Mumbai: Germany’s largest lender, Deutsche Bank AG, aims to increase the share of investment banking and consumer finance in its India revenue pie to as much as half from one-third.
At a time when most of its peers have exited the unsecured personal loans business and moved towards secured loans such as mortgages, Deutsche Bank is making fresh investments in the consumer finance business.
Greater share: Deutsche Bank aims to earn over half of its India revenue from greenfield businesses, says MD and CEO Gunit Chadha. Abhijit Bhatlekar / Mint
The bank’s retail business, including asset management and wealth management, makes up 20% of its India franchise. Between asset and wealth management, it has close to $5 billion (around Rs23,200 crore) of customer assets in India. The onshore equity markets business and investment banking contribute 10-15% of revenue.
“Over the last five years, Deutsche Bank built several greenfield businesses in India—onshore investment banking, equity broking, asset management and consumer banking,” said Gunit Chadha, managing director and chief executive officer, India, Deutsche Bank. “Today these contribute approximately one-third of Deutsche Bank India revenues, with clear ambitions to take them to over 50%.’’ He did not mention any time frame for this.
According to Chadha, the only constraint is the scalability of its branch network. The bank has 13 branches and plans to double its network in the next few years, provided the banking regulator gives its nod.
“In the consumer banking space, foreign banks are at a disadvantage when it comes to reach, as the Reserve Bank of India (RBI) annually sanctions around 12 branches to all foreign banks,” said Saurabh Tripathi, partner and director at the Boston Consulting Group.
The bank’s net profit grew 11% to Rs430 crore for the year ended March. Total assets of the bank stood at Rs24,954 crore.
Citibank NA is the largest foreign bank in India with an asset base of Rs1.05 trillion at the end of March. It posted a net profit of Rs2,173 crore for the year. Standard Chartered Plc’s local operations, with Rs97,492.2 crore of assets, expanded its net profit 12% to Rs1,907 crore. HSBC Holdings Plc’s Indian unit, with an asset base of Rs94,620 crore, earned a net profit of Rs1,291 crore.
Foreign banks in India account for around 7% of banking assets. RBI had announced in 2004 that it would reconsider the role of foreign banks in India and many in the industry were expecting a larger play of overseas lenders by 2009, but the central bank has not made any change in the norms in the wake of the global financial meltdown.
Deutsche Bank is committed to expanding its retail business in India, putting to rest speculation about the lender exiting the segment. The bank has roughly half a million customers between its credit cards and branch banking businesses.
It is sourcing new home loans and equally reopening doors on personal loans and branch banking, which is the basis of mobilization of current and savings accounts and wealth management.
The bank runs a retail book of $300-400 million (around Rs1,395-1,860 crore). On the assets side, secured mortgages and unsecured personal loans account for half and half.
“Within retail banking, our mortgage business is already profitable, branch banking is breaking even, and while the personal loans business bore the brunt of industry delinquencies, it is on the right trajectory since mid-2009 into 2010,” Chadha said. “We are on the path towards profitability in our retail business in India.’’
While a few other foreign lenders, led by Citi, are going slow on retail loans, Deutsche Bank has a different strategy. “It is very easy to sit back and extrapolate the future based on the most recent past, which is what some would do, for example, to deduce that mortgages are profitable over the long term and personal loans are value destroying. While the future should take cues from the most recent past, it cannot be the most decisive factor in the choice of a bank’s future business strategy,” he said.
“At a time when many players are withdrawing from the unsecured place and if you are the single player, you tend to gain as you can pick better,” Tripathi pointed out.
The lender, which has 8,000 employees in India, has emerged stronger from the global financial crisis, said Chadha. The bank has a capital adequacy ratio, or ratio of capital to risk-weighted assets, of about 17% and is willing to pump in more capital if required.
In 2008-09, Deutsche Bank infused Rs324 crore of core capital, taking the aggregate capital in its Indian branches to over Rs4,300 crore.
The bank also plans to increase its headcount in India, and rewards are linked to performance.
“One has to recognize that globally, and rightly so, there is a lot of pressure on the basis of compensation. What is happening globally is also happening in India now—the performance benchmarks on which talent gets rewarded are not only based on profitability but also on risk taken and capital,’’ he said.
According to Chadha, at the junior- and middle-management levels, fixed pay is going up and the bonus is coming down, and at the senior level, a large proportion—about three-fourths of the compensation package—is being given as deferred payment.