What do Citibank India head Sanjay Nayar, HSBC India CEO Naina Lal Kidwai and ABN Amro country executive in India Romesh Sobti have in common? All of them have set their eyes on domestic banks and, given a choice, they will acquire the target banks before the regulator says, “go”. They have the money, aggression and willingness to grow in a market that promises big margin business.
Banking experts have no crystal ball to see the future landscape of the industry, but agree on the main ingredients: domestic mergers, more investment from foreign banks, some foreign takeovers of private banks and some consensual nuptials if the regulator opens up the sector. But the experts and foreign banks disagree on when, if and how much the regulator will do to welcome a greater foreign presence.
Many of the big foreign banks had come to India in some form or the other as far back as a century and a half ago, but it was only in 2005 that the Reserve Bank of India (RBI) drew the first clear roadmap on how they could operate here. And RBI promised to re-evaluate these rules four years later.
In the meantime, Indian banks were given time to strengthen their balance sheets, consolidate and overall become more robust, so that they could compete. The regulator, did not however, promise that it would take away the ring of protection around local players in April 2009, when the norms are due to be reviewed. Foreign banks in India are hoping and planning, but do not expect any major changes in 2009.
Standard Chartered in India is watching the space closely. “We feel constrained with the number of branches that we have,” says Neeraj Swaroop, head of Standard Chartered Bank in India. “Assuming that the Reserve Bank of India allows foreign banks to acquire, we will be interested, depending on the opportunities available and their pricing.”
Experts say, that before 2009, public sector banks would like to join forces, and note that finance minister P. Chidambaram has supported the idea. Yet public sector banks, like it or not, are unlikely to be taken over by foreign banks if the policy opens up in 2009, even though many are weak and ripe for a strong partner. It is the private sector banks that would be targeted.
“Private sector banks, although more expensive, would be attractive targets for foreign banks,” says George Chrysaphinis, a financial institutions analyst with rating agency Moody’s Investors Service. “Public sector banks have significant legacy issues, namely huge ageing workforces, inefficient networks and poor working practices.”
Sanjay Aggarwal, national industry director for financial services at KPMG India Pvt. Ltd says, “They (private sector banks) are not up to speed in terms of computerization and profitability.”
Also, private banks in India are relatively affordable to foreign banks. India’s largest bank, ICICI Bank, has a market capitalization of about Rs86,000 crore while Kotak Mahindra, for example, has over Rs20,000 crore. Citigroup’s market cap is over $271 billion (about Rs11.1 trillion). “In the international context, Indian banks are still very small,” says Robin Roy, associate director at PricewaterhouseCoopers Pvt. Ltd.
Banking analysts say foreign banks will be taking all this information into consideration as they form their strategies between now and 2009. They will be deciding whether to compete with Indian banks on volume, or go in for niche services as they have been, recently. They will be thinking about whether to expand geographically—maybe into smaller cities—or in their products and services, including offerings to small- and medium-enterprise (SME) clients. Roy says they are looking forward to newer models for SMEs and are expecting a relaxation on mandated lending. There may also be early meetings with private banks and investment bankers as some foreign banks scout the landscape for strong potential partners and acquisition targets. Roy says that clearly some will grow on their own, while others will look for ways to expand quickly.
Despite all these possibilities, experts and foreign banks do not expect much to happen in 2009. “I don’t think 2009 is going to be a magic year where, suddenly, foreign banks can come in, start acquiring banks and become very large, but they will have a much more liberalized regime than what it is right now,” says H. N. Sinor, chief executive officer of Indian Banks’ Association (IBA), a premier banker body in the country.
“But, still, it will take some time before they can have a complete free play in the system.” Aggarwal of KPMG India notes that 2009 is also an election year, and says, “I think the issue will get evaluated once the political climate is clear.” The foreign banks also agree that the political scenario could dominate the central bank’s decision.
“We are not expecting any big bang to happen in 2009 itself,” says Romesh Sobti, country head for ABN Amro bank. “There may be a gradual change in ownership, but that will take a while. Till then, we will have to make smart use of our resources.”
Others like Sanjay Nayar, chief of Citibank in India, also thinks that 2009 may not be a year of transformation, but hopes for the ability to be a wholly owned subsidiary of its parent. “Given the opportunity, we would be like any of our private banks in India, to look and feel like an Indian bank,” says Nayar, adding that acquisition may not be high on his agenda. “Till 2009, we will have grown substantially organically. Valuations may not be the best then, so acquisition will depend on what the market has to offer at that time. Till then, we will wait and watch.”
The timing may not be certain but most experts agree that the sector will have to open, and there have already been some signs. Roy notes that the increased cap in individual investment abroad is serviced by foreign banks. Ashwin Parekh, partner and national leader of global financial services at Ernst & Young Pvt. Ltd, highlights two occasions when individual permission was granted by the banking regulator. The first was to Citibank for its investment in Indian mortgage major Housing Development and Finance Corp. (HDFC), and the second, to Rana Talwar, former Standard Chartered global chief executive who took over Centurion Bank through a fund. “There will be more risk-based regulation,” Roy says. “Depending on the risks that a foreign bank presents, the regulator will try to bring in different regulations.”
Experts and the foreign banks say the regulator will be concerned about the state of domestic banks and their ability to compete and based on that it will decide how far to open the faucet. “They (the foreign banks) will become a major player if they are allowed free operations in India,” Sinor of IBA says. “I am very sure they would immediately emerge as the market leader.”
The banks, particularly the public sector ones, have sufficiently strengthened their balance sheets, but have not joined forces to be able to compete with the foreign banks on scale and size.
In addition to these domestic concerns, many experts say that RBI will consider how welcome Indian banks are abroad when they try to expand. Roy says, “If reciprocity is not the order of the day, the local regulator will play the game as the others have played it.”
Traditionally, the driver for a majority of M&A deals in the Indian banking space is the regulator’s sensitivity to protect depositors’ money. While announcing the time frame for foreign banks’ play on Indian turf, ringfencing weaker financial intermediaries from predatory attacks, RBI has laid down certain norms for domestic players.
For instance, all banking entities must have at least Rs300 crore net worth (capital and free reserves) and a wider investor base with no single player holding more than 10% stake. In case of one bank holding stake in another bank, it is capped at 5%. RBI has not laid down any timeframe for this but analysts feel the deadline will coincide with the opening up of the sector.
Only a handful of old private banks have not yet fulfilled these norms. If they fail to do so by April 2009, they may be offered on a platter to the foreign player if RBI decides to open the sector.