Mumbai: The Hongkong and Shanghai Banking Corp. Ltd (HSBC) is targeting $1 billion (Rs4,520 crore) profit before tax from India, up from $769 million in 2010, and wants to see the country move up the ladder, from seventh largest operations to fifth, Stuart T. Gulliver, 51, group chief executive officer of HSBC Holdings Plc and chairman of the banking corporation told Mint in an interview on Wednesday.
In his first visit to India since he took over the new assignment, Gulliver said the group will continue to invest in India, an “incredibly important” country and one of the three largest Asian markets for the bank.
HSBC is also willing to locally incorporate, something which the Indian banking regulator is insisting on in its draft guidelines, released recently, on foreign banks’ India play. But Gulliver is noncommittal about whether the global entity will go for a local listing or whether the locally incorporated bank will list on domestic bourses in due course.
He also admitted that HSBC has not been able to complete the purchase of Royal Bank of Scotland’s (RBS) retail banking business as it wants to buy the assets and branches while RBS retains its banking licence—a complex deal for which there is no precedent in India.
“We are absolutely keen to do this, but it has run into some regulatory and legal headwinds simply because there is no precedent... The RBI (Reserve Bank of India) is helping us with the process and we remain very keen to close it,” Gulliver said. Edited excerpts:
This is your first visit after you took over the new responsibility. What brings you here?
We’ve been in India since 1853 when Mercantile Bank first opened. I have been coming to India since 1980. This is an incredibly important country. Its economic growth presents huge opportunities to a bank such as HSBC and I wanted to visit deliberately within the first 60 days (of becoming the chief executive officer) to demonstrate to my colleagues here in India and to government officials and to our clients the importance that I attach (to) India.
HSBC’s profit from India last year was highest in its history. Any special focus on this geography?
One of the frustrations that foreign bankers have in India is that it’s very difficult to make inorganic investments here. One needs to continue to invest directly into the Indian market by providing additional capital, additional funding and giving the guys here the opportunity to invest through expenditure limits and the capacity to recruit more people.
I would like to think that although it was a record growth last year there’s still further growth ahead of us and I have been pushing Naina (Lal Kidwai, group general manager and country head, HSBC India) and Stuart (Davis, HSBC India chief executive officer) to aspire towards a target of $1 billion profit before tax in India. We haven’t set a specific time frame for this, but we have ambition to continue to grow our Indian business. This is an incredibly important country and that’s why I am here. We employ about 34,000 people here.
Its had the seventh largest profit...
Yes, in 2010, it was the seventh largest profit before tax of the group and in the Asia-Pacific region it was the third largest behind Hong Kong and China. I’d like India in the top five of the group and I think it logically will remain in the top three in Asia.
You spoke about the limited opportunities in terms of inorganic growth. Tell us what’s happening to your plans to buy RBS’ assets?
It has become a complicated transaction in the sense that we are looking to take the branches and the retail banking business, but RBS will continue running its global banking and markets business. What we have is a transaction for which there is no precedent because RBS keeps the banking licence and we acquire the business. The separation of the business and the banking licence is without precedent.
We are getting a lot of support and help from the authorities here to find our way through a transaction which is without legislative precedent. We are absolutely keen to do this, but it’s run into some regulatory and legal headwinds simply because there is no precedent.
If we were acquiring all of RBS’ business they could extinguish one banking licence and it would have been very simple. But because they are keeping one part of their business and we are buying part of it, it has become tricky from a regulatory point of view. But there is no push back or lack of appetite from our part. RBI is helping us with the process and we remain very keen to close it.
So the branches are the key?
Of course, we want the branches. It’s taken us from 1853 to now to get just 50 branches. It’s quite a slow process. The chance of getting RBS’ 22 branches is very attractive to us.
If you are willing to go to unbanked areas, RBI will probably be happy to allow you as many branches as you want.
