Joris Dierckx, CEO, BNP Paribas India
BNP Paribas has been growing its business in India. Besides wholesale banking, where it has invested new capital, it acquired stockbroking firm Sharekhan, and recently sold a part stake in SBI Life Insurance in an initial public offering (IPO). Joris Dierckx, country head and chief executive officer, BNP Paribas India, talks to on how the group plans to capitalise on the retail investors’ appetite for equities, mutual funds (MF) and other financial products. Edited excerpts:
After the part stake sale in SBI Life Insurance, where is the group investing in India?
The part sale was planned for a long time and we are pleased that the transaction went well. It was the fourth largest IPO ever. We are not exiting the joint venture, it was only a monetisation of some stake in the company and the proceeds from the sale were about $363 million.
Last year, we made an investment in the Sharekhan acquisition. And in 2017, we invested $200 million to increase capital for the bank branches in India and we will increase it next year, as required. The group will continue to invest as we grow our businesses in India.
What is the outlook on wholesale banking?
In wholesale banking, we go where the market is and have increased our market share substantially in the past four years. We have grown from being the ninth largest foreign bank to sixth. We continue to grow our share, though the market is not expanding at the moment as credit demand is low. We are waiting for it to pick up and trade volumes to improve. We will continue to grow the local balance sheet.
We are strong in transaction banking, trade finance, number two or three in cash management and continue to invest in solutions for domestic and cross-border businesses.
In global markets, which include foreign exchange and rates, we are expanding the team. Since 2013, the Reserve Bank of India (RBI) had placed restrictions on structured derivatives. There is some evolution there so we are bringing back onshore structuring capability. We are gradually building a track record in equity capital markets. In debt capital markets, we have always been active and continue to be.
What about other businesses?
We have institutional equities brokerage, which is steadily increasing its activity in secondary markets. Our custody business worked with global clients till date, but it now has domestic clients too. The focus is now on repositioning and improving presence. We have been present for over 20 years in the wealth management segment and India is an important part of our global strategy for this business. We are expanding the team as we aim to grow our client base and business. Retail financial services are a priority area for growth in India. Strategically, we are not pursuing retail banking here given the dynamic private sector banks.
What makes you so excited about the retail broking?
The market opportunity is huge. About 70 per cent of savings are in CASA (current and savings accounts), which will not stay there. The total market capitalisation is only 70 per cent of the gross domestic product (GDP) in India, while in mature economies it is 110 per cent or more. We foresee average long-term GDP growth of eight per cent per annum over the next 15 years and expect market capitalisation to grow from 70 per cent to 110 per cent of an expanding GDP.
That’s because with interest rates going down, money will move to equities and capital formation will accelerate. With expanding market capitalisation in absolute terms and increasing retail participation, we see opportunity for Sharekhan.
What are the plans for Sharekhan?
The first step is to capitalise on the market opportunity and the second step is distribution of savings and investment products, which Sharekhan already has with a presence in 500 cities and 1.4 million clients. Sharekhan has an ambition to move from the current third position as broker to second position by 2020. At present ICICI Securities (ICICI Direct) and HDFC Securities are ahead. We also want to develop Sharekhan as a preferred digital savings and investment product provider. It already distributes mutual funds.
We have a non-banking finance subsidiary in Sharekhan, which was missing in terms of product offering. Business development started in March and we are building on that base. It is a profitable business.
In Geojit Securities, you are large shareholders without management control. How does it work?
Following a restated agreement between BNP Paribas and the initial promoters of Geojit, some specific shareholder rights of BNP Paribas were terminated. Having given up our special rights and board memberships, we are like any other shareholder of Geojit Financial Services and no longer have day-to-day involvement in the running of the business.
Sharekhan and Geojit are complementary in terms of investments. The independent directors of Geojit had concerns over conflict of interest over the two investments we had made. We acknowledged their concerns, although we did not agree with them. In recognition of their concerns, we decided to step out of day-to-day management of Geojit.
Your MF business is not growing as fast as others...
We have a small market share but it is growing. We want to build a long-term sustainable business. In most markets across the world, the MF business is driven by performance first and then brand. In India, because the market is evolving, it is other way around. Our brand recognition among Indian retail investors is low.
Also, the top six firms control around 65 per cent of the assets under management, and there are around four dozen firms. So, it is a fragmented market. Our view is that the market sooner or later has to consolidate. Also, market dynamics will broaden the market — some of the 65 per cent controlled by six players currently will go to others. We will be able to position ourselves well when this happens.
Do you see synergy between the MF business and Sharekhan?
Indeed. Sharekhan distributes MF under open architecture. They sell funds of different asset management firms including the top six. The strategy is to increase the distribution of BNP Paribas funds through Sharekhan and other players.
The RBI has been nudging foreign banks to set up subsidiaries. What do you think?
We do not think it makes that much of a difference in terms of protection of the banking system. There is a big advantage to operate through the branch structure. Notably, we operate on the balance sheet of BNP Paribas SA, which has a $2,000 billion balance sheet and a strong rating. So, the financial system is well protected. For a branch, there is no limited liability of the parent company, whereas the liability of the parent is limited to onshore capital in the subsidiary structure.
The RBI is also creating a level playing field between foreign bank branches and domestic banks in relation to capital adequacy, priority sector lending, etc. If we project into 2019-20, we expect very little difference between domestic banks and foreign banks in terms of regulatory treatment.
Is there any other constraint in the subsidiary structure?
Foreign bank branches and their dealing rooms are engaged in foreign exchange structured derivatives, and operate on the support of the balance sheet of the parent bank and enjoy the same credit rating. If you incorporate locally, the local entity will get its own rating which will, by definition, be two-three notches lower than that of the parent. That means access for this entity to global capital markets becomes more expensive, and flows between global and Indian capital markets become less efficient.
For a bank with predominantly wholesale business covering corporate and institutional banking, having a local subsidiary does not add value. It creates constraints. So, we continue to hold the view that it is better to operate as a branch.