At a time when investment banks and broking firms are struggling with wafer thin margins in capital markets business, Edelweiss Financial Services has diversified into new areas to maintain its growth momentum. But Rashesh Shah, chairman of Edelweiss, tells Somasroy Chakraborty that the company is yet to decide if it will apply for a banking licence as his "hands are full" following the entry into new lines of businesses. Edited excerpts:
Has the margins improved in investment banking business?
Overall, the market is still slow. Margins have come down significantly. To give an example, in 2007-08 the pre-tax margin in investment banking business was around 40-45%. Now, the industry is operating at 0-5% margin. As the sentiment improves we expect margins will increase to 15-20%, but it will not go back to the 40% level we saw in the past.
Is it due to increased competition?
Competition has always been intense in investment banking business irrespective of whether the market is good or bad. But one good thing is the market is now expanding beyond equity. A lot of transactions involving debt instruments are now happening. Also, many foreign players have scaled down their businesses. Earlier foreigners had around 70% market share. But I think in next two to three years, Indian banks and domestic investment banking firms will have 50% share of the market.
What is your outlook on the Indian stock market?
The optimism has come back to a certain extent and liquidity is still very good. I think interest rate cut will be a big catalyst in reviving sentiments. We are hoping for one (rate cut) in January. The question is will it be 25 basis points or 50 basis points.
You have diversified into new businesses in recent past. Do you also plan to set up a bank?
We have to wait for the final guidelines from the Reserve Bank of India (RBI). The board has decided that we must wait for the final guidelines before taking a decision. We do
believe that India needs many more banks. We have given our feedback to RBI (on draft norms) asking them to ensure level playing field. But we have not made up our mind. Our hands are full. The housing finance business is growing very fast while the life insurance business is doing well. It will keep us occupied for next three to four years.
Why did you enter the life insurance space?
We realised that in India there is lot of savings, which is not getting converted into investments. We are a nation of savers but for investments we depend on foreigners. We think that insurance is the only real intermediation product that can convert savings into long-term investments. It offers huge opportunity. It also allows us to systematically diversify our risks. For instance, in 2007-08 close to 80% of our revenues came from capital markets business. This year the contribution of capital markets business is expected to be around 15% only.
But some of the Indian promoters who entered insurance space are now looking to exit the business. Will you adopt a similar strategy?
The firms that are looking to exit are not core financial services companies. But for us it is core business. So, insurance is not just a new investment for us. We are actively involved in this business.
Then why did you agree to allow Tokio Marine to increase their stake in the life insurance joint venture to 49% once the foreign direct investment (FDI) rules were revised?
It was part of our agreement with Tokio Marine. We agreed because we felt that if a partner has substantial stake in the joint venture then they will be more serious and add value to the business.
Do you plan to enter non-life insurance segment?
No, at least not in the near-term.
