Despite operating with just under 300 branches, foreign banks have achieved a reasonable size and scale within the Indian banking system, accounting for 5.6% of deposits and 5.5% of advances, said a report by HDFC Securities. Foreign banks account for 14% of profits, 26% of fee income, 10% of employee cost and 10% of gross non-performing assets (NPAs) of the system. Against the general perception, while credit growth was tepid at 22%, profit over the last five years grew at a CAGR of 27% as against 19% for the system.
Lower cost of funds underpinned by a strong CASA and lower leverage, regulatory exemptions and lending to high yield segments resulted in best in the class margins (NIMs) at 5%. The report noted that their focus on non-fund activities has resulted in robust growth in fee income at 33%, CAGR to 41% of operating revenue as against 26% for the system. With listing of depositary receipts of StanChart in India (IDRs) ? the first ever ? investors. especially domestic ones, will have an opportunity to take global exposure in banking. Approximately 80% of the total foreign banks? implied market capitalisation would be accounted by three large banks ? Standard Chartered at $12.8 billion, Citibank at $9 billion and HSBC at $3.6 billion, it said. These banks account for 70% of total foreign bank?s balance sheet. Put together, these three banks would account for 80% of the total market capitalisation of the foreign banks and 20% of the total banking system in India.
Foreign banks have carved a niche in the vast lending market of India largely benefiting from the global presence of parent banks. These banks have developed an expertise in offering specialised products including structured products, non-fund based products, and advisory on cross border transactions, apart from other vanilla products. Until the break out of global financial crisis, retail had also been a focus area of large foreign banks such as StanChart, Citibank and HSBC and it accounted for 30-50% of their loan book; the proportion of retail book for foreign banks grew to 30% in FY08 (from 26% in FY04).