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Banking: Foreign Vs Indian - Views on News from Equitymaster
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Banking: Foreign Vs Indian
Oct 10, 2006

When it comes to banking, it is ‘localisation’ rather than ‘globalisation’ that seems to hold the key! The same is more than evident in the manner foreign banks are readying themselves to explore the Indian market before the same opens up to foreign investment post FY09. Despite their MNC status and stronghold in the financial markets globally, even banking behemoths like Citibank and HSBC are besieged with worries about garnering a sizeable pie in the extremely fragmented Indian banking sector. More so, since they are competing directly with the local private sector banks that offer a very comparable suite of products and services and are more ‘localised’ in their approach. In this article, we make comparison between the fundamentals of some of the largest foreign banks operating in the country versus some of the most efficient domestic private sector players.

The foreign banking entities in the country are handicapped in terms of exercising their will when it comes to opening new franchises, as the RBI is very stringent in issuing licences for the same and thus has restricted it to only 30 a year. The local private sector entities that so long had an upper hand in the matter have, however, been subject to an embargo on their expansion plans due to certain discrepancies in IPO issuances. Nonetheless, they far exceed their foreign counterparts in terms of geographic penetration and customer access.

  Foreign banks Indian banks
FY06 Citibank HSBC ABN Amro *Segment avg HDFC Bank UTI Bank Yes Bank *Segment avg
Branches 39 42 23 9 515 348 30 259
Employees 3,250 4,985 3,093 724 14,878 6,553 627 4,189
* Segment average refers to the average of all foreign / private sector banks

Needless to say that better customer access and focus on a wider demographic segment of customers (as against foreign banks’ concentration on ‘high value’ customers) also helps the domestic private sector banks to accumulate a larger balance sheet size and garner economies of scale. Further, the extended franchise enables them to garner deposits that are commensurate with the advance book and maintain a healthier credit deposit ratio as compared to their foreign counterparts.

Asset size
  Foreign banks Indian banks
FY06 (Rs m) Citibank HSBC ABN Amro *Segment avg HDFC Bank UTI Bank Yes Bank *Segment avg
Advances 244,550 168,120 150,730 33,640 350,610 223,140 24,070 119,990
Deposits 279,120 249,550 118,640 39,220 557,970 401,140 29,104 163,940
C/D ratio 87.6% 67.4% 127.0% 85.8% 62.8% 55.6% 82.7% 73.2%
* Segment average refers to the average of all foreign / private sector banks

Nonetheless, the focus on larger ticket lending and focus on the premium customer segment enables foreign banks to maintain better efficiency ratios, almost in line with their global performance. What, however, is interesting to note is that banks like Yes Bank and UTI Bank are fast catching up with them, atleast on the profitability front.

  Foreign banks Indian banks
FY06 (Rs m) Citibank HSBC ABN Amro *Segment avg HDFC Bank UTI Bank Yes Bank *Segment avg
Bus./ empl 160.7 97.5 90.5 100.6 75.8 102.0 38.4 67.8
Profit / empl 2.1 1.2 0.8 1.5 0.7 0.9 0.9 0.5
* Segment average refers to the average of all foreign / private sector banks

The domestic private sector entities can also give their foreign counterparts a run for their money when it comes to capitalising on fee income resources, maintaining adequate CAR (capital adequacy ratio) by accessing multiple capital raising routes and keep their asset quality under check. However, they still have a long way to go when it comes to net interest margins and return on assets. Having said that, while we do not intend to belittle the efforts of the Indian private sector banks, the huge gap in their valuation and that accorded to the foreign players globally is certainly uncalled for.

The average price to book value ratio of the Indian banks (at current prices) is almost double that of the foreign players listed on the NYSE. The incremental growth prospects of the Indian players and their ability to capitalise on the Indian consumption story are undoubtedly not ignorable. However, the valuations of the Indian entities seem to be factoring in most of the upsides. Also, once the sector opens up, fragmented market share and piecemeal efforts for consolidation will do no good.

  Foreign banks Indian banks
FY06 / CY05 (%) Citibank HSBC ABN Amro *Segment avg HDFC Bank UTI Bank Yes Bank *Segment avg
Price** / Book value 2.3 2.0 2.0 2.1 4.7 3.9 4.1 4.2
NIMs 5.9% 4.7% 3.5% 4.7% 4.3% 2.6% 3.3% 2.7%
Other income / Total income 25.4% 29.6% 32.0% 29.8% 30.6% 40.4% 53.9% 32.7%
Cost / Income 49.8% 46.5% 55.4% 46.0% 46.1% 45.0% 46.5% 31.8%
CAR 11.3% 10.6% 10.4% 12.6% 11.4% 11.1% 16.4% 12.2%
Net NPA 1.0% 0.6% 0.1% 0.8% 0.5% 1.0% 0.0% 1.2%
ROA 3.0% 1.6% 1.0% 2.1% 1.4% 1.1% 2.0% 1.0%
* Segment average refers to the average of all foreign / private sector banks
** Prices on the NYSE and BSE as on 9th October 2006

The comparison of the domestic and foreign banking entities operating in India was intended to highlight their capabilities in comparable markets. What we necessarily intend to reiterate here is that while we do not doubt the potential of the domestic private sector banks, even when compared to the best players in the world, the price that investors are paying for them seems to be a lot more expensive.

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