Only about three months into his current job, Stuart Milne is still “soaking up the Indian sun”. Just back from a short family vacation in mountainous Ladakh in Jammu and Kashmir, HSBC’s managing director and chief executive officer says he is still absorbing the colour, smell and diversity of a country that has millions of happy faces.
Quite a few of these happy faces have helped HSBC earn $814 million profit before tax in 2011 — its highest ever in India. India was the sixth most profitable market for the bank after Hong Kong, China, the UK, Brazil and Canada. The 19 per cent growth in profitability compared to the previous year was aided by reduction in losses of retail and wealth management operations and higher earnings of the commercial banking business.
Milne, who was till recently the country manager for Japan, has now decided to step on the gas in India so that HSBC stays on course to achieve $1 billion profit.
His predecessor Stuart Davis had set a timeline of 2013 for the landmark, but Milne is reluctant to set a timeline and says the target is more “directional in the near-term”. The hesitation in setting a timeline is obvious, the speed bumps faced by the economy, though Milne says India still has an enviable rate of growth compared to others.
“It would be foolish to look at just one or two quarters as the long-term trend is a rising one,” he says. “You can’t say that about many countries. The fact is Indian consumers are looking to become wealthier and are getting connected with the global economy.”
These are the set of customers that HSBC is targeting. “We don’t have the network (HSBC has 50 branches in India) or the cost structure to compete in the mass market,” Milne says. “Our target is the mass affluent segment and we want to provide the entire suite of products they need — credit cards, mortgage loans, regular deposit products, etc.”
Some of HSBC’s competitors, Milne says, has “product focus” — develop a product and then chase market share. HSBC’s strategy is the other way round, first identify the target client and then offer them service they would require. “We are not here just to build market share; our focus is profitable market share. We want to relevant to only certain sections,” Milne says. That explains why HSBC has slashed the number of credit card customers.
HSBC also wants to reduce its dependence on global banking operations and fee-based income (which now contributes almost 60 per cent to India profits) and increase the profitability of its retail banking business. “We have a large amount coming from the global banking and markets vertical and a relatively smaller contribution from retail banking, wealth management and from commercial banking. We have to balance that,” he adds. Commercial banking contributed just $122 million to HSBC’s profits last year.
Milne says correcting the imbalance is going to be easy considering that HSBC has only a very small share of the business at present. “Our retail business has become profitable, the task now to build scale in the mass affluent segment,” he adds.
Asked whether the UK parent would go in for further capital infusion, Milne says capital level is an outcome of the business the bank did and the current level of profits was more than sufficient to sustain the growth in business. In any case, HSBC’s capital ratio versus its peers was much stronger and is enough to sustain considerable growth.
Milne says what has worked in HSBC’s favour is that it was a full service corporate bank, from investment to retail, and hence is not dependent on any one category. “Some of our competitors may be dependent on their investment banking capability fee income, we aren’t.”
Admitting that the uncertain policy atmosphere is deterring many foreign companies in terms of inward mergers and acquisitions, Milne hopes it is just a temporary phase. In any case, the situation isn’t that great in other countries.
On the uncertainty over the deal with RBS to buy its retail and commercial banking businesses in India, he says talks with the banking regulator was constructive and he is confident that the deal will go through without any change in valuations. The RBS deal is crucial for HSBC, which wants to ramp up its physical presence in the country with the help of its 30-odd branches.