When can an Indian bank rank in global top 10?

Today there is only one bank from India in global top 500 companies by their market value (Dec 2008). There are 81 banks and financial services firms in that list with only entry from India in this sector being SBI. In the top 10 banks there are three companies each from U.S. and China, two from Spain, and one each from Japan and U.K. The tenth largest bank is three times more valued than SBI. Despite of being a trillion dollar economy ranking 12th in world, Indian financial sector has failed to produce a big player at world level so far. This is even when there is huge growth potential for the Indian banks because of emerging economy.

The Indian banking industry is highly fragmented. The consolidation is taking place but there is a big limitation due to most of the banks being in public sector with government as their majority shareholder and controller. There are several restrictions on the operations of these state-owned banks. Moreover mergers and acquisition process within these banks is very difficult. The good part is that government is taking steps towards merging small banks with the bigger ones.

We have looked at the possible players from India which can grow up to the global level. The top three players – SBI, ICICI and HDFC are most likely to be the front-runners in this race. To grow to the size of global giants in terms of assets, and revenues will take more than 10 years for these banks if they pursue organic growth. In such a case, if the Indian economy continues to grow at healthy rate and there are not adverse conditions, SBI could come in global top 10 by 2020-2025. For ICICI and HDFC Bank it should take similar amount of time, as being in private sector they can pursue aggressive growth strategies.

M&A could shorten the journey considerably. After the recent merger of HDFC and Centurion Bank of Punjab, HDFC has been able to gain a wider coverage. M&A activities are likely to happen more often in the private sector banks. However, because of very small size of many private sector banks the incentive to acquire them is not much. Consolidation will still occur because of competitive pressure. A merger of two big players is likely to change the direction of the industry. In the absence of such mergers these banks will be prone to acquisition by foreign banks.

So, in any case it is unlikely for an Indian Bank to get on global top 10’s list in next 5-10 years on the fundamental basis. But on the basis of market capitalization it is still achievable in next 5 years as markets are believed to be ahead of and discount the future.