India’s largest private sector lender HDFC Bank is exploring a potential bid for the assets of Citi Bank India and may join a bevy of suitors eyeing the retail operations of the global banking behemoth, sources with knowledge of the matter told Moneycontrol.
“ Citi Bank India has a good quality book, low provisioning and NPA’s and good quality customers. It represents an opportunistic buy for a player like HDFC Bank and it can use the portfolio to sell many more products,” said one of the individuals cited above without specifying whether the latter would be keen on the entire portfolio or select assets.
On 16 April, in a move which shook the industry, Citibank said it will exit consumer/retail operations in 13 countries across Asia and Europe, including India to focus on the institutional and wealth management business in these markets. In India, the financial powerhouse had close to 30 lakh customers in retail, 22 lakh credit cards and 12 lakh bank accounts, as of March 2020.
“It is undoubtedly a quality target with a lot of interest. These are early days and HDFC Bank may evaluate it,” said a second individual adding that the preliminary interest may or may not culminate into a final bid.
On April 20th, Moneycontrol had reported that the likes of DBS Bank, HSBC, Kotak Mahindra Bank & ICICI Bank are eyeing Citi’s assets.
Any sale of the consumer /retail assets of Citi India would be subject to an RBI approval, the bank’s officials had earlier told Moneycontrol.
Recently, a Macquarie report had mentioned a number of names as potential suitors for Citi's assets. These include SBI Cards, ICICI Bank, Axis Bank, RBL Bank, IndusInd Bank and IDFC First Bank.
According to reports, Macquarie has also estimated a value of $6.3 to $8 billion for Citibank's consumer business across ten of the 13 markets in the Asia-Pacific region. The Indian business which is also part of these ten markets could fetch between $1.91 billion $2.15 billion, according to the brokerage.
HDFC BANK & TECH OUTAGES
Will banking regulator RBI’s diktat in December which barred HDFC Bank from new digital launches and issuances of fresh credit cards pose a hurdle in the lenders potential pursuit of this deal?
“ Regarding the cards component, this proposed transaction is not about issuing new cards, but about taking over existing cards. A substitution of sorts. Typically, in such takeover situations, one is allowed to use the target’s brand for a few months during the transition phase,” elaborated the first individual cited above.
But some analysts feel HDFC Bank, which has the largest credit card base in the nation, may face deal hurdles due to the current regulatory restrictions.
In a recent analyst call, HDFC bank said the third party audit of its’ IT infrastructure by an RBI-appointed auditor is still underway. Once the audit is over, the RBI will take a call based on the feedback from the auditor, the bank said. There is no clarity on how long this process will continue.
On April, 19, HDFC Bank’s managing director and CEO, Sashidhar Jagdishan wrote to employees to alleviate concerns on recent multiple technology glitches and said the bank is working with them ( regulators) “closely to overcome the current situation." In the letter, Jagdishan said the bank had embarked on a Technology Transformation agenda , strengthened its firewalls further & would tighten processes linked to monitoring its Data Centre.
The RBI action was triggered by frequent outages in HDFC Bank’s digital services reported over the last two years. To be sure, HDFC Bank isn't the only bank which has reported technology problems. It's PSU rival, State Bank of India too has reported frequent technology glitches.
BANKING M&A INVOLVING FOREIGN LENDERS
On the interest from foreign suitors, a third individual who closely track the financial services industry said, “ The banking regulator’s stance in such deals is crucial regarding transfer of domestic branches and other related aspects.”
This is not the first time that a foreign bank has decided to put its India assets on the block. Back in July 2010, HSBC had announced that it would acquire select retail and commercial assets in India owned by Royal Bank of Scotland. Back then RBI had given the green signal for the portfolio sale but was against the automatic transfer of RBS’s branch offices in India to HSBC, according to media reports.
All the three individuals above spoke to Moneycontrol on the condition of anonymity.
In response to an email query from Moneycontrol on the interest in Citi’s assets and the regulatory overhang, an HDFC Bank spokesperson said, “As a matter of policy we do not comment on market speculation and rumours.” Citi India declined to comment.
“Citi's exit from India will be an opportunity for players in India to either acquire the existing stock of clients and/ or gain market share in segments like credit cards, deposits and retail loans,” said Jefferies in a report released earlier this month.
In November 2020, RBI had announced a draft scheme to amalgamate ailing Lakshmi Vilas Bank into DBS Bank India, which is owned by Singapore based DBS Bank. In March 2019, DBS Bank adopted the wholly owned subsidiary model in India which makes expansion flexible for overseas banks and treats them at par with local lenders. State Bank of Mauritius also follows the same model.
A CLOSER LOOK AT CITI INDIA’S OPERATIONS
As mentioned earlier, Citi Bank had close to 30 lakh customers in retail, 22 lakh credit cards and 12 lakh bank accounts, as of March 2020. It had around six percent market share of credit card spends in December 2020, but this percentage would have declined further since then.
The bank had advances of Rs 66,507 crore and deposits of Rs 1,57,869 crore. Citi's retail revenue contributed 30 percent to the total in March, 2020, while corporate pitched in with 50 percent. In 2018-19, retail contributed 34 percent and corporate 46 percent, according to the details available. Thus, the retail business had been struggling.
The percentage of non-performing assets (NPAs) to net advances has gone up to 0.56 percent as of March, 2020 from 0.51 percent in the previous year.
Return on assets slightly moderated to 2.55 percent from 2.57 percent and business per employee improved to Rs 43.6 crore in FY20 from Rs 37.6 crore in the previous year. Interest income declined to 6.73 percent from seven percent during the period.
Compared with this, Citi’s local rivals have been increasing share of retail business increasingly using digital channels. For instance, HDFC Bank’s retail portfolio has grown by around 7 percent as on March, 2021 from the year-ago period. Within the retail portion, HDFC Bank grew its credit cards business by 12 percent and home loans by around 10 percent. Similarly, Axis Bank has increased the share of retail loans by 9 percent on a year-on-year basis as per the data available till December, 2020.( With Inputs From Dinesh Unnikrishnan)