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From #5 to #2 is a big jump in any rankings—more so for HSBC, which has powered ahead on the back of sheer growth in deposits and profits.

Krishna Gopalan        Print Edition: February 24, 2008

Try this quick quiz: Which was the first bank to have an ATM in India?

Answer: HSBC (then known as the Hongkong and Shanghai Banking Corporation), in 1987. If that comes as a bolt from the blue, another surprise, albeit of a lesser magnitude, would be HSBC perched comfortably at the #2 position in the latest survey of India’s Best Banks. Last year, it was at #5, and in the three years before that, HSBC was at #2, #7 and #9 positions, respectively.

Naina Lal Kidwai, Country Head, India/ HSBC
Naina Lal Kidwai
So, how has this transformation come about? “The big change has been that we have moved from being a wholesale bank into one that is into more diversified segments,” says Naina Lal Kidwai, Group General Manager and Country Head, India, HSBC. By her estimates, HSBC with a workforce of around 32,000 is the largest foreign employer in the financial services sector. This large workforce is across businesses which, apart from the bank, include the asset management company and a joint venture with Canara Bank and Oriental Bank of Commerce for life insurance. “Apart from that, we have a very large in-house BPO and software development operations,” adds Kidwai.

A look at the numbers reveals that its sheer growth propelled HSBC to the runners-up position. On the overall growth parameter, for instance, HSBC is sitting pretty at #4. Break that down and you’ll realise that its deposit growth of 39.55 per cent, growth in operating profits of 50.53 per cent, a three-year cumulated average growth rate of 28.87 per cent of total deposits and 33.95 per cent growth of loans and advances has propelled HSBC into the top four on the growth parameter. Operating profit per employee, too, has been robust, with the bank enjoying the #3 slot on that front. Quality of earnings too, has, been the bank’s strong point; it’s at #2 position on the front of return on assets, and on top of the heap on the sub-parameter of net interest income/average working fund (AWF). (see It’s Heady Up There).

 Dutch surprise
ABN AMRO is another foreign bank that’s zoomed up the charts.

For Meera H. Sanyal, 2007 was a remarkable year where a lot of things came together for ABN AMRO (Rank: #4). The bank was involved in two of India’s largest cross-border transactions—Tata Steel’s $12-billion buyout of Corus and Hindalco’s $6-billion acquisition of Novelis. There was a lot more that took place as well. As Sanyal, Executive Vice President, Country Executive—India & Chairperson ACES (ABN AMRO Central Enterprise Services, which is the 100 per cent subsidiary of ABN AMRO Bank N.V. to provide operations and IT processing services to business units of ABN AMRO globally), puts it: “At the end of 2007, I think the market has recognised our leadership in various businesses like M&A, ECM and transaction banking.”

ABN AMRO has been in India since 1920 and today has a network of 28 branches in 21 cities. This is not just in the larger cities but also includes Tier II and Tier III cities like Nasik, Panipat, Kolhapur and Salem. During the course of this year, that presence will expand to Agra, Jalandhar and Jodhpur. The seeds for these expansion plans were sown a long time ago. “In the early ’90s, we took our first steps from being a specialised diamond bank to becoming a full-fledged commercial bank with a wide range of offerings on the corporate side. With the acquisition of Bank of America, we made our big foray into retail banking,” says Sanyal.

For now, the more important part is how ABN’s buyout by a consortium led by Royal Bank of Scotland plays out globally. Sanyal thinks it will be a strong combination. “In terms of product areas and client coverage, it becomes a top five bank in the world,” she says.

HSBC’s decision to look at more segments has been among the more important business decisions that the bank has taken. For Kidwai, it has been the best decision that the bank has taken in the last two years. “Our entry into the small and medium enterprises (SMEs) and middle market segments is merely a reflection of our faith in Indian entrepreneurship,” she emphasises. Interestingly, this is the kind of profile that HSBC has in countries like Mexico, Brazil, Turkey and Malaysia. “This is quintessential HSBC playing in all segments,” adds Kidwai.

