In a change to the bank’s strategy for India, HSBC announced in early December that it will buy a 20% stake in UTI Bank, a small private Indian bank, for around $90m. HSBC will pay private equity investors Commonwealth Development Corporation (CDC) Capital Partners and South Asia Regional Fund about $66m for a 14.7% stake in UTI Bank, and has a call option to buy another 5.3% in the next three months. HSBC intends to exercise that option, and will then, under India’s regulatory rules, make a general offer for another 20% to UTI Bank’s shareholders sometime in March.
The purchase, announced while HSBC CEO designate Michael Smith was visiting India, surprised many because HSBC, which has a 150-year-old franchise in the country, has not been particularly aggressive in the past. While it has acquired assets and customers from other departing foreign banks here, it did not appear keen to buy a minority stake in a local bank. That now seems set to change. Soon after the announcement, Mr Smith said HSBC was open to picking up more minority stakes, perhaps in insurance and pension joint ventures, while waiting for local regulations to evolve, indicating that the group is stepping up its strategic plans for India. HSBC brought in $150m of capital early in 2003 to meet new regulatory rules and the UTI Bank purchase takes the total capital HSBC has invested in India to $590m.
Participation plan
CEO of HSBC India Niall Booker says the purchase signifies HSBC’s decision “to participate in a bigger way in a strategic market that has all the engines of growth” even when it is not fully open to foreign investment. It has bought minority stakes in a bank and insurer in China, a country that also restricts foreign direct investment (FDI) in banks. Early this year, the Indian finance minister raised the cap on FDI in private banks to 74%, yet a 10% cap on voting rights and other restrictions hinder investment. The FDI cap for insurance ventures is currently 26%, and the rules for pensions are expected soon.
Even though HSBC says the purchase is a “financial investment” that could “fork out in several ways”, the strategic intent is apparent. “We are happy with the way the bank (UTI Bank) is being managed. It has a slightly different franchise from our own in the retail banking and small and medium-sized enterprise (SME) markets,” Mr Booker says.
A late entrant into the booming asset management and home loans market, HSBC has lately become more aggressive; its retail assets grew in the last fiscal year from around a fourth to a third of its total assets. UTI Bank has about 217 branches; about 15% of its loan book are SME borrowers, and retail borrowers account for about 19%, says P J Nayak, the bank’s chairman and managing director. More importantly, its annual post-tax profits have grown by 50% in the past four years, most of which has come from healthy fee income.
Bankers see HSBC’s move as a vote for India’s economic growth prospects. “It is a signal to the market that when professional management and good quality assets are available, big banks such as HSBC will come knocking,” says Rana Kapoor, a former head of Rabobank Nederland’s financial arm in India. Several other private banks are lining up. IndusInd Bank’s managing director Bhaskar Ghose says a strategic partner will help bring a strong brand name, introduce new retail products and give his bank substantial access to foreign currency funds. Banks from the Far East and Middle East are the most likely acquirers, he adds. Sudhakar Gande, who heads troubled private bank Global Trust Bank, is eager to find a suitor who can infuse substantial capital into the bank. Investment bank JM Morgan Stanley has been hired and a deal should be inked by January.
Possible buyers
Among the possible buyers are a few foreign private equity investors and foreign banks, some of which have picked up small stakes in Indian banks. In September 2003, Rabobank acquired 20% in Yes Bank, which is being launched in March by former partners including Mr Kapoor. Foreign private equity groups Citigroup Venture Capital and Chrysalis Capital have picked up stakes in Yes Bank and UTI Bank, and are reportedly talking to other private banks, such as the Bank of Punjab. Some have even taken control. ING, a minority investor for several years in private Indian bank Vysya, took control of the bank last year. Bank Muscat and former Standard Chartered chief Rana Talwar’s Sabre Capital are in the process of taking over Centurion Bank.
For HSBC to gain control of UTI Bank, three government-controlled financial institutions that own around 50% of UTI Bank must agree to the takeover. UTI bank’s biggest shareholder, ailing asset manager UTI (which owns 33% of its shares) might be open to an exit. Should HSBC buy out UTI, HSBC-UTI Bank could emerge as the biggest foreign bank in India. With assets of around $4.5bn HSBC is the third biggest today, after Standard Chartered and Citigroup. For the moment, it can expect to have a seat on the board of UTI Bank.
