Archive for July, 2013

High NIM Propels Indian Banks Into FORTUNE 500

Sunday, July 28th, 2013

The fragmented state of the banking industry and, arguably, the relatively conservative policies of the Indian banking regulator Reserve Bank of India, have kept the assets of Indian banks somewhat subdued compared to their global peers. Not surprisingly, league tables of the global banking industry that use asset as the benchmark to carry out their ranking, have traditionally been bereft of an Indian bank.

Barring FORTUNE 500 and State Bank of India, that is.

Since it spans multiple industries, the FORTUNE magazine uses revenues – not assets – to measure a company’s size. On this basis, the latest FORTUNE GLOBAL 500 list published on 23 July 2012* ranks India’s #1 bank SBI as the 285th largest corporation in the world. My industry analysis – more on that in a bit – shows that SBI is placed at the 33rd spot among 48 banks that feature on this fabled list of the world’s 500 biggest corporations. Debuting at the 498th rank in 2006 with US$ 13.755B in revenues, SBI has nearly trebled in size to US$ 36.95B to reach its current position where it’s bigger than Goldman Sachs (US$ 36.793B), Commerzbank (US$ 29.235B), Standard Chartered Bank (US$ 24.488B) and many other better known banking giants.

However, reckoned by assets, SBI’s US$ 360B place it well below China Merchant’s Bank, the smallest bank on this list (US$ 22.093B in revenues, US$ 445B in assets).

Therefore, SBI’s relatively high rank by revenues despite a lower asset base suggests that it turns over its assets at a greater rate than many other banks. To verify this, I searched the whole magazine and FORTUNE’s website for the banking industry list. Since I couldn’t find it, I developed one myself , which can be downloaded here.

Turns out that my guess was right. SBI ranks #7 on the Revenues / Assets metric as against #33 on revenues and # 45 on assets. While I’m no financial analyst, SBI’s superior Revenue:Asset performance can be explained by the relatively high Net Interest Margins (350 to 500 bps) enjoyed by banks – local and multinational alike – in India compared to many other countries. For the uninitiated, Net Interest Margin (NIM) is “a measure of the difference between the interest income generated by banks (from loans given to borrowers) … and the amount of interest paid out to their lenders (on deposits received from depositors), relative to the amount of their (interest-earning) assets”.

During SBI’s five year reign as a FORTUNE 500 company, no other Indian bank has entered the FORTUNE GLOBAL 500 list. A comparison of the revenues of India’s second largest bank, ICICI BANK, (US$ 13.812B) with that of the last company in the list (MANPOWER @ US$ 22.006B), might suggest that SBI’s solitary presence in the GLOBAL 500 list could continue well into the future. However, given the relative buoyancy of the Indian economy, there’s no ruling out the possibility that some other bank could become a FORTUNE 500 company sooner rather than later, especially if the industry’s high NIM levels hold up in the coming years. Let’s see…

Full Disclosure: Apart from my present or past banking relationships with some of the banks mentioned in this blog post, I have no interest in them.

* For those of you looking up this list online, here’s a word of caution: Although it’s called RANK 2011 in the print version of the magazine, the corresponding online version of this list shows up by selecting 2012 – not 2011 – from the dropdown menu on the website

Even If Customers Don’t Bother About Costs, Regulators Do

Sunday, July 7th, 2013

My recent post The Tug-of-War Between Different Pricing Models sparked a lively debate and attracted several comments and 1-on-1 feedback about whether customers care about costs or not.

Some people believe that buyers are only interested in the value they receive from a product and are least bothered about how much it costs a manufacturer to produce it. It’s thanks to such buyers that five star hotels – and many other industries – can get away with their prices. For example, a typical London 5* hotel charges £25 for a full English breakfast although its cost is less than 50p (Source: Hotel Babylon).

On the other hand, others – including me – believe that customers do care about costs. Take, for example, the author of this article who argues that Indian Railways is not justified in charging a higher price for return trips on trains. To give a bit of background, train tickets are always issued for one-way journeys. This is unlike air tickets where round trip booking is common and one-way trips are sometimes not even permitted. By issuing a return ticket, Indian Railways is certainly delivering convenience. Despite that, the consumer activist writer of the article complains about the premium solely on the grounds that Indian Railways is incurring no extra cost to issue a return ticket.

I concede that whether or not customers worry about costs is a cultural thing and could vary from one country to another. That said, the way the governments and regulators approach this topic seems uniform in many parts of the world. In a true laissez-faire economy, governments shouldn’t be involved in the business of business, let alone get into prices charged by private players. However, in the real world, they do.

Even in a Mecca of free market like the USA, there has been a spate of legislation in recent times around fees and charges that can be levied by banks. For example, according to Dodd-Frank-Durbin act, banks can charge a maximum of 24 cents per debit card transaction. While enacting this law, the legislators specifically linked price to cost and noted that fees for debit card transactions should be “reasonable” in comparison to the cost of processing them. Other examples where prices are set on the basis of costs are credit card APR limits (US CARD Act), overdraft charges on checking / current accounts (USA, UK) and insurance premiums (Germany, India).

So, whether customers care about costs or not, regulators do.