The world's largest banks

Once the trio of Oriental Bank of Commerce (OBC) in north India and Corporation Bank and Indian Bank in south India leverage their combined balance sheet strength of Rs 1,47,079 crore (Rs 1,470.79 billion) to build new businesses, they'll become the number three player in the country.

Marginally ahead of Punjab National Bank (PNB), but still way behind State Bank of India (SBI) and ICICI Bank.

What's more important, though, is that Indian banks fare very poorly in comparison with others globally. India's best and brightest, the SBI, is roughly one-tenth the size of the world's biggest bank -- Citigroup -- on the basis of Tier I capital. Citigroup's consolidated Tier I capital last year was $79 billion. For SBI, it was just $7.9 billion!

To arrive at the consolidated tier I figure, capital and reserves have been taken into account and revaluation reserves and minority interest (that is the parent bank's investment in group outfits) have been deducted from it.

On this basis, State Bank of India's global position is 72. It is not even within the first 10 big banks in Asia where the first three slots have been occupied by Chinese banks with each of them having a capital base of over $30 billion. In fact, six Chinese banks feature among the top 25 Asian banks while India has only two representatives -- SBI and ICICI Bank.

Based on the list that appeared in the July issue of The Banker (a Financial Times publication) HSBC Holdings was placed at the second slot after Citigroup, with a capital base of $74.4 billion. It is followed by Bank of America ($74 billion), JP Morgan Chase ($72.4 billion), Mitsubishi UFJ Financial Group ($63.9 billion), Credit Agricole Groupe ($60.6 billion), Royal Bank of Scotland ($48.6 billion), Sumitomo Mitsui Financial Group ($39.6 billion), Mizuho Financial Group ($38.8 billion), and Santander Central Hispano $38.4 million).

So, the global Top 10 features three banks each from the United States and Japan, two from the United Kingdom, and one each from France and Spain. China's biggest bank, China Construction Bank Corporation, is the world's 11th largest bank with a capital base of $35.6 billion.

The Banker list placed SBI at the 107th spot. However, this was done on the basis of SBI's 2004-05 balance sheet. Based on its 2005-06 performance, it's position should be 72nd. While that's marginally better, it doesn't help that the world's 10th bank is almost five times bigger (in terms of Tier I capital) than India's largest financial intermediary which roughly occupies about 20 per cent of the country's banking space.

In other words, the Spanish bank Santander Central Hispano is as big as the entire Indian banking industry and the Citigroup is twice as much in terms of capital employed.

Things don't get much better even when you shift the focus to Asia (excluding Japan). China Construction Bank Corporation is the Asian giant. It is followed by its local peer Industrial & Commercial Bank of China (Tier I capital: $31.7 billion) and Bank of China ($31.4 billion).

Then comes National Australia Bank ($17.3 billion), Kookmin Bank of South Korea ($11.6 billion), ANZ Banking Group ($11.5 billion), Commonwealth Banking Group ($10.8 billion), Agriculture Bank of China ($9.8 billion), Westpac Banking Corporation ($9.3 billion) and Bank of Communications ($8.9 billion).

So, China dominates the Asian banking space occupying five of the top ten slots, Australia accounts for four slots and South Korea for one. Here again, the Asian giant is four and half times bigger than SBI.

The other Indian bank that features in the list of the Top 25 in Asia is ICICI Bank, at the 22nd slot. ICICI Bank's capital base is slightly more than half of that of SBI ($4.3 billion versus $7.9 billion). Punjab National Bank has half of ICICI Bank's capital ($2.1 billion).

Bank of Baroda is next with a Tier I capital of about $1.8 billion, followed by Canara Bank ($1.5 billion). Three other Indian banks have more than $1 billion worth of Tier I capital. They are Industrial Development Bank of India ($1.48 billion), HDFC Bank ($1.15 billion) and Bank of India ($1.13 billion).

When it comes to two other parameters relating to scale -- total assets and profit (pre tax) -- Indian giants remain minnows. SBI's total assets are $154.8 billion against Citigroup's $1.5 trillion. Similarly, ICICI Bank's asset base is $56 billion and that of Punjab National Bank is $33 billion.

There are at least 15 banks in the world which have assets over $1 trillion. Citigroup is one of them. The others are HSBC, Bank of America, JP Morgan Chase, Mitsubishi UFJ, Credit Agricole, Royal Bank of Scotland, Mizuho Financial Group, Barclays, ABN Amro, UBS, Deutsche, BNP Paribas, Societe Generale and Credit Suisse. No Chinese Bank has over $1 trillion assets. Industrial and Commercial Bank of China, which has the maximum asset base, has a book size of about $800 billion. This is over five times State Bank of India's asset base and roughly about the size of India's total banking assets.

Similarly, SBI's consolidated pre-tax profit is $1.9 billion against Citigroup's $29 billion, Bank of America's $25 billion and HSBC's $21 billion. Industrial and Commercial Bank of China's pre-tax profit last year was $7.3 billion and that of China Construction Bank was $6.8 billion.

The one area where Indian banks are able to compete with their global peers is their return on assets (RoA). Among big Indian banks, ICICI Bank, PNB, Canara Bank and HDFC Bank have a return on assets of over 1 per cent return, while SBI's return on assets is 0.89 per cent. Among Indian banks, HDFC Bank has the highest return on assets -- 1.71 per cent.

This is lower than that of Citigroup (1.97 per cent) but much better than the RoA of HSBC (1.40 per cent). Our banks are small but efficient. However, if the economy has to grow at over 8 per cent, they must build the scale. India Inc has already announced over Rs 650,000 crore (Rs 6,500 billion) of investment plans. Without the scale, local banks can't possibly support this growth story.