Life Insurance, and Renuka Ramnath, chief of ICICI Venture, both quit. About the same time, Subrata Mukherji retired from ICICI Securities, while Sandeep Bakhshi, who had built the general insurance business, returned to the bank. Kochar then made Bakhshi CEO and MD of ICICI Prudential Life Insurance, while Bhargav Dasgupta, Vishakha Mulye and Anup Bagchi took over in the same position at ICICI Lombard General Insurance, ICICI Venture and ICICI Securities, respectively. Barring Bakhshi and Bagchi, the others were hard core bankers with no experience at all in their new domains.

Wasn't Kochhar taking a big chance? "The culture and approach are common across the group," she says. "It's not very difficult for a person in one business to take charge of another." Bagchi of ICICI Securities adds that the bonding that already existed between the new heads - all of them having been colleagues under Kamath - made all the difference. "Relationships are not built on organisational structures alone," he adds. "Trust also develops when you have grown together."

This trust - higher than in earlier teams, according to the subsidiary CEOs - has led to better synergies. "The new leadership is probably one reason for the group synergy," says Kochhar. Having new team heads also enabled Kochhar to get a tighter grip on the subsidiaries, which may not have been possible had the earlier incumbents - some of whom were her seniors in the profession - remained. The current subsidiary chiefs, for instance, are all required to meet Kochhar for monthly reviews of how their businesses are doing. Finally, a new team made altering the business model of a subsidiary wherever required - to adapt to the changing environment - easier.

ICICI LOMBARD GENERAL INSURANCE

ICICI Lombard General Insurance has faced major challenges, incurring losses in 2010/11 and 2011/12. "This was mainly due to the Insurance Regulatory and Development Authority (IRDA) increasing the provisioning requirement," says Dasgupta, 48, MD and CEO since May 2009. Another crucial change was the de-tariffing of most general insurance products IRDA introduced - companies are free to decide their own premiums instead of the Tariff Advisory Committee doing so. "In the changed environment, we focused on building capabilities in risk management, especially underwriting skills," Dasgupta adds.

ICICI Lombard has also changed its business mix, the share of retail business increasing from 49 to 60 per cent, with growing emphasis on health and motor insurance. "We have consciously moved to a greater focus on personal lines than on corporate," says Dasgupta. Besides, specialty segments are being nurtured such as liability insurance, aviation insurance, credit insurance and weather insurance. "These businesses, which contributed eight per cent earlier, now bring in 14 per cent of the total premium," Dasgupta adds.

New ways of selling are very much on Dasgupta's mind. Direct online insurance sale, which does away with the traditional agent, has been a great success, with 46 per cent of ICICI Lombard's premium coming through this channel in 2013/14, compared to 32 per cent in 2008/09.

ICICI PRUDENTIAL LIFE INSURANCE

Just as IRDA's orders on increased provisioning affected the general insurance segment, its directives curbing unit-linked insurance plans (ULIPs) hit life insurance companies hard. ULIPs are essentially investment products which offer life insurance as well, and IRDA's orders, coupled with the sluggishness of the stock markets during the downturn, saw their popularity drop sharply. The ULIP share in the life insurance products' basket has fallen from 96 per cent in 2008/09 to 66.5 per cent at present.

Overall, life insurance has not grown at all in the last five years, but renewals of ICICI Prudential's existing policies - 70 per cent of its total premium in 2013/14 - have seen it generate steady profits. MD and CEO Bakhshi, 54, is clear that he does not need any more capital infusion from the bank. "We have generated surpluses over the years," he says. "Our solvency ratio is 350 per cent against 150 per cent mandated by IRDA. This will sustain future growth." (Solvency ratio is an index of the company's ability to meet its financial obligations.) ICICI Prudential has also seen great success in selling policies through ICICI Bank - 60 per cent of its fresh premium in 2013/14 came through that route. It is also the largest contributor to the ICICI Group's profits among the subsidiaries, Rs 1,567 crore in 2013/14.

ICICI PRUDENTIAL AMC

Fund house ICICI Prudential AMC has changed in three important ways. For one, it was earlier more focused on selling products, and relatively inconsistent in the returns it gave investors. It is now much more investor-oriented, with the products department a part of the investment department. For another, it is now much more process-driven than before, an orientation, insiders claim, Kochhar was particularly keen on.

"Fund management is not about star fund managers but having strong processes in place," says MD and CEO Shah. There are defined processes on every aspect of fund management - cash calls, portfolio construction, risk mitigation, portfolio review and monitoring. For a third, better known earlier for its expertise in fixed income management, the fund has since improved its equity products suite too, with equity market share of over 12 per cent. "We have beaten the benchmark equity indices in most of our schemes," says Shah.

The fund house runs two more verticals - portfolio management and international fund advisory services. "In the last five years, we have got funds from West Asia, Southeast Asia and Japan," says Shah.

ICICI VENTURE

When Vishakha Mulye took charge in April 2009, ICICI Venture, the group's private equity subsidiary, had only two verticals - PE and real estate. Mulye has added two more verticals - infrastructure and special situation fund (distressed assets). "Our vision is to become a multi-asset platform," she says. The last five years have been particularly difficult for PE, but Mulye has raised $1.4 billion across the four verticals during this period and now oversees a total of $2.5 billion. The fund has also returned an estimated $900 million to investors in the last five years, using an innovative mix of exits - strategic sales, promoter buybacks, sales to other PE players and initial public offerings.

Each vertical has a dedicated investment team. Still, profitability has been a struggle in depressed market conditions, with profits dropping from Rs 148 crore in 2008/09 to Rs 33 crore in 2013/14. Earlier this year, the company was even taken to court in Mauritius by a group of NRI investors who allegedly lost money on the real estate fund. ICICI Venture maintains PE as an asset class can never guarantee returns. But there is hope that with the equity market showing buoyancy this year, profits will rise. The asset portfolio may also see new verticals such as credit fund or PIPE (public investment in private equity) funds.

ICICI SECURITIES

There has been a complete shift in the business model of ICICI Securities. To reduce volatility, MD and CEO Anup Bagchi has expanded the focus from mostly brokerage and equity-linked business to cover distribution of financial products such as mutual funds, insurance, non-convertible debentures, fixed deposits and home loans as well. The organisation has also changed to accommodate the widened focus with senior lateral hires from both within the ICICI Group and outside. "This helped reduce the time to market," says Bagchi. "The same organisational structure cannot implement a different strategy." The fresh domain expertise it has inducted gives ICICI Securities access to more in depth knowledge and better ideas as well as new clients. The equity to non-equity share in the company's business is about 65:35. The investment banking business, which had been shifted to ICICI Bank in the heyday of mergers and acquisitions, has come back to the subsidiary.

LOOKING AHEAD

The subsidiaries are thus all sitting pretty. ICICI Lombard and ICICI Prudential are both leaders in their segments, while ICICI Prudential AMC is at No. 2, second only to HDFC MF in terms of assets under management. The synergy is apparent from ICICI Securities being the biggest non-banking distributor for ICICI Prudential AMC, while ICICI Securities is the largest distributor of home loans for ICICI Bank. But are the profits sustainable? Kochhar remains cautious. "The subsidiaries are in businesses which are very market dependent," she says. "Some volatility will happen because of the market."