Global Banks Target Indian Investors

The bull market is on hiatus, but that hasn't deterred the likes of HSBC, BNP Paribas, and ABN Amro from moving into retail brokerage

By Nandini Lakshman

The Indian economy is getting hammered. Since January, the rupee has weakened 9%. The stock market capitalization (BusinessWeek.com, 1/22/08) has shrunk 32% and is currently hovering at its lowest level since June of last year. Inflation, at 11%, is at a 13-year high. At least in the short term, the India growth story is seriously in danger.

But foreign banks are beefing up their operations in India, particularly in retail brokerage. They believe that despite the current gloom it's only a matter of time before the stock markets bounce back and investors flock to their brokers. "The India story remains a good one," says Tarun Kataria, chairman of HSBC Securities & Capital Markets in India. "Experience suggests that a time of maximum bearishness represents a good buying opportunity."

Like others, Kataria wants to be prepared. That's why last month HSBC (HBC) acquired a publicly listed homegrown broker—IL&FS Investsmart—to debut retail brokerage, catering to the average investor in India. It was a late move for the bank. HSBC has been providing banking services to India for more than a century, but mostly in the personal banking, credit card, and wealth management business. For the really tough business of selling debt, equity, and other investments to average investors, local banks dominated.

Global Banks Target Middle-Class Investors

Other global banks have also developed the risk appetite for more lucrative work. In the past three years, many have set up wealth management units targeted at the rich and growing middle class with rising disposable income. Now they want a wider clientele: the less wealthy but promising retail customer.

Merrill Lynch (MER) was one of the leaders, having bought out Indian partner DSP in 2005. Though Indian companies like Kotak Mahindra and Motilal Oswal have been some of the leading brokers in the country, foreign players like ABN Amro, BNP Paribas (BNPP.PA), and Citi Wealth Advisors, the retail brokerage arm of Citigroup (C), have been trying to narrow the gap.

Until a couple of months ago, India's market was the place to be. In the last four years, a bull run in India ensured over 200% returns (it's backed off 29% from its all-time high in January) for foreign and local retail and institutional investors. As investors rushed into the market, the sheer scale of average daily retail turnover—up over fourfold to $12.7 billion in 2008 from $3 billion in 2004—made being in the brokerage business a must for foreigners (BusinessWeek.com, 11/8/2007).

Cleaning Up the Brokerage Business

Over the years, the Indian market has cleaned up its act, too. Unlike the bull run of the 1990s, when many brokerage firms were embroiled in some major scams and subsequently ran up huge losses, the Securities & Exchange Board of India's fully electronic boards have made the investment exercise more transparent, and easier to detect scams. The launch of futures and options trading in 2001 brought in a whole host of investors.