Feb. 26 (Bloomberg) -- On a visit to an IndusInd Bank Ltd. branch in India’s Himalayan foothills, Romesh Sobti, who was considering taking the top job at the lender, recalls noticing “a little bit of sloth.” The sign at the entrance had burned-out light bulbs.
Amid the bad loans and low margins that Sobti discovered when he quit ABN Amro Bank NV’s local unit to become chief executive officer of the Indian lender in February 2008, spent light bulbs indicated that things needed to be put right, he said. Among his first tasks was an e-mail to get them fixed.
“You can’t have big ideas without seeing how they’re executed on the ground,” Sobti, 62, said in an interview at his Mumbai headquarters.
It was the beginning of a turnaround that has led to an almost 600 percent increase in the stock price, making it the best performer among the 14 companies on the BSE India Bankex Index, which climbed 110 percent in the same period. That’s made it a darling of Wall Street investors including New York-based BlackRock Inc., Templeton Asset Management Ltd. and private-equity firm General Atlantic LLC.
“If I look at what Sobti is doing, it’s a story of very solid and sustainable growth,” said Mumbai-based General Atlantic Managing Director Ranjit Pandit, who called IndusInd one of the “best-managed banks in the country” along with HDFC Bank Ltd.
Since Sobti took the helm, return on equity improved to 17.4 percent as of the end of December from 6.8 percent in March 2008, company filings show. The nonperforming-loan ratio has shrunk to 0.3 percent from 2.3 percent. He’s more than doubled the net interest margin, a measure of lending profitability, to 3.46 percent from 1.53 percent, according to the bank’s website.
More than 460 branches, up from 180 when Sobti came in, are drawing 55,000 new customers a month, compared with an average 25,000 monthly in 2011, he said.
That’s partly a result of bringing most of his team from Amsterdam-based ABN Amro in what may be the largest defection from a foreign bank in India, Sobti said. Nine of 13 members of his core management team left ABN Amro, where he had led Indian operations, to join him. In the level below, about 20 out of 45 came in, all bringing what Pandit calls “multinational banking DNA” with them.
“What we found was the bank was in need of restructuring, recapitalization, re-infrastructuring and re-talenting,” said Sobti, a 5-foot-10-inch golfer with a 12 handicap.
The newly assembled team gathered over morning newspapers in the conference room -- a daily practice that endures today -- and lunches in Sobti’s office, also still held daily, according to Sobti and confirmed by members of his staff.
On the table was a strategy to lower costs, raise capital and recover bad loans, including one for 1.5 billion rupees ($28 million) which Sobti will only say was to “a large player in the energy sector owned by billionaires.” Other lenders owed more than 100 billion rupees were seeking to partially recover their loans through a corporate debt-restructuring process involving a writedown. Sobti opted out.
“We wrote to all the lenders and asked them, ‘Why are you restructuring? Look at the Forbes list: They are billionaires,’” Sobti said. “We were a little tiny player, but it was a big amount for us. It was a killer.”
IndusInd negotiated directly and recovered its loan in full, Sobti said. The bank’s restructured debt -- which can involve a payment moratorium, longer maturity, lower principal or reduced interest rates -- fell to 0.26 percent of total loans as of Dec. 31, compared with 1.45 percent at ICICI Bank Ltd., the country’s largest private lender by assets.
“There was aggressive intervention to resolve old bad loans,” said Sobti.
In the first month, Sobti and his lieutenants traveled to all 180 bank branches within 15 days, giving local managers a docket with the bank’s strategic plan and an outline of his or her new role with responsibility for sales, operations, service, compliance, targets for the next 12 months and an outline of weekly and monthly reports due at headquarters.
“They were shocked,” Sobti recalled. “Of those 180 managers, less than 30 are with us now.”
A sense of taking “ownership and responsibility” was required, Sobti said, and not every manager felt up to the task. To compensate those who did, the bank started giving stock options all the way down to customer-service executives for the first time in its history. Currently about 600 of the more than 12,000 staff receive stock options.
Sobti attributes early achievements to “like-mindedness” among his team in setting out to achieve common goals for the bank, founded in 1994 by billionaire Srichand P. Hinduja, 77, the eldest of four Hinduja brothers who hold a less than 10 percent stake in the bank.
“Like-mindedness doesn’t mean they are ‘yes men,’” Sobti said. “They would have five different opinions.”
Suhail Chander, who heads corporate and commercial banking and came in with the ABN Amro group, recalls times when he and Sobti raised their voices over how to achieve an objective.
“By and large, we move in tandem,” Chander said. “On the major issues we don’t disagree usually. It’s the nitty-gritty on which we fight and shout at each other. But it doesn’t create ill will as our relationships are very long.”
Sobti said he faced skepticism from analysts and investors in the first 18 months over the quality of various loan categories, prompting him to start disclosing details of bad loans in each product segment.
“Given that the delivery was consistent and in line with what he was saying, which was the most important thing, that is ultimately what convinced us to invest,” said Pandit, who tracked the bank’s turnaround for almost a year before investing for Greenwich, Connecticut-based General Atlantic, which has a 4.42 percent stake.
