Thursday, June 12, 2008

Bank consolidation not a priority in India

Some people get a terrible complex when they look at the size of Indian banks. Too small, they say, compared to even banks in China. We have to do something about this. Indian banks must consolidate.

I have long been sceptical about this proposition and have written about it at length. My scepticism was reinforced when I had a chance recently to compare the market caps of Indian banks with those of the world's top banks. The comparison is quite revealing.

India's top two, SBI and ICICI Bank, are not very far from the world's top banks in market cap. Both are valued at over $20 bn today. This is not bad compared with $110 bn of Citigroup or about $53 bn each of Barclays Bank and Deutsche Bank. Only HSBC with a market cap of $200 bn looks distant.

Two factors are responsible for Indian banks drawing closer to the world's top banks in market cap. The proximate factor is the sharp decline in share prices of international banks consequent to the sub-prime crisis. Indian banks too have seen sharp declines in prices. But the effect has been to narrow the absolute difference in market cap. Citigroup is down from over $250 bn to $110 bn. SBI is down from nearly $50 bn- which was one fifth of Citigroup's market a year or so ago- to $23 bn, which is close to a quarter of Citigroup's market cap today.

The longer term factor is the wide difference in earnings growth. Indian banks are growing earnings at 20-25%; the world's top banks consider themselves lucky if they touch 10%. This is bound to draw the top Indian banks closer to the world's majors.

Can Indian banks then hope to make international acquisitions? Unlikely, I am afraid. Financial muscle is not the only thing that counts, you need solid managerial capabilities. Most banks lack this. ICICI Bank may just bring it off but not public sector banks.

More on this in my ET column, Banks' asset size is not the issue.


Kartik N said...

I have recently stumbled upon your blog and have enjoyed reading your posts.
I agree that there is no need for a "National Champion" in the Indian Banking arena. From my own personal experience the Indian Banking industry has some way to go before being able to compete in the international arena. Although right now you could hardly call the western banking giants paragons of management virtue as they are all smarting from excess leveraging over the last few years.
In fact banks like Barclays are very unlikely to survive as standalone institutions and will be a takeover target at some point soon. The best managed bank globally has to be HSBC given the resilience their balance sheet has shown in the current crisis - still not surprising considering their prudent management over the years.
Moving back to the Indian banking space - who would you say are the market leaders or future global players? ICICI clearly comes to mind, and SBI could have tremendous appeal owing to their reach but I suspect political interfereance will always stymie it reaching its full potential. Axis bank seems to be quite switched on from my experience. I suppose in the long term a commercial bank needs to also widen its investment banking reach to become a global player ultimately.

P.S. Not long ago the largest bank in the world by market cap was ICBC of China.

piyush said...

How much time you think ICICI will take to be pretty near to $50bn

T T Ram Mohan said...

Sorry I have not had a chance to respond, I have been travelling a bit.

Kartik, you are right, ICICI Bank and SBI are the primary contenders for the global sweepstakes but both still have some distance to go before they can make big acquistions. The problem, as I argued, is not scale- they will get the scale before long- but their ability to manage sophisticated banking operations.

Piyush, you ask when will ICICI Bank touch $50 bn, Well, take the valuation of around $23 bn today and project earnings growth of 20-25%. Say, the next three to five years? Sooner, if valuations in the Indian market pick up from today's pathetic levels.