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By Isabelle Sender

Cashing in on India's Banking Boom

Global players are rushing to increase their presence on the subcontinent. Among S&P's picks: Citigroup and Bank of America

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From Standard & Poor's MarketScope

An annual survey of India's best banks places a local concern, Mumbai-based HDFC Bank, as the country's No. 1 pick in the large-bank category. But other names on the list will no doubt be familiar to U.S. investors -- especially a number of global players that Standard & Poor's considers attractive.

HSBC Holdings (HBC; S&P investment rank 3 STARS, hold)) moved to No. 2 among the large banks, from No. 7 a year earlier. Citigroup (C; 5 STARS, strong buy), a multinational with scale and size but limited exposure to India, dropped to the sixth slot, from its No. 2 showing a year earlier.

On the Top 10 list for those banks operating in India with fewer than five branches, JPMorgan Chase (JPM; 4 STARS, buy) and Bank of America (BAC; 5 STARS) head the small-bank pack, the survey suggests. The final results will appear in late February in Indian enterprise magazine Business Today, which partnered with consultant KPMG on the survey.

"BASTION OF GROWTH."  HSBC's ascendancy isn't surprising. According to London-based S&P equity analyst Derek Chambers, it has above-average exposure to fast-growing business segments, as well as what S&P views as long-term revenue growth potential in emerging markets. Many financial firms already have established a presence and seek to branch out more in India, in order to increase their exposure to this emerging market.

"India is a bastion of growth where financial-services firms are looking to leverage and allocate capital," says U.S.-based S&P equity analyst Mark Hebeka, noting he expects expansion in dynamic emerging markets in general in 2006 and beyond. "We view the larger firms as having an advantage due to their ability to invest more capital and sustain longer periods of building," Hebeka explains. "We view their diverse product offerings and the many relationships that most currently have as competitive advantages as well."

In a recent research report on Citigroup, Hebeka wrote that he believes more diversified players, like the New York-based giant, "will be able to have the freedom to allocate capital toward faster-growing emerging markets and invest in more profitable business lines and products."

DEEP LABOR POOL.  Some stand to benefit more than others, but Hebeka believes that U.S. investors seeking portfolio appreciation can expose their portfolios to India without taking on too much risk. Half of the names on the "Best Banks" list are foreign multinationals' subsidiaries whose corporate parents are highly ranked by S&P.

Hebeka views the rapid development of businesses in India as offering strong potential for commercial lending, as well as a large retail base with growing wealth and buying power. Some banks can't expand fast enough. JPMorgan, which admitted it was strapped for human resources in India, said it plans to expand in India by hiring 4,500 employees on the subcontinent over the next two years.

Half of India's population of roughly 1.2 billion is under the age of 25. So for at least the next 20 years, India will have a growing population of people in their prime working years -- unlike emerging-market rival, China, which has a rapidly aging population. Many businesses appear likely to benefit from the boom, including financial services. There were close to 300 foreign, public-sector, and regional banks -- up from about 60 in 1997 -- doing business in India last year. Not surprisingly, it was a year in which total bank loans alone grew about 30%, and consumer lending grew 8%.

CARD CARRYING.  India's low interest-rate environment is spurring a borrowing boom among the nation's consumers. As a result, Indians are buying homes, cars, and other products at rates never before seen on the subcontinent. India, which bills itself as the world's fastest-growing democracy, has a growing consumer base -- the latest estimates place its middle class between 250 million and 300 million strong. That's an eye-catching number for growth-minded global banks.

There's still room for Indian consumers to increase their debt load, according to a 2004 report by Merrill Lynch (MER; 5 STARS). Indian household debt was a mere 4% of gross domestic product -- the lowest among a group of south Asian countries including South Korea and Taiwan, each of which reported household debt exceeding 60% of GDP, and Malaysia and Thailand, with 25% each.

What's evident is that India, along with China and the rest of South Asia, is one of the fastest-growing consumer bases for credit-, debit-, and cash-card services from Visa, MasterCard, and American Express (AXP; 3 STARS). The $150 billion credit-card market in Asia is projected by Boston Consulting Group to grow at about 15% to 20% yearly for the next three years.

PRIVATE BANKING BOOM.  However, the size of the Indian credit-card market is estimated to be about $4 billion and growing at 35% yearly, according to GE Money, which was formed when GE Capital, the finance arm of conglomerate General Electric (GE; 3 STARS) partnered in 1998 with State Bank of India, provider of a quarter of all loans in India. GE Money states that it has experienced double-digit growth since then. In January, the company reached a big milestone, signing its 2-millionth cardholder.

GE's goal is to have $10 billion in consumer-finance assets on the Asian subcontinent by 2010. In August, 2005, Vishal Pandit, the head of GE Money, claimed to have the equivalent of $1.3 billion in Indian consumer-finance assets. He said he also plans to make acquisitions to increase growth after 2009, when foreign-investment rules for banking investment are scheduled to be relaxed.

India is the second-largest new-growth market for private banking -- after China -- in terms of the number of wealthy households. Boston Consulting Group projects that growth in Asian offshore private banking will be fueled by those two countries for at least another five years.

India's wealthy families have an estimated $560 billion in assets, and China's wealthiest have more than $700 billion. Investors seeking to expose their portfolio to these families can consider Asia's biggest private banks, which, according to the Financial Times, include Citigroup, HSBC, and UBS (UBS; 3 STARS). With household wealth growing at slower levels elsewhere in the world, the rising riches on the subcontinent represent an opportunity that the big global players simply can't ignore.

Sender is a reporter for Standard & Poor's Global Editorial Operations

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