Now, 45 analysts have a buy rating on the stock, and eight recommend holding it. The only three calls to sell the shares come from Brics Securities Ltd., Eva Dimensions LLC and Bank of America Corp.
One of the key risks is the possibility of an exit by top managers who joined from ABN Amro with Sobti, according to Barclays Plc’s analyst Anish Tawakley.
More than 90 percent of stock options held by the top five managers have already vested, and out of 13.4 million options given to the team in the last three years, only 170,000 options per person worth 17.2 million rupees remain to be vested in January 2014, he wrote in a note in April. Any change in the team could jeopardize the bank’s growth strategy, as their “expertise and experience have been integral to the bank’s success,” Tawakley wrote.
Foreign institutional investors’ stake in the lender has doubled to 45 percent as of Dec. 31, from 22 percent at the end of 2007, before Sobti came in, exchange filings show.
BlackRock, the world’s biggest asset manager, owns at least 2 percent of IndusInd through its DSP BlackRock India Investment funds as well as direct stakes, according to exchange filings. Templeton Asset Management, based in Singapore, holds a 1.4 percent stake.
On Feb. 13, India’s CNX Nifty Index, which tracks the 50 largest companies on the National Stock Exchange of India Ltd., said it will add IndusInd Bank. Joining the index means passively managed funds that buy and sell stocks to mirror the gauge are more likely to invest.
Arun Rajendran, a spokesman for DSP BlackRock, and Padmanaban Nair, a spokesman for Templeton, declined to comment on the stakes.
IndusInd Bank’s stock closed at 61.15 rupees on June 25, 2008, the day after Sobti’s first full quarter of earnings after coming in February of that year. The shares ended at 422.25 rupees on Feb. 26.
Sobti draws praise from competitors. Aditya Puri, CEO at Mumbai-based HDFC Bank, which as India’s largest bank by market valuation is almost seven times larger than IndusInd, calls Sobti “an old friend” who is “meticulous and honest,” though “not adventurous.”
IndusInd Bank trades at 20.3 times its estimated earnings on a standalone basis for the current financial year, making it the third-most-expensive lender after Kotak Mahindra Bank Ltd. and HDFC Bank, according to data compiled by Bloomberg.
Of the 40 listed lenders in India, 32 have more branches than IndusInd, which is dwarfed by the almost 14,570 outlets of State Bank of India, the nation’s largest. IndusInd is looking to open branches while it increases profit, Sobti said, with more than 230 outlets planned in addition to the current 461 over the next 18 months.
The challenge will be avoiding an erosion of profitability as it grows, according to Nilanjan Karfa, banking analyst at Mumbai-based Brics Securities. IndusInd’s new branches currently break even in less than a year, compared with 2.5 years on average for other banks. That could change if the bank grows too fast, he said.
“We fear there are natural limits to such efficiency, and the bank may face a scalability problem, with profitability peaking out over time,” said Karfa, who recommends investors sell the stock.
The bank’s dependence on commercial-vehicle financing is an area for concern when it comes to meeting growth targets, according to Vishal Narnolia, Mumbai-based banking analyst at SMC Global Securities Ltd.
“One-fourth of IndusInd’s loans are to finance commercial vehicle purchases,” he said in an interview. “With economic growth slowing and courts imposing mining bans in different parts of the country, commercial vehicle sales are slowing down, posing a downside risk to a 25 percent to 30 percent loan-growth target set by the lender.”
The Reserve Bank of India on Feb. 23 sought applications for new banking permits. Indian billionaires including Kumar Mangalam Birla and Anil Ambani have expressed interest in setting-up new banks. New entrants into the banking space will increase competition among lenders for market share in loans and deposits, Narnolia said.
The bank has yet to meet all the goals set out in the early days, Sobti said. Cost-to-income ratio, a measure of profitability, fell to 49 percent in December from 67 percent in March 2008. It’s still higher than Sobti would like.
“The cost-to-income ratios for the best banks are 45 percent,” he said.
The Hinduja family, which has a board seat occupied by Ajay, the son of 67-year-old Prakash Hinduja -- a Geneva-based brother -- isn’t concerned. Other family members control various companies of the Hinduja Group, including energy, transportation, finance, media, real estate and technology. IndusInd Bank isn’t considered part of the group.
“The bank has shown a degree of consistency in its profit growth, and that is probably why the market is responding to this,” Srichand Hinduja, who also serves as chairman of IndusInd International Holdings Ltd., the bank’s Mauritius-based holding company, said in an e-mail from his base in London. “As shareholders, we look for consistency more than rapid rise.”
The family chose Sobti because of his “experience and a track record that instilled confidence,” Hinduja said, adding that the family is “more than happy” with his results. “What we like most is that this management has focused on short- and medium-term delivery while investing for the future.”
The bank plans to add solar-panel-powered ATMs in rural areas and use the credit-card services networks, which IndusInd acquired from Deutsche Bank AG in 2011, to expand loan offerings and products including insurance, according to Sobti. And bank branches no longer have burned-out light bulbs.
“People sometimes call it micromanagement,” said Sobti, “but senior managers should be able to switch from macro to micro.”
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