Bhatt Says State Bank `Nowhere' If ICBC Enters India (Update1)

State Bank of India, the nation's largest, said it will be at the mercy of Industrial & Commercial Bank of China Ltd. unless the government allows takeovers to bridge an $800 billion gulf in assets.

``If ICBC comes to India, State Bank will be nowhere,'' Chairman Om Prakash Bhatt told reporters in Kolkata on May 12. State Bank wants government approval to merge with seven units to add 50 percent more branches and boost lending.

While State Bank extends one in six loans in India and controls almost a quarter of Indian banking assets, it only ranks 69th globally. ICBC, based in Beijing, is worth more than the entire Indian banking sector seven months after it sold shares in the world's biggest public offering.

Finance Minister P. Chidambaram has said banks must merge to cut costs before overseas financial services firms are allowed to add branches and clients by taking control of private banks in 2009. Before China opened up its banking sector in 2006, the government pumped $400 billion into banks to clear bad debts and permitted $44 billion of stock sales.

``Overseas banks will certainly pose some threat but it will take some time for them to become a serious threat,'' said R.K. Gupta, who manages 3.5 billion rupees in Indian assets at Credit Capital Asset Management in New Delhi. ``It will be a good idea for Indian banks to consolidate to become stronger and more efficient.''

Buying Stakes

Citigroup Inc., HSBC Holdings Plc and Standard Chartered Plc have all acquired stakes in Chinese banks, helping them set up credit-card, consumer finance and lending businesses to compete on a global scale. The three overseas lenders are restricted to a combined 163 branches in India, a fraction of State Bank's more than 9,400 outlets.

``For any foreign bank to compete it needs penetration at that point of time,'' said R. Rajagopal, who manages 3 billion rupees as head of equities at DBS Cholamandalam Mutual Fund in Mumbai. ``Most state-run banks have a wide reach and that gives them an advantage which a foreign bank will take time to acquire.''

Demand for banking services in China and India, home to a combined 2.4 billion people, or a third of the world's population, is soaring as companies and individuals borrow to sustain the two fastest-growing major economies. China's $2.5 trillion economy grew 10.7 percent in 2006, surpassing an expected 9.2 percent expansion in India for the year ended March.

Loan Demand

Accelerating loan demand helped State Bank on May 12 report fourth-quarter profit increased by 75 percent to 14.93 billion rupees ($364 million) in the three months ended March 31. That was higher than the 10.87 billion rupee median estimate of five analysts surveyed by Bloomberg News.

Indian banks benefited from 28 percent loan growth in the year to March, following 35 percent average annual expansion in the previous two years. State Bank, which accounts for 15.5 percent of loans in India, gained from raising lending rates.

State Bank's shares rose 54.25 rupees, or 4.7 percent, to 1,203.45 rupees at 1:19 p.m., on the Bombay Stock Exchange. The stock has gained 6.8 percent over the past six months, valuing the bank at $15 billion. By contrast, ICBC's market value is $234 billion, according to Bloomberg.

Associate Banks

State Bank of India owns 100 percent of four of its seven associate banks; State Bank of Hyderabad, State Bank of Indore, State Bank of Saurashtra and State Bank of Patiala. It owns 75 percent stakes in State Bank of Bikaner & Jaipur and State Bank of Travancore and 92.33 percent of State Bank of Mysore.

Bhatt said the government may merge the associate banks into a single competitor, or allow them to sell shares and then merge with State Bank. The seven held assets of 1.4 trillion rupees as of March, 2004, according to State Bank's Web site.

State Bank has assets of less than $156 billion, compared with New York-based Citigroup's $1.9 trillion and ICBC's $962 billion. India's banking sector had about $676 billion of assets as of March 2006, compared with China's $5.7 trillion.

Almost all sectors of Indian economy need funds to grow. ICICI Bank Ltd. Chief Executive Officer K.V. Kamath estimates an investment pipeline of $500 billion for infrastructure and manufacturing projects over the next three years.

Tata Steel Ltd. and Hindalco Industries Ltd. needed to borrow from overseas banks to fund a combined $18 billion of acquisitions this year.

ICICI Bank on April 28 said it plans to sell 200 billion rupees of shares to meet growing demand for funds.

Seeking Acquisitions

State Bank isn't alone in scouting for acquisitions. ICICI Bank, India's biggest bank by market value, acquired Sangli Bank last month to gain 186 branches and access to prosperous farmers in the west of the country.

Canara Bank, the nation's fourth biggest by assets, on May 2 said it will buy a lender in the western and northern region. Chairman M.B.N. Rao declined to name the bank.

``Consolidation is in the best interest of banks,'' said Rao. ``Banks need to be large, huge and big,'' as competition from overseas banks increases and companies and infrastructure projects seek loans.

To contact the reporter on this story: Sumit Sharma in Mumbai at
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