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SBI Vs HSBC Vs Citi - Views on News from Equitymaster
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Mar 16, 2006

Considering the fact that the core function of a bank i.e. lending and borrowing is commoditised, banking behemoths globally, have ventured into businesses beyond intermediation (between lenders and borrowers). Their Indian counterparts are steadily aligning to this trend. In this article, we compare two of the world’s largest banks with SBI. About SBI
State Bank of India is the country's largest banking entity, both in terms of market share (20%) and asset size (23% of total Indian banking sector assets). Catering to a lion's share of the country's population, the bank also acts as a proxy to the government and the RBI. The bank has a dominant corporate and retail banking franchise (9,081 branches and over 5,000 ATMs) serving more than 90 m customers. Although the bank's loan book is largely skewed towards the corporate sector (63% of non-food advances), the retail side is also fast catching up.

About HSBC
Headquartered in London, Hong Kong and Shanghai Banking Corporation is one of the largest banking and financial services organisations in the world. HSBC's international network comprises over 9,700 offices in 77 countries. The bank serves over 110 m customers and had assets to the tune of US$ 1,467 bn at the end of CY05. HSBC India has a franchise of 43 branches and over 150 ATMs across the country.

About Citigroup
Citigroup is the world’s largest financial conglomerate (in terms of asset size) with about 200 m customer accounts in more than 100 countries. The bank has global employee strength of about 275,000. Citigroup is organised into three major business groups – consumer and corporate banking (Citibank), investment banking and equity research (Smith Barney) and global wealth management. In 1998, Citicorp merged with Travelers Group to form Citigroup Inc. Citibank is one of the world’s largest players in credit cards, with a base of 20.9 m accounts in 42 countries.

Revenue streams
What clearly distinguishes the Indian banks against their global counterparts is their affinity to ‘brick and mortar’ banking as against the financial-service-provider approach adopted by the latter. This is clearly evident from the fact that while banks like HSBC and Citibank derive a significant proportion of their revenue from services like investment banking and wealth management, the same is almost negligible in case of SBI (despite the fact that it has an investment banking arm - SBI Caps).

Revenue contribution
FY05/CY05 (% total revenue) SBI HSBC Citigroup
Retail banking 21.6% 23.7% 61.1%
Corporate banking 32.4% 24.6% 18.3%
Proprietory investment activities 45.4% 2.1% 12.0%
Wealth management 0.0% 4.4% 2.0%
Investment banking 0.6% 45.2% 6.6%

Although one might argue that in the case of Citigroup, revenues from retail banking is considerably higher, it should be noted that the same is not due to higher net interest income (as in the case of SBI) but due to higher fee-based revenues (which are not subject to interest rate volatility). Having said that, the reason we are highlighting this point is to reflect on the ‘quality’ of earnings. While the revenue streams of SBI are limited by product and region, that of HSBC and Citigroup are well diversified and subject to minimal volatility.

On a relative basis, SBI compares favourably against its global peers. While the bank is better off in terms of capital adequacy and operating efficiency, it is at par with the global leaders in terms of revenue to assets ratio. What is noticeable is that Citigroup, despite high operating costs, surpasses the other two in terms of RoE (return on equity) because of having higher revenue from non-fund based sources. The same is not true in case of HSBC, despite the fact that it garners 45% of its revenue from investment banking.

Comparative financials
  SBI (Rs bn) HSBC (US$ bn) Citigroup (US$ bn)
  FY04 FY05 CY04 CY05 FY04 FY05
Total assets 4,078.1 4,598.8 1,452.4 1,467.0 1,484.1 1,494.0
Total revenue 187.9 210.6 51.3 57.6 79.6 83.6
Capital adequacy ratio 13.5% 12.5% 11.6% 11.8% 11.9% 12.0%
Return on equity 18.2% 17.9% 13.7% 17.1% 17.0% 22.3%
Net NPA 3.5% 2.6% 1.4% 1.5% 2.2% 2.4%
Cost to income 49.2% 47.8% 45.5% 50.0% 62.5% 53.8%
Branches (nos) 9,072 9,089 8,435 9,700 7,729 8,559
Employees (nos) 207,039 205,515 236,000 260,000 252,000 275,000
Source: Annual reports

In terms of asset quality, SBI has come a long way. The bank’s net NPA levels reduced from 5.2% in FY03 to 2.3% in FY05 due to better provisioning, enhanced credit appraisal and debt restructuring (CDR mechanism). With this, SBI today fares equally well in terms of asset quality against its global peers.

Global exposure
Domestic focus and lack of geographic diversification clearly handicaps Indian banks’ revenue streams. During FY06, SBI acquired equity stakes in Indian Ocean International Bank Limited (IOIB), Mauritius. This was followed by acquisition of 76% stake in Giro Commercial Bank (Kenyan bank) in 2QFY06, which has an asset base of US$ 60 m. The bank has cited that it will continue to pursue the inorganic growth route in the overseas markets (international business stood at US$ 7 m in 1HFY06).

HSBC is currently trading at 16 times while Citigroup is trading at 13 times trailing 12 months earnings. SBI, on the other hand, is trading at 9 times trailing 12 months earnings (1.3 times FY08E adjusted book value). Given its PSU status and poor productivity ratios, SBI has traded at a discount to its private sector peers. However, given that the bank has attempted to shed most of its PSU legacies and is competing effectively with the latter, a valuation re-rating cannot be ruled out in the longer term. Having said that, the bank’s quasi -government body status will continue to subject it to the Centre’s whims and fancies.

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