What ails foreign banks in India?


DBS Bank Ltd, Singapore’s largest lender, witnessed a sharp rise in bad loans in India in year ended March. Its net non-performing assets (NPAs) rose to 10.21%, up from 2.37% in the previous year, the highest among all banks. As it had to set aside more money to take care of rising bad assets—Rs.516 crore against Rs.169 crore in 2012-13—DBS’s net profit in India plummeted to Rs.2 crore from Rs.289 crore.

It is paying the price for rapid growth in its loan book from Rs.4,015 crore in March 2010 to Rs.15,155 crore in March 2014, betting big on India. Another foreign bank, larger than DBS, is also paying the price of aggressive growth: Standard Chartered Bank Plc (StanChart). Its gross NPAs rose to 7.8% in March 2014, forcing it to set aside Rs.2,799 crore (against Rs.s214 crore in the previous year). Higher provision dragged down net profit from Rs.2,960 crore in 2013 to Rs.1,548 crore in 2014. Barring Citibank NA, for some reason or the other, four of the top five foreign banks operating in India have posted lower profit in 2013-14 despite India being the most promising market for them.

Citi is the largest foreign bank in India with assets worth Rs.1.45 trillion, followed by Hongkong and Shanghai Banking Corp. Ltd, or HSBC (Rs.1.31 trillion), StanChart (Rs.1.31 trillion), Deutsche Bank AG (Rs.57,695 crore) and DBS (Rs.45,462 crore).

In 2012, DBS for the first time raced ahead of Deutsche to become the fourth largest foreign bank. It held on to that position for two years, but conceded the lead by a wide margin last year. The first signs of stress were seen in 2013 when DBS’s net profit dropped 14%, as it had to set aside money for off-balance-sheet exposures and bad loans in infrastructure sector where projects have been stalled for lack of clearances from various quarters. StanChart too has been following an aggressive strategy to build its loan book which, at Rs.68,423 crore, is the biggest among foreign banks in India.

StanChart started Indian operations by opening its first branch in Kolkata in April 1858, a year after the first war of Independence in which sepoys of the British East India Company rebelled against their rulers. HSBC has been in India even longer. Its origin can be traced back to October 1853, when Mercantile Bank of India, London and China was founded in Mumbai with authorized capital of Rs.50 lakh. Mercantile Bank was acquired by HSBC in 1959. Citi, which has the biggest asset base among all foreign banks in India, is 111 years old; Deutsche is 34 years old; DBS started operations in 1995.

As it has been aggressive in giving loans, StanChart has high 95% credit deposit ratio (second to Deutsche Bank’s 111%), implying that its deposit funds are used almost fully to support advances while other funding sources like reserves and surplus are being used to buy bonds and keep money with the Reserve Bank of India (RBI). A bank needs to keep 4% of its deposits with the central bank as cash reserve ratio and invest at least 22.5% of deposits in government bonds. StanChart has also relatively low capital adequacy level of 12.5%. The proportion of the so-called CASA or the low-cost current account and savings account is also lowest in StanChart among the big foreign banks at 35%. As a result, its cost of funds is relatively high and it has earned lower net interest income than Citi despite a bigger loan book.

HSBC seems to be following the most conservative strategy with the lowest credit deposit ratio (56%) and highest capital adequacy (17.4%). Its investment book is the biggest and because of its conservative strategy, its bad loan pile is lower than Citi and StanChart. On the flip side, its net interest income is much lower than Citi and StanChart.

Indeed, Deutsche has smaller balance sheet than Citi, HSBC and StanChart, but the annual growth of its advance portfolio in 2014 was 30%, the highest among large foreign banks. Its level of bad assets is pretty low (0.6% gross NPAs) but over a period of time, its loan book growth could affect the quality of assets.

Citi, which has the largest balance sheet, has also the largest deposit base and the highest CASA ratio (48%). At 72.2%, its credit deposit ratio seems to be more balanced than other large foreign banks. Incidentally, all foreign banks registered a drop in CASA ratio last year as they rushed to collect term deposits from non-resident Indians in the form of so-called FCNR(B) deposits. RBI offered them incentives to do so, as it wanted to boost the nation’s foreign currency assets in its bid to protect the rupee from losing its value against the dollar.

Citi also has the largest net interest income while StanChart has shown the highest growth in such income (7.4%) and HSBC’s net interest income actually dropped 4.5%. When it comes to fee income, StanChart tops the list at Rs.2,007 crore. It’s almost double that of Citi and three times of HSBC, but Citi’s fee income grew 6% while StanChart’s fee income almost remained flat and HSBC actually recorded a drop in fee income. Citi’s margin—profit before tax and credit provisions—at Rs.5,627 crore was higher than that of StanChart and double of HSBC and its operating expenses as a percentage of earnings before credit provisions was the lowest at 34%.

With inflation moving south and economy showing faint signs of recovery, it will be interesting to watch how foreign banks play the growth in Asia’s third largest economy. Some of them may end up paying the price for over aggression and reading the tea leaves wrong.

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