Bank looms large in Ambani manoeuvre

Mukesh Ambani, the Indian billionaire, is known for keeping his cards close to his chest. No surprise, then, that more than a month after he announced his entry into India’s financial services sector via a joint venture with DE Shaw, the US hedge fund, few know exactly what he intends to do in the world of finance.

The union between the secretive businessman behind Reliance Industries and the $20bn fund known for using complicated mathematical models to spot market trends has left investors and market observers guessing.

But behind closed doors and in the exclusive clubs where many of Mumbai’s most influential spend their weekends, rumours abound that the billionaire aims to found the first bank owned by an Indian conglomerate.

“[Mukesh] Ambani definitely wants to open a bank,” says a person close to the chairman of Reliance Industries, his flagship holding company. “The man likes to think big when it comes to investing in a new business.”

His end goal, say people familiar with the matter, is a “Bank of Ambani” – as some financiers have termed the budding financial venture – that can compete with ICICI Bank, India’s largest private sector lender and retail bank.

Building a bank from scratch is ambitious but for a man whose father went from son of a poor village teacher in Gujarat to founder of India’s biggest family-controlled conglomerate, the mission is far from impossible.

Analysts say that given the landscape, a “Bank of Ambani” would make sense.

India’s state-dominated banking sector, while fragmented, is stable, according to Moody’s. One of its strengths is its “favourable funding profile, driven mainly by retail customer deposits and a minimal dependence on wholesale funding, which provides stability to the banks,” says the US rating agency.

The country’s biggest private sector banks including ICICI and HDFC have weathered the global financial crisis better than peers in developed markets and since late 2009 have routinely reported record quarterly profits as credit demand surges.

But more importantly, most of India’s 1.2bn people still have no access to formal banking services, a predicament that has prompted the government to propose allotting new banking licences.

The government is keen to tap the expertise of the private sector, which in industries such as consumer goods and mobile telephony has found ingenious ways to reach new markets.

Reliance is expected to have cash and cash equivalents worth about $22bn by the end of March 2012, according to HSBC.

DE Shaw has extensive experience in India, where it employs more than 1,300 people in corporate debt and portfolio management, making Asia’s third-largest economy its biggest base for operations outside the US.

Analysts say that Reliance’s financial war chest and powerful brand within India are a good match with DE Shaw’s technology and sectoral experience to build a solid and profitable retail banking network.

However, the ambitions of the man who ranked ninth in the Forbes March 2011 global rich list with a fortune of $27bn could be thwarted by India’s central bank.

The Reserve Bank of India, which regulates the industry, is divided over whether conglomerates should be permitted to own banks. “Conflicts of interest, concentration of economic power, likely political affiliations, potential for regulatory capture, governance and safety net issues are the main concerns,” it says.

The central bank was expected to make a call on the matter by the end of March but has postponed the decision indefinitely. Analysts, however, expect a verdict by the end of this year.

That delay partly explains Mr Ambani’s reluctance to disclose details about his intentions, as the central bank’s call on whether conglomerates can own banks will determine his plans in the financial services sector, says one analyst.

Even if the central bank’s verdict is No, Mr Ambani plans at least a private equity business, energy trading, a mutual fund and an infrastructure lending unit, say people familiar with the situation.

What is also certain is that Mr Ambani would be competing directly with his younger brother Anil, whose Reliance Capital is a significant operator in the financial services sector and a likely competitor for a banking licence.

The two brothers could be setting the scene for another battle, given the prevailing view that even if the central bank does give conglomerate ownership the green light, it is unlikely to allow both Ambani brothers to have fully fledged retail banking institutions.