Once you get into tier V and VI areas, it’s unlikely to be commercially viable for a bank such as ourselves. If you are looking at tier III and IV cities, it is viable, but you got to separate the RBS transaction from the specific issue because that issue was financial inclusion, which is a broader issue, and I think we are very consciously aware of our social responsibilities... We can reach further down than Mumbai and Delhi, but probably reaching into the very rural areas we wouldn’t have a compelling proposition that would actually be of appeal to the clients.
RBI has released its guidelines, which allow foreign banks a larger role with a caveat that they would need to locally incorporate themselves.
We studied RBI’s propositions quite carefully and we are very open to the idea of a wholly-owned subsidiary in India. Part of the thing RBI is doing is to address the recovery and resolution issues that all central banks had to confront post the financial crisis. What happens if there is another financial crisis and a major international bank gets into difficulty? How am I within India going to resolve that company and protect myself and my own depositors?
One of ways to do that is to make foreign banks create subsidiaries with separate capital, separate boards, separate non-executive directors, separate liquidity. That is the best way for individual countries to protect themselves. We already have subsidiaries in a number of countries around the world in the UK, France, Malaysia, China and Australia. We are quite comfortable with the notion.
The opportunity and upside appears mostly through the tax environment and corporate tax which is attractive to us.
There is nothing negative about it?
I really don’t think that being a wholly-owned subsidiary creates a disadvantage for us. There’s some small technical points around the very first creation of a subsidiary from branch structure and capital gains.
Will local incorporation be followed by local listing?
There is one foreign bank, which has listed its parent company (Standard Chartered Bank). If the regulatory authorities ask us to list, do we list the subsidiary or the parent company? We need to see what’s the advantage in each of them as we wouldn’t want to confuse the equity market.
As a starting point, I am very bullish on India—I like to own 100% of my subsidiary. However, if it becomes a regulatory requirement, we will need to dilute. There are several precedents. We own 40% of our bank in Saudi Arabia, 80% in Germany and 63% in Hong Kong— there are several examples where we do not own 100%.
If the Indian government decides that they need us to have a local partner, then we will need to work out what’s the advantage to us because I have got shareholders and I can’t give up their share in the Indian business. So, we will need to be able to make the case, for example, by getting 500 branches—otherwise it becomes hard for me to justify.
Given your investment banking background, do we see an extra emphasis on i-banking in India?
You will see continued emphasis on global banking and markets in India because it is a business that we build successfully; we need to continue to build our equity platform here. I think our foreign exchange, interest rate and bond platforms are very strong and we also will continue to invest in the M&A (merger and acquisition) advisory side of our business as well—so global banking business will remain a key focus.
What I am not going to do with the group is to change the mix and favour global banking and markets. I want to continue to run a universal bank, which is diversified by customer group and geography. I think that’s what gives us financial strength and is one of the reasons why HSBC during the financial crisis took no equity and no debt from any government across the world. So, I am not going to shift the company to being dominated by investment banking even though that’s where I have spent 30 years.
Any impact of what’s happening in Japan on HSBC?
We have been in Japan since 1865-66. Clearly this has had an impact on our business there, but actually P&L (profit and loss) impact on the group overall is quite modest because the firm made $19 billion profit before tax last year and our Japanese operations contributes only $200 million. So, it’s not a large financial risk to us.
Can you list the challenges in India?
The economic challenge here will be mostly about inflation and energy prices. If we do have sustained high oil prices because of what is happening in Bahrain and Libya and indeed what I imagine will be substitution of nuclear power with natural gas-based power in Japan and possibly other countries then the energy price will feed through, slow your GDP (gross domestic product growth). The recent financial crisis has taught a lot of people that foreign firms often can’t be relied on when the going gets tough and actually (what) you need is a few banks that are tested over decades and then you know that even if the difficulty comes they won’t suddenly pull away. You also need a few banks that are financially strong. We will face competition from the other guys coming in, but I think we and a couple of other foreign banks should be able to keep our market share.