17/06/2015
Indian banks face marketing challenge not seen in nearly two decades from the likes of Paytm or Flipkart
Aditya Puri, the 64-year-old chief executive who built HDFC Bank from scratch into the nation's most valuable in less than a quarter of a century, does not look up to the Indian Institutes of Management, or Wharton, or Harvard graduates to meet his hiring needs these days. Instead, he looks for enthusiastic youngsters from the eBays, Snapdeals and Flipkarts.
For Puri, competition is no more from just banking peers, but from anyone and from anywhere. It is no more the ability to do credit appraisals, or delivering service at customers' doorsteps that will determine whether a bank remains an investor's darling. It is a bank's ability to deliver services on the mobile handset.
Indian banks scramble to hire talent from the e-commerce industry, which is putting banks that are hundreds of years old to shame when it comes to valuations that investors offer, though many may end up in a whimper. The discussions dominating bank boardrooms are Paytm and Alipay, the payments company of Chinese retailer Alibaba, which last year had the biggest ever initial public offering in the world. Nearly half the valuation for Alibaba is derived from Alipay, which is yet to contribute significantly to earnings .
It may not be an exaggeration to say that some fear, with regulatory changes, that banks may be eclipsed by the nimbler startup e-commerce firms which are redefining the way business is being conducted. "There is a threat from everybody," says Puri. "You have to be paranoid. We are not talking about introducing one wallet or one video. The genesis of this (Payzapp) was that a lot of investors who came to meet us started saying banking is going to be obsolete. You are going to be a dinosaur. There are so many of these bright kids sitting in Silicon Valley who are looking at how to disintermediate you."
Just like the Alipays, Tencents and Baidus are stealing a march over established banks and retailers in offering customer convenience in China, payment enablers such as Paytm, Oxigen and others are an emerging threat for Indian banks. Lenders are reacting with apps such as Payzapp, ICICI's Pocket and SBI's tie-up with Amazon.
Paytm, a gateway and a market place backed by Alibaba is being valued at nearly $2 billion without much revenue or profits to talk about when Indian Bank and Indian Overseas Bank together with more than 3,500 branches and a century old history, are valued lesser. For more than a decade, banks were split into state-run, old private sector and the new-age private sector banks such as HDFC Bank and ICICI Bank, which derived higher valuations due to their customer focus and snatching market share from nationalised banks.
In four years, state-run banks have lost a 1.5 percentage point market share in savings account deposits while private banks gained 3.2 percentage points, according to brokerage Morgan Stanley. The loss in other segments is similar. For private banks too, future market share gains are not a given. A changing networking landscape and nimbler service providers can threaten their expansion.
For most manufacturing companies, it is price-toearnings or per-share earnings, what is known as EPS; for some it is on revenue. Among Indian banks, HDFC Bank is the priciest at more than four times its book value given its low bad loans, ability to have low-cost deposits, and keep growing both its loans and deposits. State-run banks, which have been struggling for survival, trade below their book value.
The basic business of a bank is to raise deposits from savers and lend to borrowers who are either investing in plants, or consuming things such as televisions or cars, or buying homes. When the essential role of a bank is to take a risk, how does it shift to earnings without much risk on its books?
If payments companies could get high valuations, why not banks, which anyway facilitate payments? In fact, the history of some highly-valued companies such as Visa or MasterCard in the US, or even the National Stock Exchange or the National Securities Depository in India show banks facilitate technological developments, but are poor in monetising them .
Be it product offerings from the likes of Paytm or Flipkart, Indian banks face a challenge they have not seen in nearly two decades. If top executives see what is coming and prepare for it, it may be an exciting ownership for investors. Invoking Charles Dickens' Tale of Two Cities, HDFC Bank's Puri says, "It is the best of times, it is the worst of times. I want to be in the best of times when change comes."
Source: Economic Times
