Saturday, December 02, 2006

Is ICICI Bank (NYSE: IBN) a Citibank and HSBC killer in the making?

You have all seen the outsourcing boom taking thousands of jobs to India and the emergence of Infosys, Wipro, Tata Consulting Services, and Satyam as global powerhouses. Infosys with a market cap of $30B is not a small fish anymore-it is one of the major global software players now.

Those of you who are following the ICICI story can't be amazed at what this bank is doing not just in India, but internationally. The bank is establishing itself outside India very fast. From ICICI's website: "The Bank has subsidiaries in Canada and UK, branch offices in Bahrain, Hong Kong, Singapore and Sri Lanka and representative offices in Bangladesh, China, Dubai and USA." It recently got approval to expand in Singapore.

Banking is fun business. People come and give you their money-what you have to do is manage your risk to make sure that for every X dollars they give (in the past, present and future), you make 1.2X to earn a 20% profit margin. Banks are controlled and backed by Governments-making them lower risk plays than most other investments. They are also direct bets on the growth of an economy-which is the reason they correlate well with the overall stock market and the GDP.

Can banking move to India? ICICI already does this for it's banking operations outside India-it does most of the back-office stuff in India and maintains only a Sales presence in the branches outside India. Just a pretty face, so to speak-all the hard work is done in India. What's so great about this?

Costs. Let me say it again, Costs. Just as Infosys can hire a software developer at 15% the cost of a US software developer back in India, so can ICICI hire an accountant, a finance major, a business major, etc. in India, for 15% (or less) of an equivalent individual in the developed world. This is why ICICI can offer better rates on deposits to Canadian and UK customers than the local banks.

Can you see the outsourcing of banking going to India? People are wary of depositing money in a foreign bank-but they were wary of outsourcing to India before 2000 also. Eventually they trusted the Indians-and now I predict the second wave of outsourcing is going to happen-outsourcing of financial services.

ICICI is owned by the world-72% of ICICI shares are outside India. However, no single entitity owns more than 10% of the stock-making it a truly global bank in it's ownership. Citigroup and HSBC can try to take their back office operations to India-just as IBM and Microsoft and EDS are hiring thousands every year in India to take advantage of the low costs, but this will take time. ICICI is ahead of the curve, so far ahead that it will be nearly impossible for the foreign banks to establish their back offices in India faster than ICICI can grow outside India. The result-ICICI will be big winner in world banking. You can bet that if the bank executes well-it will be a major player in the worldwide banking industry in the next 5-10 years.

If you are on the board of directors of Bank of America, UBS or Goldman Sachs reading this blog, go buy some ICICI bank shares. You will own a phenomenon in the making.

If you are a bank employee outside India reading this-hedge your job now by buying ICICI bank shares! The Indian train is coming to take over the world's banking. Remember, banking ain't rocket science (and even rocket science has a good chance now of being perfected in China and India).

Sanjay John G.


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