I never thought I would see this in my lifetime but emerging market financial institutions from India or China may be able to buy out American banks due to the fallout from mortgage crisis, according to the latest Goldman Sachs report. The report by Goldman Sachs Group Inc says:
Further, we would not be surprised to see the first acquisition of a major US broker or commercial bank by an emerging market institution. While most US brokers and some US banks have broadened their geographic presence over the past decade, none has developed a truly robust Chinese or Indian offering. With these economies growing at multiples of the US, we would not be surprised to see a larger international bank attempt to gain access to the US financial services community through acquisition.
Add to the mortgage crisis, the rapid decline in value of US dollar against these currencies and the growth rates of these economies – the scenario begins to look much more plausible. Its a matter of when and not if.
The ownership of a company by a foreign institution, although sure to cause a ruckus with the likes of Lou Dobbs, is not a big deal. After all, even today banks like Citi have substantial foreign ownership from the likes of Saudi Kings and Princes. And emerging market banks like India’s ICICI Bank have substantial foreign ownership – which means Americans own part of these institutions through a complex chain. But there is a big deal.
The Big Deal: Lower Cost Structure
The cost structures of these banks are much lower than that of their American counterparts. A few years ago, I met an executive from one of these banks at a banking conference event. The Indian bank was having trouble obtaining a license to operate in the US and he said to me that it was because American banks did not want competition in their home court.
A country such as India where cell phone calls cost a penny per minute, cell phones cost $25, cars are being designed for $2000 and employees still cost 1/3 to 1/10th of US counterparts – can deliver banking services at much lower costs.
First it was IT, now it may be the turn of banking. Telco and retail could very well be next. Clearwire-Reliance anyone?
Notes for the reader:
- Clearwire is a WiMax company in US that is struggling due to the break up of the Sprint deal.
- Reliance is India’s largest conglomerate with a successful Telco business and market cap approaching $100 billion (yes with a B).
- ICICI Bank is India’s largest bank.
- Goldman Sachs is one of the few large banks/brokers that has come out ahead through the mortgage fiasco.