When you say you’ll start at 4.30 pm you must start at 4.30 pm,” says Romesh Sobti, indicating that he’ll have to take a short break from his interaction with us to rush off for a webcast with the 24,000 employees of private sector lender IndusInd Bank. It’s the day after the first quarter results for FY17, and the bank which Sobti, 66, has led from the front for eight years has turned in yet another stellar performance. Loan growth is at 30 percent, fees have grown 28 percent, and the current account-savings account (CASA) ratio, a key metric, is at 34.4 percent. Profit after tax also grew strongly at 26 percent, with net non-performing assets (NPAs) at 0.38 percent.
“We will talk [during the webcast] about what happened in the last quarter, what the new initiatives are, what we see happening in the future. And then we will invariably talk about compliance. For 33 quarters I have talked of compliance. Stay within the rules of the land. Compliance has to be drilled in, indoctrinated,” Sobti, a 17-year ABN Amro Bank veteran, explains. For him, a successful strategy must entail that all employees of an organisation are on the same page. It is this belief in discipline and a strong performance culture that has led IndusInd—a private sector bank promoted by the Hindujas in 1994 and a marginal player for years—to become an investor favourite.
When Sobti, the managing director and CEO, took over the reins of IndusInd in February 2008 as the global financial crisis was breaking, the bank was seen as an impaired entity with very little going for it. It ended FY08 with a net profit of Rs 75 crore, net interest income (NII) of Rs 340 crore, return on assets (RoA) of 0.34 percent and net NPAs at 2.27 percent. By FY16, the bank’s net profit had soared to Rs 2,286 crore, with NII at Rs 4,516 crore and RoA at 1.91 percent, evidence of the effect Sobti and his team have had on the fortunes of the bank. And the market has rewarded IndusInd handsomely for the transformation: Between February 1, 2008 and July 11, 2016, its stock has soared from Rs 93.50 to a staggering Rs 1,127, a gain of 1,105 percent. For FY16, the bank, which now ranks among the country’s top six in the private sector, clocked revenues of Rs 7,813 crore and operating profits of Rs 4,141 crore.
Much of IndusInd’s success can be attributed to the manner in which Sobti—and the team he brought in from his erstwhile organisation ABN Amro Bank—put in place three-year planning cycles (PCs) and went about executing those plans with clockwork precision. “It’s a transition from a highly impaired bank, in terms of earnings profile and the quality of the book, to a status where we could have claims to some rankings on these scores,” says Sobti, dressed in a smart grey suit and natty green tie in his Mumbai office, typically seeking to underplay the success. “The journey was broken up into cycles of three years. We call them planning cycles. They give you focus.” So, from PC-1, which began in 2008, the bank is currently on the last lap of PC-3, which ends in FY17. While the first stage was about restoring profitability, health to the book, credibility and essentially setting out what the bank wanted to be, the second was about achieving scale. The third cycle was where market share was seen as a key objective.
“In the first three years, we had some tailwinds and also some headwinds. We rode both well. Re-talenting was also somewhat easy because we had the Lehman crisis and others were releasing talent,” Sobti explains. The growth story which Team Sobti laid out also attracted talent, as did a stock options plan. “We wanted to be a universal bank, focusing on distribution as a key area and building a liability-first franchise.” The fact that the plan was working was clear at the end of phase one itself: “We saw the sharpest increase in our key vectors of success. Net interest margin (NIM) rose [from 1.53 percent in FY08] to 3 percent and RoA rose [from 0.34 percent in FY08] to 1.5 percent, while cost-to-income declined from 73 percent to 50 percent,” Sobti recalls.
Sumant Kathpalia, 55, head of consumer banking at IndusInd, who joined the bank with Sobti from ABN Amro, says the key was to focus on different aspects of the business in the different planning cycles. “While PC-1 was about getting the financial vectors right, PC-2 was about introducing retail banking in a bigger way and getting into the credit cards business [which it did by buying Deutsche Bank’s cards business in 2011]. PC-3 was about becoming a full-blown consumer bank.”
Vishwavir Ahuja, who is MD and CEO of the private sector RBL Bank (formerly Ratnakar Bank) and has followed a similar career trajectory, taking charge of a small private sector lender after a long and successful stint at Bank of America, says Sobti deserves the “highest respect and regard for being a mature businessman”.
“He is a seasoned banker, having cut his teeth at SBI and then through stints at Grindlays and ABN Amro. But at the same time, he is a true leader, a great listener and excellent at managing people. He is clear in his thinking and communicates clearly,” says Ahuja, who knows Sobti since 1983 and meets him regularly at social dos. “Thoughts like retirement cannot be associated with him. He is extremely fit, and when he’s not playing golf, you’ll see him walking,” he says. “He’s unobtrusive in the manner in which he drives people. He’s also very helpful. When I was taking over at RBL, he helped me very much. I see him as a mentor.”
Ahuja also says while other CEOs could have been overwhelmed by a promoter group like the Hindujas, that would never be the case for someone like Sobti who has the confidence of the promoters. “They have always been very supportive in all our plans,” Sobti stresses.
Cycle 4: A Sneak Peek
For PC-4, Sobti, the meticulous planner, has some key elements to play with. In a presentation made on May 26, 2016, called ‘A Glimpse into Planning Cycle 4’ at a Morgan Stanley conference, Sobti outlined four areas—rural banking, off balance sheet, digitisation and niche portfolios—as the likely focus for that period. Each of these themes, he says, can contribute 10-15 percent to the bank’s profits in that cycle. While rural banking and microfinance mesh well, future growth will be driven by higher penetration in rural India. Technology will lower costs of servicing and there will be a large opportunity for banks to cross-sell savings accounts, remittances, benefit transfers and insurance.
On the digital side, the bank will partner with existing players wherever possible to generate maximum returns as also with payment banks, aggregators and wallet companies. Earlier this year, it partnered with online payment solution firm PayU India to enhance the digital experience for customers by bringing the full suite of consumer banking products online and powering them through payment innovations and online ecosystems enabled by PayU India. A tieup with Paytm is also on the anvil.
“All this is playing out [but] none will work on its own,” Sobti says of digitisation. “Payment banks want collaboration; they have to sell products other than payment products. Banks want it as well. The digital ecology has many players who have to collaborate. Banks, payment banks, aggregators, the existing big payment players like Mastercard and Visa and even the fintech companies— all will collaborate. Success will come out of collaborations.” And along with digital will be the continuing hunt for profitable portfolios like the ones the bank picked up from Deutsche and ABN Amro.
So, does IndusInd favour portfolio acquisitions to bank buyouts?
“We will be there if a bank is available. But the universe of banks available is so minute. The last one was the Kotak–ING deal. So I am saying, let’s also look at an alternative strategy like what we did for credit cards and gems and jewellery,” he says. “You can stack up all this in a way that gives you inorganic growth without having to acquire a bank. But we won’t acquire for the sake of acquiring unless it gives me that 3D benefit.”
Having seen almost three full planning cycles and tasted success, what, then, does Sobti see as the definitive DNA of IndusInd Bank? “I can’t point to a thing,” he says candidly. “But I think it’s about a strong performance culture and one of delivery. It’s also about having a clear strategy. Strategise once, execute daily. Execution plans take up 30 pages, strategy takes up five. You can say our DNA is diversified,” he says with a laugh. That’s another play with D right there.