Mumbai: Their parents are in deep trouble, with respective governments owning significant stakes in many, courtesy bailout packages, and as a result, the local operations of foreign banks may have to curb growth aspirations, even consider fire sales, say analysts.
On Wednesday, The Economic Times reported, citing unnamed sources, that Royal Bank of Scotland Group Plc. (RBS) may consider selling its Indian assets.
RBS, now 70% owned by the UK government, announced in January that it had lost up to £28 billion (about Rs2 trillion today) in 2008.
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The India chief executives of most foreign banks say capital is not a concern and that their growth will be fuelled by profits from the local operations that they will retain, but the numbers show that in the past year, their business here has slowed.
The growth, in terms of loans issued, for 30 foreign banks slowed to 16.9% in the year to 2 January, against 30.7% a year ago, according to Reserve Bank of India (RBI) data. And their year-on-year deposit growth shrunk to 12.1%, from 34.1%.
In contrast, the growth of public sector banks, in terms of loans issued, was 28.6%, up from 19.8%, and their deposit growth remained stable at 24.2%, RBI said.
In the year ended 31 March, foreign banks accounted for about 7.5% of banking assets in India. A slowdown in growth will see them lose market share, though all of them consider India as a growth market.
RBS led a consortium that acquired for €71 billion (Rs4.5 trillion today) Dutch bank ABN Amro Bank NV in 2007.
Citigroup Inc. reported a $8.29 billion (Rs40,372 crore today) loss in the fourth quarter (Q4) of 2008. Deutsche Bank AG expects to make an estimated loss of €4.8 billion in Q4 of last year. The German bank’s Q4 and full year earnings will be released later this week.
Among other foreign banks operating in India, Bank of America Corp. has posted a net loss of $1.79 billion in Q4 of 2008, but ended the year with a profit of $4.01 billion.
HSBC Holdings Plc.’s profit before tax was down 28% in the first half of 2008. It will announce its annual earnings in the first week March. Standard Chartered Bank Plc., which made profits in the first half of 2008, will announce its annual earnings at around the same time.
Another British bank, Barclays Plc., has stuck to its forecast that its 2008 pretax profit will be “well ahead” of £5.3 billion, but international rating agency Moody’s Investors Service recently cut the long-term ratings on the lender by two notches on expectation that losses would rise due to credit related write-downs and rising impairments.
Anticipating pressure on capital, foreign banks have sought RBI’s permission to tap the local debt market for their so-called tier II capital, in line with Indian banks. Tier II capital consists of hybrid debt-equity instruments and long-term debt, while tier I is the core capital—a bank’s equity and reserves.
“Currently, foreign banks raise long-term debt in foreign currency from their headquarters. We have asked RBI if this restriction can be withdrawn and if we can access the local market,” said the chief of a foreign bank, who spoke on condition of anonymity.
Currently, banks are required to maintain 9% capital adequacy. In other words, for every Rs100 worth of loans they issue, they need Rs9 as capital. Failure to raise capital will force banks to shrink their balance sheets.
That’s not going to happen, say some foreign bank executives. “We have seen no evidence of less commitment to India. Citi is not shrinking its balance sheet in India,” said Mark Robinson, CEO of Citibank NA, India. “The biggest source of capital for us is our local earnings. As an Indian bank, we make money here and reinvest here.”
Neeraj Swaroop, regional CEO of Standard Chartered Bank (India and South Asia), also said his bank is not struggling for capital. “We have not had any issues with our capital. In 2008, the bank injected $500 million as capital in Indian operations, in addition to retaining some of our profits.”
“The Indian market holds some of the highest potential in our footprint and we remain committed to supporting the business through capital injection as required by the business,” he added.
Gunit Chadha, CEO of Deutsche Bank India, claimed to be among the most capitalized foreign banks in the country, said, “We have over Rs6,000 crore of invested capital, of which Rs325 crore came in 2008-09 and over Rs2,000 crore came in 2007-08; investments made even during the crisis.”
“We continue to grow our client credit book, but given the stresses which are building in corporate balance sheets and consumer portfolios, we are near-term cautious,” he added.
According to Chadha, the bank’s wholly owned non-banking finance arm is well capitalized, and the bank has issued corporate loans through this arm. “We have not yet branched out to using the non-banking finance arm to conduct consumer finance, which many of our peers have done. The non-banking finance company is well capitalized for future growth, with a capital base close to Rs750 crore.”
HSBC and RBS declined comment.
Some of these banks have been bailed out by their respective governments, which now have a significant stake in them, and questions have been raised on the possible impact nationalization would have on their business plans.
“It is still early days, but it’s so obvious that when a country is infusing its taxpayers’ money in a financial institution, the governments and public will want these banks to play a role in the national economy,” said a banking analyst with a foreign brokerage firm, who asked not to be identified because he is not authorized to speak to the media.
According to Roger Lawson, communications director at the United Kingdom Shareholders’ Association, an independent organization that represents the interests of private shareholders in the UK, the British government will have a role to play in the lending policies of UK-based banks, “particularly those such as Royal Bank of Scotland (where it has 70% of the equity now) and others where they have interests, even minority ones”.
“I can also see such banks reducing their investment in foreign operations (for example, RBS sold part of its stake in Bank of China Ltd recently). They are tending to sell off smaller, peripheral operations so as to raise cash, and I don’t see any of them expanding their overseas operations substantially in the near future,” Lawson said in an email.
Most foreign banks operating in India have registered handsome growth in profits in the past year.
For instance, HSBC India’s net profit for the year ended 31 March increased to Rs1,192 crore, from Rs846 crore in the previous year. Standard Chartered Bank’s net profit for the year ended 31 March increased to Rs1,706.23 crore, against Rs1,364.31 crore in the previous year. Citibank India posted a profit of Rs1,804.26 crore in 2008, up from Rs900 crore in 2007 and Deutsche Bank’s profit in 2008 rose 95% to Rs789 crore.
The US government has so far infused around $2 trillion into its banking system and the British government has unveiled two rescue packages worth £800 billion since October.
Graphics by Sandeep Bhatnagar / Mint