MUMBAI: A spate of billion-dollar deals for Indian banks has thrust the country’s financial sector into the global spotlight, at a time when US credit losses and trade tensions have rattled investors globally.
Over the weekend, Emirates NBD Bank PJSC said it planned to invest US$3bil in RBL Bank Ltd, marking the biggest foreign investment in India’s banking sector.
Earlier this month, Abu Dhabi’s International Holding Co PJSC inked a deal to buy into Sammaan Capital Ltd for about US$1bil, while Sumitomo Mitsui Financial Group Inc’s banking unit in May agreed to pay US$1.6bil for 20% of Yes Bank Ltd.
All told, about US$15bil of deals involving financial services targets in India have been struck this year, data compiled by Bloomberg showed as global investors scour for opportunities in one of the world’s fastest-growing major economies.
This builds on the momentum of prior years to invest in lenders, insurance and financial and technology players.
The exuberance to what’s happening elsewhere is striking.
Recent US collapses of Tricolor Holdings and First Brands Group have stoked fears of hidden credit losses.
India itself is trying to work things out with the United States after it was slapped with 50% tariffs that could hit its growth.
There also isn’t a track record of triumph by overseas buyers, as the sector remains dominated by well-entrenched local players and had struggled with a shadow bank crisis less than a decade ago.
“The success story of foreign banks acquiring Indian banks is very limited” and hasn’t always reflected in profit and revenue growth, said Hemindra Hazari, an independent research analyst.
The large sums foreign investors are willing to invest showed intent, but whether they can build a profitable retail franchise in India’s competitive market remains to be seen, he said.
For now, suitors are focusing on the positives. Indian lenders look relatively more insulated, and are gaining from rapid digital adoption, government moves, as well as a large under-banked population.
Japan’s megabanks have been outspoken about their appetite for Indian assets, while deep-pocketed firms from the Middle East and Europe are now setting their sights on the expanding middle class in Asia’s third-largest economy.
“The Indian growth story has been accepted globally,” RBL’s chief executive officer R Subramaniakumar said at a briefing on Sunday.
He pointed out that a stable financial system and robust regulators add to the appeal.
The Reserve Bank of India (RBI) has moved in recent years to strengthen the financial sector via measures aimed at boosting credit flow, encouraging lending and financing.
The regulator has also clamped down on excessive risk-taking, frequently warning shadow lenders about pursuing growth at any cost and vowing to take action if they don’t strengthen risk controls.
The steps come after the sector blew up about seven years ago when a pile-up of bad loans weighed on growth.
This led the government to overhaul bankruptcy laws and re-capitalise state-owned banks.
Now, policymakers are exploring ways to attract more foreign investment, including discussing options to make it easier for overseas investors to raise stakes in state-run banks and allowing large companies to apply for banking licenses, Bloomberg News reported earlier.
Recent set of earnings from industry heavyweights HDFC Bank Ltd and ICICI Bank Ltd saw both lenders reporting better-than-expected results driven by lending growth, even as interest margins remain under pressure.
The 12-member Nifty Bank Index has rallied more than 13% this year, closing at a record high last Friday.
More jumbo deals could follow. A planned government stake sale in IDBI Bank Ltd is expected to fetch billions.
Japan’s biggest lender Mitsubishi UFJ Financial Group Inc is actively hunting acquisition targets, and is said to be in advanced talks to buy a stake in Shriram Finance Ltd.
“Geopolitical risks have accelerated financial and supply chain risks, and foreign investors are looking for alphas in countries that minimise them,” said Vivek Ramji Iyer, partner and leader in financial services practices at Grant Thornton Bharat.
“India’s domestic focus and low correlation with the global economy make it a lucrative entry point.” — Bloomberg
