Tuesday, November 20, 2007

Goldman: Chinese or Indian Banks May Buy American Banks

I never thought I would see this in my lifetime but emerging market financial institutions from India or China may be able to buy out American banks due to the fallout from mortgage crisis, according to the latest Goldman Sachs report. The report by Goldman Sachs Group Inc says:
Further, we would not be surprised to see the first acquisition of a major US broker or commercial bank by an emerging market institution. While most US brokers and some US banks have broadened their geographic presence over the past decade, none has developed a truly robust Chinese or Indian offering. With these economies growing at multiples of the US, we would not be surprised to see a larger international bank attempt to gain access to the US financial services community through acquisition.
Add to the mortgage crisis, the rapid decline in value of US dollar against these currencies and the growth rates of these economies - the scenario begins to look much more plausible. Its a matter of when and not if.

So What?
The ownership of a company by a foreign institution, although sure to cause a ruckus with the likes of Lou Dobbs, is not a big deal. After all, even today banks like Citi have substantial foreign ownership from the likes of Saudi Kings and Princes. And emerging market banks like India's ICICI Bank have substantial foreign ownership - which means Americans own part of these institutions through a complex chain. But there is a big deal.

The Big Deal: Lower Cost Structure
The cost structures of these banks are much lower than that of their American counterparts. A few years ago, I met an executive from one of these banks at a banking conference event. The Indian bank was having trouble obtaining a license to operate in the US and he said to me that it was because American banks did not want competition in their home court.

A country such as India where cell phone calls cost a penny per minute, cell phones cost $25, cars are being designed for $2000 and employees still cost 1/3 to 1/10th of US counterparts - can deliver banking services at much lower costs.

First it was IT, now it may be the turn of banking. Telco and retail could very well be next. Clearwire-Reliance anyone?

Notes for the reader:
  • Clearwire is a WiMax company in US that is struggling due to the break up of the Sprint deal.
  • Reliance is India's largest conglomerate with a successful Telco business and market cap approaching $100 billion (yes with a B).
  • ICICI Bank is India's largest bank.
  • Goldman Sachs is one of the few large banks/brokers that has come out ahead through the mortgage fiasco.


Nitin Goyal said...

A couple of things:
-Most (if not all) US Banks do leverage India's lower cost of operation. From Indian call centres to IT systems managed by the Indian majors, India's lower cost of operation is in play everyday.
-In India, most high net worth individuals (at least the microscopic few I know of) are sick of services provided by Indian Banks. They prefer foreign banks. It will be a herculean task to expect an ICICI or HDFC to provide a similar level of service that customers in the US are used to or expect.

Bottomline: Having economies of scale is a different proposition from value added, quality services. My 2 cents is that Indian Banks are more into the first one and it requires a completely different mindset to do the second. Of course additions and corrections are welcome. :-)

Anonymous said...

I would expect Chinese Banks to be first movers in this respect.

Expect the first such deal to go through significant DoJ approvals and several political approvals before it consumates - so it will be a long drawn acquisition or merger process. Chinese or Indian banks would need to have deep pockets, would need to hire top high flying lawyers to navigate the troubled waters and have proper political lobbies and alliances.

Anonymous said...

Banking: In addition to ICICI, the Indian bank to watch is Kotak Mahindra ... it is small now but wants to be a global player one day.
Telecom: Clearwire-Reliance ... not yet ... one day in future but not yet ... Reliance needs all its cash to expand its GSM operations (moving away from CDMA) ... and possibly to emerge as market leader in triple-play (with WiMax??!! ... I know that's stretching)