State-run Banks: In Search Of A Core

<div><em>You can expect a slew of deals going ahead – as state-run banks seek to jettison what’s non-core to their business. And there are no “ifs” and “buts” here as North Block too wants it that way, says</em>&nbsp;<strong><em>Raghu Mohan</em></strong></div><div>&nbsp;</div><div>In the 90s – in the first blush of liberalisation – state-run banks set up arms to tap into just about every other sub-sector in financial services – for insurance, capital markets, broking, and factoring. Many of these entities just chased the fashion of the day. Some came to hold stakes in stock exchanges by virtue of them being seen as “institution builders”. That’s how the State Bank of India came to hold a tad above 10 per cent in the National Stock Exchange; IDBI Bank (from its days as a development financial institution) five per cent; and so too the now almost defunct IFCI with six per cent.</div><div>&nbsp;</div><div>The immediate trigger for the sale of non-core assets by state-run banks is the realisation that the Centre will be hard pressed to infuse funds into state-run banks – now that a distinction has been made between the “better” and worse off in this category. The estimated additional capital requirements on account of Basel-3 which kicks in from fiscal 2019 is put at Rs 5 lakh crore -- of which non-equity capital will be Rs 3, 25 lakh crore, while equity capital will be Rs 1, 75 lakh crore. In his first Budget speech of July 2014, finance minister, Arun Jaitely, put it at Rs 2, 40 lakh crore. The exact amount depends on a range of factors: credit growth, its quality, dud-loan provisioning, and the technicalities &nbsp;under Basel-3.</div><div>&nbsp;</div><div>In a recent report, Jefferies’ analysts Nilanjan Karfa and Anurag Mantry noted that “government capital allocation will also factor in and come with specific riders on what banks can generate through sale of non-core assets. This further accentuates the deleveraging that banks will undergo as a part of their balance sheet repositioning… We agree that not everything can or will be sold, but the need to unlock value from the non-core assets has never been higher than it is today”.</div><div>&nbsp;</div><div>The sale of non-core assets by state-run banks basically takes a leaf out of a global trend. For instance, Barclays has set up a “Bank non-core” or BNC to house such assets to eventually sell them off. Others like Citigroup, RBS and Credit Suisse have adopted a like strategy.</div><div>&nbsp;</div><div>In India, the sale of non-core business lines has been executed largely by foreign banks as their parents revisited strategy back home.&nbsp;Such “cherry-picking” can range from the simple: HDFC’s Rs 60-crore buyout of Gruh Finance, the housing finance arm of Gujarat Ambuja Cement, more than a decade ago, to the complex: HSBC’s move to knit RBS retail and branch licences. It can be geographical: StanChart’s buyout of ANZ Grindlays Bank’s India and West Asia operations for $1.3 billion in 2000. Or of a vertical: ABN Amro’s decision to buy BankAm’s Asian retail book for $200 million in 1999 after its merger with NationsBank. It’s a case of different folks, different strokes.</div><div>&nbsp;</div><div>If you are hard-pressed on outreach as a foreign bank, you go for an embedded local non-bank player to secure your retail ambitions. Seven years ago, HSBC picked up 73.21 per cent in IL&amp;FS Investsmart, a retail brokerage house for $241 million, 43.85 per cent from E-Trade Mauritius, and 29.36 per cent from Infrastructure Leasing and Financial Services (IL&amp;FS).</div><div><br><img alt="" src="http://bw-image.s3.amazonaws.com/chart-lrg (1).jpg" style="width: 650px; height: 267px; margin: 1px;"><br><br>Basel-III will now see state-run banks get onto the bandwagon now – as sellers to raise capital.</div>