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Case study of take over RBS by HSBC

U.K.-based Royal Bank of Scotland (RBS) on Friday announced sale of its retail and commercial banking business in India worth $1.8 billion (about Rs.8,500 crore) to British banking major HSBC. RBS, which received a 45.5 billion pound bailout from the U.K. government post the 2008 financial crisis, will sell its retail and SME business in India for a premium of $95 million, which would be over the adjusted net asset value of the bank's businesses in the country. The exact amount to be paid by HSBC would be worked out later, the officials said. The sale coincides with RBS announcing in London that it has offloaded its metals, oil and European energy business to U.S.-based bank JP Morgan in a $1.6 billion deal. RBS, which had in 2007 taken over ABN Amro Bank, has 31 branches, 11 lakh customers and 1,800 employees in India. HSBC serves 15 lakh customers through a network of 50 branches and 7,000 employees. After the acquisition, which is expected to complete in the first half of 2011, HSBC would move closer to Standard Chartered Bank in terms of branch network. Among the foreign banks, StanChart has a network of 94 branches, followed by HSBC (50) and Citibank (42). Even after the sale, RBS said it would continue to retain its wholesale and investment banking businesses in India. Post the sale of its retail and SME businesses, RBS will continue as a leading global wholesale and investment bank, transaction services and private bank in Asia Pacific with a significant presence in 11 markets, including core markets such as India and China. This gives us an excellent geographic footprint, accounting for 90 per cent of our current revenues in the region, RBS Country Head Madan Menon said. RBS was earlier reported to be talking to Standard Chartered Bank for a possible sale of Indian assets. The takeover of RBS's Indian businesses, according to HSBC Group's country head Naina Lal Kidwai, is an important addition to our existing network and testament to our ambition to expand our footprint in India.'' We see tremendous growth potential in this country, both in helping domestic and international companies capture opportunities in India's growing trade and investment flows with the world and in meeting the financial needs of its rising affluent consumer market,'' she added. Commenting on the deal, HSBC Group Chief Executive and Chairman of The Hongkong Shanghai Banking Corporation Michael Geoghegan said the main focus of our strategy is on emerging markets and this acquisition is our third transaction in one of the world's largest and fastest growing developing markets in the last two years. The RBI supervisory board discussed the details of the transactions and evaluated the regulatory aspects of the deal at its Jaipur meeting in October," said a source in the know of the development. An email query to the RBI went unanswered. Recently, the senior management of the two banks had met RBI officials to resolve issues relating to the deal that has been pending for two years, as the regulator is reluctant to allow an automatic transfer of RBS's branches. Currently, the RBI, in line with the World Trade Organisation guidelines, gives 12 branch licences annually to foreign banks.

"The uncertainty seems to have cleared. We expect the deal to go through, but with certain riders. This could lead to renegotiation on the pricing," said an investment banker familiar with the development. In July 2010, HSBC had announced that it would acquire select assets of RBS for a premium of $95 million over the net asset value of the business, which could change due to possible loan defaults. "RBS, which had acquired 31 branches in the country when it bought out the ABN Amro Bank NV's Asian operations in 2007, had decided to retain five branches and surrender the remaining to the RBI," the banker said. "Following this, HSBC would have to apply for fresh licences. They could be granted branch licences in locations like Moradabad and Panipat, where HSBC does not have a presence." "We continue to work closely with HSBC and the regulators to complete the deal in a manner that satisfies regulatory requirements and is in the best interests of our clients and employees," an RBS spokesperson said. In a recent interview to ET, HSBC India CEO Stuart A Davis said: "When we first looked at the business, we thought this acquisition would give us distribution and customers, and bring in one to two years of growth. We have made an application to RBI on a certain basis and the central bank has given us indications on what we can expect. Certainly, our discussion with the RBI was such that we thought what we got would be satisfactory to us." However, responding to the ET query, an HSBC spokesperson, in an email response, said: "We continue to engage positively with the regulator." Government ownership UK taxpayers bailed out RBS in 2008 and the government owns over 80% of the business. HSBC avoided government assistance. However, amid the economic depression, they raised $17.8 billion via a shareholder rights issue in order to restore their balance sheet and provide some capital protection. Government assistance has consigned RBS to greater public scrutiny and the eventual reduction of government ownership could saturate the market and hold back the share price for years to come. Selling assets Under EU government ownership rules, RBS is required to sell non-core assets to pay down its liabilities. One such asset reduction will be the company's insurance business (now under the name of Direct Line), formally the second biggest insurance operation in the UK, will be sold via an IPO (Initial Public Offering) in the second half of 2012. HSBC are under no such obligations. However, the company continues to make strategic asset sales. The group plans to improve investor returns by selling non-profitable or cost ineffective businesses. Dividends HSBC has maintained dividend payments on its ordinary shares throughout the financial crisis. The ordinary shares currently provide investors with a yield of over 4.6%, variable and not guaranteed (source: Digital Look). RBS are to resume paying dividends on preference shares and some other products, however they are still some way off paying a dividend on their ordinary shares. Global exposure The level of global exposure between the two banks also offers a significant contrast. At RBS, 95.7% of the group's 2011 Net Interest Income was generated from the UK, the US and Europe. This compared to just 55.3% for HSBC, with the balance coming from Hong Kong, the rest of Asia Pacific, Latin America and the Middle East and North Africa. Pre-crisis acquisitions

At HSBC, a late 2002 takeover of US personal finance company Household International provided HSBC with an early warning system prior to the financial crisis. Early signs of difficulties in the US housing market became evident at Household International only a few short years after its acquisition and allowed HSBC to position itself accordingly. However RBS's successful takeover of NatWest in 2000 boosted management confidence in pursuing further takeovers. However such confidence, and egged on by a counterbid by rival Barclays, led to what proved to be a vastly overvalued takeover of ABN Amro. Future prospects Four years on from the bottom of the financial crisis and both banks continue to adjust to a changed world. At RBS, the reduction in liabilities over recent years does finally appear to be placing the bank on firmer ground. Analyst opinion currently points towards a strong hold. For HSBC, former difficulties in the US are slowly being laid to rest, while long-term growth hopes for China feature highly - analyst opinion continues to denote a buy.