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Indian Enchantment: How HSBC Is Using Sustainable Finance To Drive Its Growth In India
HSBC has a reputation for doing things differently. In India, HSBC has emerged as one of the country's s strongest banks, thanks largely to its innovative approach to retail banking. Currently, HSBC is working through the acquisition of Royal Bank of Scotland's Indian retail and SME operations. This acquisition will give HSBC over 27,000 employees within India alone. Despite this, while others have been patient, HSBC has has dove into the Indian market, investing significantly in infrastructure, information processing, software, and transaction support systems. Many critics continue to question the timing of such investments, particularly considering the inflationary challenges India continues to faces. Moreover, many continue to express concern regarding India's long term monetary future, as well as HSBC's exposure to this financial risk. If inflation continues to persist above the current interest rates, won't the value of the Indian currency significantly weaken? While the answer to this question is yes, HSBC has refused to relent, relying on its unique organizational structure and sustainable asset base to drive emerging market growth. Will this be enough to ensure HSBC's long term success in India?
When one examines HSBC's financial statements, one of the most striking discoveries is its conservative asset to deposit ratio. HSBC has consistently kept its Indian asset to deposit ratio below 80%, opting to take deposits prior to lending. This approach has provided HSBC with a degree of financial comfort and sustainability that many of its competitors lack, enabling regional operations to stand independently. Additionally, HSBC has adopted a unique global structure, operating as a holding company with independent regional subsidiaries. Each subsidiary has its own board, management team, deposits, and capital. This structure has resulted in a balanced distribution of power through every operating market, forcing local and regional operators to maintain a long term perspective rather than focusing on short-term funding from capital markets. Additionally, HSBC has recently attempted a unique financing strategy, seeking to raise capital in India through the provision of perpetual bonds. HSBC currently maintains a tier-I equity capital base, which is close to 10.8%. About 96% of that is equity capital. Many continue to believe that the capital ratios will gradually increase to 12% tier-I capital. As this occurs, the capital raised through these new bonds will likely be considered as tier-I capital, providing a significant advantage to HSBC's financial position.
With so many positives, it's hard to question HSBC's Asian growth prospects. HSBC recently moved its main office to Hong Kong, and continues to look for operational expansion opportunities in India. Currently, over 60% of HSBC's profits come from emerging markets, with dramatic recent growth in India, as well as Australia. Moreover, India's internal consumption continues to increase despite inflationary challenges, and many expect that India will become one of the world's largest economies in the very near future. Having escaped the legacy of excessive debts, India will likely to not face the same kind of financial constraints that threaten to constrained developed nation growth over the next 5 years. Additionally, long term domestic demand within India looks positive, despite the recent faltering manufacturing performance which continues to impact operations.
India also continues to show promise as a private equity (PE) haven. In the April-June 2010 quarter, private equity investment in India rose to USD 2.3 billion, taking the total PE inflows this year to USD 4.29 billion. An upturn was also witnessed in terms of the number of deals recorded during that period. In the second quarter of this year, 24 PE transactions were effected, against 15 deals in the same period of 2009. The first two quarters of 2010 witnessed PE deals worth USD 4.29 billion compared to USD 4.32 billion in the entire 2009-10 calendar year. The largest PE transaction during the April-June period was Olympus Capital's USD 300 million investment in Tata Power's special purpose vehicle for developing Indonesian coal mines, followed by Temasek Holdings's USD 200 million investment in GMR Energy. Another major deal was Temasek's acquisition of a 5 per cent stake in the National Stock Exchange for USD 175 million. In terms of the number of deals, the most active sectors were finance, consumer discretionary and information technology. The top five deals accounted for nearly 42 per cent of the total value of private equity deals in the second quarter of 2010.
Despite global economic uncertainty, HSBC seems well positioned to capitalize on India's economic growth. Last week, the International Monetary Fund raised India's growth forecast for 2010 to 9.5%, arguing that favorable financing conditions and robust corporate profits would accelerate economic expansion. While this is positive, HSBC must continue to be vigilant. Europe's debt crisis threatens the global financial rebound, and public confidence remains fractured. Despite these risks, one cannot help but stop and applaud HSBC's aggressiveness in India. With a rich operational tool-kit and highly sustainable assets, it is hard to see how HSBC will not succeed in its quest to transform the Indian economy, bringing its shareholders profits, growth, and investment portfolio stability.