Banks feel the heat of mating season

MUMBAI: The buzz of consolidation in the Indian banking industry is gathering decibels.

While some are facts, others are derived guesses and still others pure bunkum: HDFC Bank planning a merger with parent HDFC, SBI getting indirectly consolidated with its seven associates; Chinese giant ICBC eyeing a stake in ICICI Bank, Citibank having a greater handle on HDFC, Canara-Dena merger, LIC seeking a bigger play in banking….

What is true, however, is the increasing need for size in the Indian banking space.

Talking to CNBC TV18 on Wednesday, HDFC Bank managing director Aditya Puri said if the 25% statutory liquidity ratio norm (banks have to invest a quarter of deposits in government securities) is brought down, it could facilitate a merger between HDFC and HDFC Bank easier.

Later, speaking with DNA Money, an HDFC Bank spokesperson said this is nothing new: “We continue to maintain our earlier position — that there is no change in our position. We are open to looking at the merger as long as it makes sense.”

Vishal Goyal of Edelweiss Securities says there is definitely a need for consolidation. “There are just too many small and medium-sized banks and also, regional banks now. This is not the most efficient model to operate.”

In the case of public sector banks, there are concerns over incremental growth, he said.

In other words, the need for capital will soon become an issue as these banks will also have to ensure that the government ownership does not fall below 51%.

Deepak Jasani, Head of Retail Research, HDFC Securities, said consolidation will bring size of balance sheet and business - two elements necessary to attract and retain people, and to spend money on technology and other infrastructure.

Early this week, State Bank of India chairman O P Bhatt sounded alarmed when asked about a possible entry of Industrial & Commercial Bank of China Ltd (asset size $964 billion and market capitalisation of $234 billion) into Indian waters. “We will be nowhere,” Bhatt said.

Just compare the financials of ICBC and SBI. India’s largest bank has assets worth $156 billion and is valued at $15.5 billion.

No wonder, the SBI chairman is keen to merge the seven subsidiaries with SBI.

Talks on this have been cropping up time and again. In a recent parliamentary session debate, finance minister P Chidambaran skirted a question on this citing it as a sensitive political issue.

Foreign competition will also be at India’s doorsteps soon, once the banking sector is opened to foreign players in 2009. However, the manner (gradual, phased, etc) in which the RBI agrees to this will be crucial. But public sector banks are far from prepared for that eventuality.

Says HDFC Securities’ Jasani: “In terms of capital, quality of assets and manpower, there is a lot of catching up to do for the public sector entities.”

In the private space though, ICICI Bank announced plans to raise Rs 20,000 crore, equivalent to over 80% of its existing networth (shareholder funds).

If that happens, ICICI Bank will surpass SBI (standalone) in terms of networth, total income as well as profit.

But, ICICI Bank is not doing so with the key intention of thwarting competition. Says Edelweiss' Goyal: "ICICI Bank is going for scale and they need capital for their own organic growth. The threat is not leading to the dilution. It is more for the PSU banks."

With regard to the opening up of the banking sector, Goyal said there is a likelyhood of that happening. "But first, there will be mergers and acquisitions rather than competition. Foreign banks will likely buy out private banks and then there will be competition."

Meanwhile, with India’s top two banks talking of or moving towards increasing their respective sizes of balance-sheet and profit & loss accounts, others will start feeling the heat.

Another analyst said at some point of time, they (especially public sector banks) will be forced to consider consolidation. That is, size will matter the most.

In the context, it will be interesting to see how long the HDFC structure stays put.

“If the merger happens, it is good for the both the companies in terms of size, product portfolio, etc,” says Goyal.