The importance attached to commercial banking at HSBC is hardly understated and it is clear that the bank is looking to spot the small businesses of today, which will become the big players of tomorrow. In the past, HSBC stuck it out with the then small players like Infosys, Biocon and Bharti with whom the bank has merely strengthened its relationship over time. “It is important that we do recognise that smaller-sized corporates create much value for the organisation over their lifetime. After all, large companies start out as small ones,” says Puneet Chaddha, HSBC’s Head of Commercial Banking, India. His target is clear—to make commercial banking a dominant component of the bank. “It could potentially account for nearly half of the bank’s revenues,” adds Chaddha.

Kidwai admits readily that having a limited branch network—this is on account of Reserve Bank of India regulations—has not been the easiest thing though it could still be an advantage. That also explains why the bank lags at #20 on the parameter of overall size. (Also dragging HSBC down is the parameter of capital adequacy, where the Londonheadquartered bank is at near-bottom, with a rank of 32). However, over time, the bank has managed to handle very strong distribution networks and electronic and internet-based products. “We were able to put the challenge of the bricks and mortar business behind us,” she says. Today, HSBC has a network of 47 branches which is the second-highest among all foreign banks.

There has been a lot going on at HSBC’s other businesses as well. Kidwai points out that HSBC did the largest convertible issue ever out of India, in February 2007 (the issue size was $1 billion). That was for Reliance Communications.

Overall, the sense of optimism about businesses like investment banking and capital markets is hard to miss and the officials at the bank speak of these areas growing significantly over time.

Clearly, the India story is something that HSBC is extremely bullish about. “India is interesting because it offers both scale and diversity. It offers large markets that straddle IPOs, local currency bonds, equity and rates derivatives, private equity and cross-border M&As,”says Tarun Kataria, Managing Director, Head of Corporate, Investment Banking and Markets, India. He expects this business to grow organically in healthy double digit rates. “In three years, one can easily expect the existing business to double,” adds Kataria.

 
Click here to enlarge
If Kidwai had it her way, she would certainly want to have a broader branch network. This becomes an imperative in an environment in which non-banking entities are running away with the retail market. “Today, 78 per cent of people rely on debt or borrowing from the non-formal sector. Of the rest, just 14 per cent come to banks,” explains the Country Head.

But that’s still a market worth going after, in an innovative manner. HSBC Pragati is a case in point where personal loans of up to Rs 50,000 are doled out with options of flexible repayment over a 12-48 month period. “Interestingly, in our branches in our cities, half of the people walking into our branches are walking into a bank for the first time in their life.

They have never borrowed from a bank,” says Kidwai. Asset management likewise is another huge area where approximately $14 billion is managed.

Out of this, around $4.5 billion is managed out of India while another $9 billion is managed from abroad. Keeping a clear and continuous customer focus has been an overriding theme at HSBC. According to Rajnish Bahl, Head of Personal Financial Services, India, HSBC, over the next 10 years, would want to be a preferred bank for a majority of India’s banked population.

 Rock solid, rock steady
If it’s at #2, it’s for ample reason

  • Has strong equity in the Indian markets. HSBC has been in the country since 1853, as Mercantile Bank in its earliest avatar

  • A diverse model in India, which includes activities like asset management, electronic data processing, private equity, securities and capital markets and, of course, commercial banking

  • Has a strong client portfolio among corporates. Unilever, for example, is HSBC's client in 17 countries, including India

  • The foray into the small & medium enterprises and middle markets has been a big story. Over time, the bank expects this to be a huge business

  • Has a very large workforce, which totals around 32,000 today. It is estimated that HSBC is the largest foreign employer in the financial services sector
Under personal financial services comes branch banking, debit and credit cards, mutual funds and insurance. HSBC’s Systematic Investment Plan (SIP) had around 10,000 investors a year ago.

That number is now at 1.25 lakh. “On an average, we are looking to grow our business (this is for the entire personal financial services business) on an organic basis by 40-45 per cent over the next five years,” adds Bahl.

For HSBC, the benchmark is competition and Kidwai makes no bones about it. “We need to learn continuously from what is happening out there to make sure our practices are the best compared to them,” she states. “New babies like insurance (a business that’s expected to roll out by the year end) will find their feet in five years. That apart, SMEs and consumer finance will be major mainstay activities,” adds Kidwai.

The scenario today is impressive with HSBC’s cash management and trade business accounting for 5-6 per cent of the country’s trade; and the custody business rustling up a 45 per cent market share. “Eventually, we would like to be among the top 3-5 operators in whichever space we can,” sums up Kidwai. Going by current growth rates that could well be the case.

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