Goldman Sachs: Indian/Chinese Institutions Could Buy American Banks

I never thought I would see this in my lifetime but emerging market financial institutions from India or China may be able to buy out American banks due to the fallout from mortgage crisis, according to the latest Goldman Sachs (GS) report. The report says:

Further, we would not be surprised to see the first acquisition of a major US broker or commercial bank by an emerging market institution. While most US brokers and some US banks have broadened their geographic presence over the past decade, none has developed a truly robust Chinese or Indian offering. With these economies growing at multiples of the US, we would not be surprised to see a larger international bank attempt to gain access to the US financial services community through acquisition.

Add to the mortgage crisis, the rapid decline in value of US dollar against these currencies and the growth rates of these economies - the scenario begins to look much more plausible. It's a matter of when and not if.

So What?

The ownership of a company by a foreign institution, although sure to cause a ruckus with the likes of Lou Dobbs, is not a big deal. After all, even today banks like Citi (C) have substantial foreign ownership from the likes of Saudi Kings and Princes. And emerging market banks like India's ICICI Bank (IBN) have substantial foreign ownership - which means Americans own part of these institutions through a complex chain. But there is a big deal.

The Big Deal: Lower Cost Structure

The cost structures of these banks are much lower than that of their American counterparts. A few years ago, I met an executive from one of these banks at a banking conference event. The Indian bank was having trouble obtaining a license to operate in the US and he said to me that it was because American banks did not want competition in their home court.

A country such as India where cell phone calls cost a penny per minute, cell phones cost $25, cars are being designed for $2000 and employees still cost 1/3 to 1/10th of US counterparts, can deliver banking services at much lower costs.

First it was IT, now it may be the turn of banking. Telco and retail could very well be next. Clearwire (CLWR)-Reliance anyone?

Comments

[ratsharp]

anshu couple of points..
1. indian banks too dont like competition on home front...license to open branches are limited in india too.
2. the cost structure arbitrage in banking is a myth beyond what jp morgan's done in its retail business ... IB/capital markets cannot be handled frm india
3. branch banking in india ..is like branch banking in us.. the big banks realize that all of it cant be online..and so their cost structure is already lower... getting indian institutions cant reduce costs ...unless of course oracle offers discounted prices to indian/chinese banks..
4. the purchase of american institutions by indian/chinese is based on the premise that the latter will get cheaper/efficient assets in US compared to their own country ..and possibly rreplicate some of the setup in their own less efficient environment...
5. people dont do serious banking with cheap costs ( coz costs with larger us banks is low based on the services they provide in a country which is multiple times the size/scope of india/china ( in terms of urban areas) ...similar to telecom. The high end banking is about trust ... can never be inspired by countries which have possibility of nationalization etc.

more later...

[Anshu]

You make some excellent points. Let me respond point by point:

1. Yes, Indian banks don't want competition in their backyard. Who does?
2. Its not just about cost of processing. US banks can outsource to low cost centers too. Smaller competitors (Indian/Chinese banks or even ING Direct in US) are often willing to provide same services for lower costs. This is not about utopia - the Chinese and Indian banks need to globalize if they want to compete with likes of HSBC and ABN AMRO.
3. Yes, branches are needed. In fact, they provide a more sustainable competitive advantage to bigger banks than any online feature possibly could.
4. Yes.
5. Wealth Management and other high-end businesses would be hard to break into. But that is the reason to buy rather than organically build out a global banking operation.

Overall, I agree with your theme and arguments.

(All opinions expressed here are personal.)