Margins are down and competition has risen

Margins are down and competition has risen

Mumbai: Standard Chartered Bank is expanding its product suite for corporate clients in India to get a larger market share. The British bank will not aggressively look for new clients and instead would like to be the preferred banker for every financing need of its clients, says V. Anantharaman, 47, managing director and regional head, origination and client coverage, in India and South Asia for the bank. Edited excerpts:

Loading video...

Both domestic and foreign banks are expanding their presence with different product suites. Where does your bank stand?

There is only a limited wallet for investment banking in India, whichever way you cut it, slice it and dice it. Unless you are a bank that has commercial banking operations, lending capabilities and investment banking advisory, you cannot make returns in this kind of a market.

Balance sheet lending has helped us a lot; when in 2008-09 other banks were shut for business, we were open. Don’t forget that when the equity markets are down, companies are still growing, with the economy growing at 8-8.5%.

Standard Chartered has just built its equity capital market team when companies are shying away from raising money from a volatile stock market.

We have built a strong team by hiring most experienced people from across the industry. Early this year, we got the Tata Steel (Ltd) follow-on offer mandate because of the strong relationship we have with the client. While we were among the seven banks selected, our equity franchise worked really well. We collected one-third of the retail portion of applications. This is not because of the 96 branches we have, but (because of) the strong retail presence, thanks to our acquisition of UTI Securities [now renamed Standard Chartered Securities (India) Ltd]. We are the only foreign bank in India that has strong retail and institutional distribution for the equities business.

What’s your business strategy?

We are not going after a lot of new clients. We have clients who have been with us for years and we are telling them that rather than talking to five or six different banks for your entire capital structure, talk to us, we can help you.

The important thing is to do that holistically and making sure that the relationship managers who cover these clients are fully aware of our capabilities. The number of relationship managers has not changed, but the training and orientation have definitely increased over time.

Does that mean you haven’t added clients recently?

We have added clients over the years. We look at large corporations, multinationals and middle-market segment as well, and that’s the area where you see a lot of growth in India. We started that business in 2007, and it’s doing exceedingly well. We have got very good traction all over India and we have certain client onboarding criteria because the intensity for the smaller client is much more. We have also a few bankers focused on commodity traders and agribusiness. Then there is a financial institution segment and trade finance.

Anything which is non-vanilla goes through a detailed process of how we structure the security package, the take-out financing, the cash flow waterfall. Our advantage is being seen as both an international bank and a domestic bank.

What are the challenges?

The margins are down and competition has increased. Some of them are regulatory in terms of developing issues like subsidiaries—how will the business model change for us if we were to become subsidiaries rather than remain branches, what will that do to our counter-party risk, how will that change our cost of funds, etc. All these issues will have to be addressed and then accordingly (we will) tweak our business model to suit the new business environment.

Stiff competition and undercutting of fees have led to a drop in revenue for investment banks in India.

Here, the value to financing is disproportionately higher than the value to advising. So, if you are able to offer a comprehensive package, the value of that advice is built in to the overall returns from clients. We don’t offer balance sheet for every deal. For example, in one of the recent deals involving an acquisition of an IT (information technology) services company by a US-listed firm, we could have funded the acquirer, but we didn’t because the deal was structured slightly differently and there were banks who were cheaper than us. We didn’t want to compromise on returns.

There is pressure on companies to redeem foreign currency convertible bonds (FCCBs). Isn’t that an opportunity for banks to lend?

We will have the see how it plays out. I don’t expect restructuring of many FCCBs. There will be a lot of overlapping investors as well. It will be a combination of how much liquidity the companies have and, in some cases, they will have to raise debt and equity capital to repay maturing FCCBs.

Money is easily available overseas and in abundance. Will more Indian companies use this arbitrage opportunity?

Given the low dollar interest rates, the actual fully hedged cost of these borrowings is still lower than rupee borrowings in most cases. So it still makes sense to borrow from the overseas markets. Not all deals will go through, but in general we see more high-yield issuances from Indian companies, which has never happened before.

In late 1990s early 2000s, a number of companies wanted to do it and for various reasons but could not access this investor pool. Now, these companies have acquired or set up subsidiaries for doing business offshore, and through these entities they are raising money.

Deals India, published jointly by Mint, Dow Jones Newswires and The Wall Street Journal, is a one-stop destination for investment professionals following deal flow, deals news, private equity and venture capital activity in India.