State Bank of India buys Indonesian bank

With its third acquisition this year, what is State Bank of India''s strategy?

At an address on contemporary and future issues in Indian banking early this year, V Leeladhar, Deputy Governor of India's central bank, told the audience that the, "The notion that the State Bank of India (SBI) can compete in the international arena seems far fetched at the moment". To corroborate this statement, he cited The Banker magazine's ranking of the world's top 1,000 banks. This stated that India's largest bank ranked number 82 with assets of $91 billion in 2004 and was not even one tenth the size of Sumitomo Mitsui, which ranked ninth with assets of $950 billion.

SBI chairman AK Purwar, is obviously not laying too much store by Leeladhar's statements. On Monday, SBI announced that it had bought a 76% stake in Indonesia's PT Bank IndoMonex, an unlisted bank headquartered in Jakarta.

Purwar issued a press release stating that the acquisition will provide SBI an entry into Indonesia and "increase footfall in the ASEAN region". The Indonesian acquisition is SBI's third overseas acquisition this fiscal year, following on the heels of deals in Mauritius and Kenya.

Purwar has publicly stated that for a bank, which has grown domestically from 400 branches in 1955 to almost 14,000 branches in 2005, SBI's international presence is not commensurate with its domestic dominance. SBI now plans to increase its coverage from 54 offices covering 31 countries to 70 offices covering 36 countries, with a focus on Asia and Africa.

Purwar has set ambitious targets that earnings from overseas operations should multiply from the current 6% to 15% to 20% within three years. Further, he intends SBI to become one of the top three banks in Asia by 2008 and among the top 20 globally over the next few years. Purwar's team has been working overtime to convert his vision into reality.

On October 7 SBI announced the acquisition of 76% stake in Giro Commercial Bank in Kenya for an undisclosed amount. Giro Commercial Bank was a closely held bank with promoters of Indian origin. It had six branches in Nairobi, Mombasa and Kisumu. In February, SBI acquired control of Mauritius based Indian Ocean International Bank for a consideration of $10 million.

Fitch Ratings has a BB+/AAA (local) rating on SBI. Managing Director Amit Tandon says, "Although the Indonesia acquisition specifically is too small to have any significant rating impact for SBI, in general we believe that SBI's strategy to globalize through acquisitions is a good one".

Fitch published a special report on Indonesian Banks dated October 18, 2005, which mentions that, "Foreign ownership of Indonesia's banks has removed the risk of related-party lending that proved so devastating to them during the Asian crisis. It is also seeing best-practices introduced, particularly in the crucial area of risk management policies and procedures".

In this context it is likely that Indonesia is welcoming SBI with open arms. SBI's initial focus seems to be on countries which have either a large number of Indians and/or Indian businesses.

However, some analysts are already questioning whether a bank with a domestic market share of around 25% is going to be able to make its presence felt globally with fragmented acquisitions like the three announced so far this year. Purwar addressed exactly the issue at a banking symposium this year. He said that as SBI is new to this area it would like to start small and even burn its hands whilst gaining some experience.