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.

SBI retains the top spot as loan provider in Asia ex-Japan

In the underwriter league table published by Bloomberg, SBI has retained top spot in year 2008 in both categories: Loans mandated arranger and loans book runner. With 46 deals worth 17 billion dollar, SBI enjoys a market share of 9.5% as loan mandate arranger. At the second position is HSBC with 4.3% market share. As a loan book runner SBI has 13.3% market share with 40 deals worth 18.7 billion dollars. At the second spot is Bank of China with 7.1% market share. Another Indian bank featuring in the top 20 list is ICICI Bank placed at 13th in book runner and 20th in mandate arranger ranking. Overall the loan disbursement volumes have fallen by 20-25% from year 2007.

The banks which holds the mandate of the borrower for the loan is Mandated Arranger. If there are multiple mandate holders each of them can be called mandate arranger provided they unanimously agree upon it.
The bank that keeps the book for a deal gets the book runner status. Generally, it is the lead arranger / main underwriter of the syndicate for the deal.

Data Souce: Bloomberg's Underwriter League Tables December 2008

State Bank of India (SBI) amongst World's top 50 Banks

State Bank of India, the only bank from India to figure in the FT Global 500 list, is amongst the top 50 Banks of the World by market value as on 31 December 2008. The complete list is available here. With a market capitalization of 16.8 billion dollars SBI stands at 43rd rank in the world in comparision to other banks. If Financial Services sector is included SBI ranks 52 with only 0.2 billion dollars less than coming within top 50.

SBI has higher market value than HBOS & Lloyds TSB of U.K., and Wachovia of U.S. It is quite close to U.K.'s fourth largest bank - Barclays which ranks 39 and has market value of 18.5 b$. These ranks are based on market value as on 31 December 2008. Since then Barclays market value has fallen considerably. Today, Barclays has dropped by about 25% to 12 billion dollars. Though market value is changing everyday it is the best measure which ideally(in an efficient market) takes into consideration all the fundmentals of the business.

At todays closing price and exchange rate SBI's market cap is 15.2 billion dollars.

Applying Dividend Discount Model (DDM) to 'State Bank of India' (SBI)

Dividend Discount Model values a firm's equity on the basis of the future dividends that the company is expected to give. Discounting all the future dividends gives the value of the stock as this is the only money an investor is going to get if he keeps the stock till perpetuity.

The general valuation formula for DDM is:
P = D1/(k - g)

where
P - ideal price of the stock
D1 - dividends for the year 1
k - cost of equity/ discounting rate
g - growth rate of the dividends

There are some assumptions in this model which require careful use of this model for finding the intrinsic value of a stock based on its dividends.

We will use a live example of State Bank of India (SBI) to illustrate the use of DDM. The following is the last 10 year dividend history of the company:

Year End	Total Dividends paid (Rs crores)	PAT (Rs crores)	Retained Earnings (Rs crores)	Retention ratio, b
Mar-98	211	1861	1650	0.89
Mar-99	211	1029	818	0.8
Mar-00	263	2051	1788	0.87
Mar-01	263	1880	1617	0.86
Mar-02	316	2423	2107	0.87
Mar-03	447	3105	2658	0.86
Mar-04	579	3681	3102	0.84
Mar-05	658	4305	3647	0.85
Mar-06	737	4405	3668	0.83
Mar-07	737	4534	3797	0.84

Using this we find that SBI has policy to retain about 85% of their earnings and distribute 15% as dividends to its shareholders. The retained earnings add on to the shareholder's equity and should earn profits for SBI. For each year we also looked into the returns on the equity (ROE) for SBI. the data is as follows:

Year End	Retention ratio, b	ROE	Growth rate, g
Mar-98	0.89	21.2	18.8
Mar-99	0.8	10.3	8.2
Mar-00	0.87	18.2	15.9
Mar-01	0.86	14.7	12.6
Mar-02	0.87	17	14.7
Mar-03	0.86	19.2	16.4
Mar-04	0.84	19.7	16.6
Mar-05	0.85	19.4	16.5
Mar-06	0.83	17	14.2
Mar-07	0.84	15.4	12.9

We have calculated the growth rate of dividends using:
growth rate = retention ratio X Return on equity ; g = b*ROE
Since dividends next year will be equal to this year's dividends plus the earnings on the retained earnings of this year with SBI.

The average growth rate for the 10 year period was about 14.7%.

SBI paid dividends of Rs 14 per share in 2007. Hence D0 = 14.
D1= 14*(1+g) = 14 * 1.147 ~ 16

Finding the discount rate is the trickiest part of the valuation and it depends on many factors and can be estimated using CAPM or other similar models. For simplifications we will take cost of equity as given in this case. We will take cost of equity as 15% and assume that SBI will enjoy this high growth for next 20 years before settling at something less than India's GDP growth rate (~ 7 %) and find out the value in the next article. Till then you can try it on your own.

[Hint: SBI is currently trading at 2400]


[To be completed in next post...]