Chaudhuri May Lead India's Largest Bank as Rival ICICI Expands

By Ruth David and George Smith Alexander - Mar 13, 2011

State Bank of India, the nation’s biggest lender, is poised to name 36-year veteran Pratip Chaudhuri as chairman as competition from rivals including ICICI Bank Ltd. intensifies.

Deputy Managing Director Chaudhuri, 57, was the only person recommended to a cabinet committee tasked with selecting the head of the state-controlled bank, a finance ministry official said on March 11, declining to be identified before an official announcement. Chaudhuri didn’t return three telephone calls to his office in Mumbai.

Chaudhuri’s task of boosting shareholder returns at the 205-year-old lender may be hampered by state control that gives private-sector rivals an edge in mobile and Internet banking, said hedge fund manager Vikas Pershad. Goldman Sachs Group Inc. and Morgan Stanley are seeking licenses in the world’s second- fastest growing major economy and ICICI posted record earnings.

“Now private banks are better positioned to capture growth,” said Pershad, Chicago-based chief executive officer of Veda Investments LLC. “Over the next five years, if I think of which bank in India will perform the best in terms of return on equity and share price, I find it difficult to believe SBI will be first, second or third.”

Shares of State Bank, which accounts for almost a quarter of India’s loans, are unlikely to outperform local rivals such as Mumbai-based ICICI, India’s second-largest lender, said Pershad, who doesn’t hold the stock and says he doesn’t plan to invest in the state-run lender.
Stock Performance

State Bank has more than tripled in the past five years, compared with a 66 percent gain in ICICI, according to data compiled by Bloomberg. The stock shed 1 percent to 2,565.15 rupees in Mumbai trading on March 11, giving the lender a market capitalization of $36 billion.

Chairman Om Prakash Bhatt, who began his term as head of the Mumbai-based bank in July 2006, will retire at the end of this month. During his tenure, the bank’s loans climbed almost threefold to 7.4 trillion rupees ($164 billion) as of Dec. 31, and deposits more than doubled to 8.79 trillion rupees.

Chaudhuri, who started with State Bank in 1974, was put in charge of international banking operations in April 2009.

The new chairman of State Bank will need to attract deposits and raise capital in a banking system with tighter liquidity constraints, Brian Hunsaker, an analyst at Keefe, Bruyette & Woods Asia Ltd. in Hong Kong, said on March 12 from London. The lender will also need to expand lending while curtailing growth of bad loans, he said.
‘Immediate Challenge’

ICICI, whose loans and deposits shrank for almost two years as Chief Executive Officer Chanda Kochhar sought to curb unsecured lending and reduce the cost of funds, will also be a tougher competitor, Hunsaker said. The lender in January said profit for the quarter ended Dec. 31 rose 31 percent to a record as loans increased and provisions for bad debts declined.

The nation’s largest non-state lender plans to add 500 branches a year, Kochhar said on Jan. 28. ICICI has more than 2,500 outlets, according to its website. That’s about a fifth of the more than 12,400 branches operated by State Bank.

“There’s a limit to how much SBI can gain given its size,” Hunsaker said. “SBI’s major competitor is now going to be a force to reckon with: That could be the new chairman’s immediate challenge.”

Foreign banks may also increase operations in India, though they won’t pose a threat to State Bank until they’re allowed to expand branches or make acquisitions, Hunsaker said.
New Licenses

Morgan Stanley is awaiting approval from the Reserve Bank of India for its banking license application, the Mint newspaper reported last month, citing V.K. Bansal, chairman of the New York-based firm’s local unit. Goldman Sachs, which offers investment banking and research services in the Asian nation, has applied for a commercial banking license in India, the New York-based company said almost a year ago.

India’s central bank will issue guidelines on new banking licenses by March 31, Finance Minister Pranab Mukherjee said last month as the government seeks to expand banking services to the nation’s rural areas.

State Bank, whose operations include insurance and corporate advisory units, said profit for its banking unit climbed 14 percent to 28.3 billion rupees for the three months ended Dec. 31. The lender accounted for 17 percent of the nation’s loans and deposits, it said in a presentation on its website.

The lender should consider developing a “large overseas presence” to build foreign exchange reserves that can support acquisitions abroad by Indian companies, said Abizer Diwanji, executive director for corporate finance and head of financial services at KPMG India Pvt. in Mumbai. State Bank should seek greater market share in handling global remittances, he said.

Still, the government’s control over State Bank’s operations makes the lender less flexible and able to adapt to changes than private-sector rivals, Hunsaker and Pershad said.

“It’s not been easy to change the working of the bank, to get the elephant to dance,” Pershad said. “The real test for the bank will come now, to meaningfully expand earnings growth.”

To contact the reporters on this story: Ruth David in Mumbai at rdavid9@bloomberg.net; George Smith Alexander in Mumbai galexander11@bloomberg.net.

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net
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