On Friday, RBS announced that it has entered into an agreement with HSBC to sell its retail and commercial banking business in India, involving portfolios with a gross asset value of $1.8 billion as of March 31.
The total consideration will comprise a premium of up to $95 million over the tangible net asset value (TNAV) of the businesses being acquired at the close of the transaction, less an adjustment equal to 90% of any credit losses incurred on the unsecured lending portfolio in the two years subsequent to deal completion.
Completion, subject to regulatory approvals, is expected in the first half of 2011. In addition to seeking the required regulatory approvals, HSBC will also need to apply to the Reserve Bank of India for branch licences required to support the acquired businesses.
Some analysts say the deal could end up costing RBS, as the TNAV could be near neutral or negative and, if bad debts worsen in the next two years, that could quite simply erase the premium. That said, it is part of the master plan of RBS, which is 83% owned by the UK government, to consolidate and focus its efforts on key business areas.
"We are unable to quantify the credit losses at present," said an HSBC spokesman in Hong Kong on Friday.
RBS has sold more than 20 non-core businesses, including operations in countries such as Kazakhstan and the United Arab Emirates. In August last year Australia and New Zealand Banking Group (ANZ) bought its retail and commercial businesses in Hong Kong, Indonesia, Singapore and Taiwan, and its institutional business in the Philippines, Taiwan and Vietnam for $500 million plus a premium of $50 million. As has been well reported, this has been in part driven by the European Union, which has required banks that have received large amounts of government help to sell some of their non-core assets.
"We have made excellent progress in recent months with our disposal of non-core assets, resulting in over 20 businesses sold so far," said Bruce Van Saun, group chief financial officer for RBS, in a statement. "I am delighted that our retail and commercial banking colleagues and customers in India will now become part of HSBC, one of the largest and most successful banking groups globally."
HSBC is getting a sizeable business in a fast-growing market that restricts foreign participation in banking: RBS's retail and commercial banking businesses in India currently have 1.1 million customer relationships served by over 1,800 staff through 31 branches. HSBC currently has about 2 million customers and 50 branches across 29 cities in the Indian market.
India's central bank limits the role of foreign lenders in the country, but many overseas banks are looking to enter or grow their presence in the country. Last week, Japan's Sumitomo Mitsui Financial Group agreed to buy a 4.5% stake in Kotak Mahindra Bank for $296 million, Goldman Sachs has applied for a banking licence in India, and Australia and New Zealand Banking Group plans to return to the country after a 10-year absence.
But HSBC's nearest foreign bank competitors are Citi and Standard Chartered. Citi has been adding to its India team and Standard Chartered recently boosted its profile by raising $530 million in the first issue of Indian depository receipts. That said, provided the RBS integration goes smoothly, HSBC will be a tough competitor to beat in the coming years.
Speaking in New Delhi, Michael Geoghegan, HSBC's group chief executive, reportedly said: "The main focus of our strategy is on emerging markets and this acquisition is our third transaction in one of the world's largest and fastest growing developing markets in the past two years."
As for RBS, it continues to position itself wisely, streamlining its business and focusing on its global banking and markets, global transaction services and private banking businesses. In India it still employs more than 280 people for these businesses.
"Asia-Pacific [remains] one of four core regions for RBS Group. Post the sale of its retail and SME businesses, RBS will continue as a leading global wholesale and investment bank, transaction services and private bank in Asia-Pacific with a significant presence in 11 markets, including core markets such as India and China. This gives us an excellent geographic footprint, accounting for 90% of our current revenues in the region," said RBS's John McCormick, CEO of global banking and markets, APAC, in an emailed statement.
"We will continue to capitalise on the market opportunities in India, leveraging our in-depth local market knowledge, coupled with global expertise in providing financing, risk management, wholesale and investment banking, cash and trade finance solutions to our targeted clients," he added.
"Our client base is a more tightly defined group of large-scale sophisticated corporates, financial institutions and government institutions and we have been maintaining a very close dialogue with these clients, delivering the full depth and breadth of our resources and capabilities to them, including balance sheet," McCormick said.
