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Asia-PacificAugust 1 2016

Indian banks retain appetite for post-Brexit UK

Traditionally strong in the UK, some Indian banks – such as SBI and Yes Bank – are setting up new operations of becoming subsidiaries and focusing on the retail market, and they are not letting the UK’s decision to leave the EU affect their plans.
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The UK has consistently been a key market for Indian banks with overseas operations. Significant commercial and historical ties between the UK and India have given Indian banks opportunities to serve the UK’s Indian diaspora – the largest ethnic minority group in the country at 1.5 million people – and to facilitate trade and investment ties between the two countries. London also represents a gateway to other European markets. So how will the UK’s decision to leave the EU affect Indian banks’ plans?

Today, nine Indian banks have operations in the UK, four of which have already acquired subsidiary status. The others are still branches. The number of Indian bank subsidiaries is set to grow in the next few months as a result of a 2014 ruling by the Bank of England’s Prudential Regulation Authority (PRA) that all non-European Economic Area (EEA) banks with retail or small and medium-sized enterprises (SME) balances of more than £100m ($131.6m) must acquire subsidiary status. Indeed, non-EEA bank branches are harder for the PRA to monitor as they are one legal entity with the parent bank and are supervised by the regulator in the country of origin. Branches also rely on the parent bank for capital.

Subsidiaries, however, are authorised, regulated and supervised by the UK regulator. They are also separately capitalised from the parent bank and their eligible deposits are protected by the UK’s deposit guarantee scheme.

SBI's subsidiary 

One Indian bank that will be acquiring subsidiary status is State Bank of India (SBI), the country’s largest bank. As a subsidiary, SBI UK will need to raise capital independently of headquarters. “[As a branch] the mothership would be there for us for additional capital and support, which decreases costs of doing business,” said former SBI UK chief Mrutyunjay Mahapatra before the PRA’s ruling.

But current SBI UK regional head Sanjiv Chadha points out that although as a subsidiary SBI UK will raise capital independently and will be under more pressure to generate returns on this capital, it will be more free to decide how to deploy it.

Indian banks in UK

There will also be room to improve governance standards. “The subsidiary will have its own board and monitoring mechanisms. And the board will be made up of staff from London who can give more guidance than someone sitting in India,” says Mr Chadha. “There are more pros than cons in having a subsidiary. SBI subsidiaries in other countries might have mixed results in terms of returns, but it is always positive in terms of governance standards.”

SBI UK’s subsidiary will focus on retail banking and will open in the first quarter of 2017. SBI UK was historically a wholesale bank focusing on corporate credit, treasury and syndication. It began offering retail services in 2011 and today boasts 85,000 retail customers and $2.3bn in retail deposits.

“There has been strong growth on the asset side, but now we need to build the liability side of the retail portfolio,” says Mr Chadha.

Retail moves

Setting up retail operations in a foreign country can be costly because of the expense of running services such as ATMs and debit cards. “There is a minimum threshold of business size you need to go into retail,” says Mr Chadha. “A lot of retail profits come from lending, in which case you need to have been in the market for a long time.” SBI has been in the UK for almost a century.

At scale, however, retail can be profitable. “To acquire a customer is costly, but to sell a second or third product to them is much easier,” says Mr Chadha.

SBI UK also benefits from not being a legacy bank. This keeps its cost-to-income ratio low (26%, while the parent bank’s is 54.74%) and allows the lender to offer retail products at competitive prices, according to Mr Chadha.

One of SBI UK’s most popular products is an instant access account that can be opened online in 10 minutes. It pays a rate of 1.25% while most high street banks offer about 0.45% for similar products.

To Mr Chadha, this pricing model is sustainable despite the 0.8 percentage point premium over competitors. “As long as we keep our costs low – and we can, by leveraging our 16,000-branch scale in India – we can run this business sustainably. We are not like Metro Bank, which has 25 branches in the UK and that’s it,” he says.

As part of its new life as a retail-focused subsidiary, SBI UK is renovating existing branches, extending opening hours to seven days a week and opening branches. The latest appeared in the London suburbs of Hounslow and Ilford in early 2016.

SBI UK chose these two locations because they are home to large Indian communities. However, the new subsidiary will not only focus on Indians resident abroad. Indeed, if 15 to 20 years ago India-based business accounted for 90% to 95% of SBI UK’s business, today that proportion is down to 60%. 

“We look for areas with good economic activity and trade that can happen among SMEs in addition to retail. Having an Indian diaspora [just] gives us a good start,” says Mr Chadha. Beyond London, SBI UK has branches in Leicester, Coventry, Birmingham, Wolverhampton and Manchester.

Brexit impact

Before the UK’s EU membership referendum in June, Mr Chadha argued that beyond retail, SBI UK also functioned as a gateway to Europe. Indeed, the bank had begun a feasibility study to set up operations in Amsterdam. As a subsidiary regulated by the PRA, SBI UK will be considered a UK entity and that gives it passporting rights into the EEA, which includes both EU and Europe Free Trade Association countries such as Norway. Under the EU single market directive, EEA firms can carry out a set of activities in any other member state via branches, agents or cross-border services.

But since the vote for Brexit, there is doubt over whether the UK will still have access to the EU single market and benefit from passporting rights into the EEA.

Mr Chadha is unfazed by the referendum result. “The SBI has operated a successful banking [operation] in the UK and in parts of Europe for many years, and while we understand that the vote to leave the EU will create some level of uncertainty in the coming weeks and months, we remain committed to our customers and do not expect the vote’s outcome to impact our operations or growth plans in a significant manner,” he says. “We operate in the UK as part of the largest commercial bank in India and are able to offer our customers a high level of protection and transparency.”

A positive Yes

Another Indian bank refusing to give in to post-Brexit gloom is Yes Bank, a private sector lender set up in India in 2004. “Regardless of Brexit, London is a crucial and significant market and that is not going to change,” says managing director and CEO Rana Kapoor. “The best time to come in is at a time of adversity.” Yes Bank will set up operations in London in 2017.

To Mr Kapoor, London offers some of the best access to financial and human capital in the world. “In all this Brexit confusion, we are ignoring the fact that London’s fundamental strengths are intact,” he says. “The financial services capital management and intellectual property management is outstanding in this city. That has to be pivotal to keeping the structure of UK’s economy in place.”

It is fair to say that Yes Bank’s future London set-up, however, would not be hit heavily if the UK were to lose passporting rights to the EEA. Indeed, Yes Bank London operations will focus on bringing together Indian and UK entrepreneurs and start-ups through advisory work. “It is not profitable to lend at 1%. What makes sense is advisory. It has a fantastic multiple,” says Mr Kapoor.

More broadly, Mr Kapoor is bullish about the result of the Brexit referendum because a potential drop in UK investment into Europe might result in more UK investment into India. “There is low cost of capital in the UK,” he says. “But how do you turn that into high returns? Instead of investing in Europe at low returns, why not invest in India, where firms offer 15% to 20% return on equity? UK businesses will need to get bold and aggressive.”

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