Will High NIM Propel Indian Banks Into FORTUNE 500?

The fragmented state of the banking industry and, arguably, the relatively conservative policies of the Indian banking regulator Reserve Bank of India, have kept the assets of Indian banks somewhat subdued compared to their global peers. Not surprisingly, league tables that use asset as the benchmark to rank banks have always been bereft of an entry from India.

Barring FORTUNE 500 and State Bank of India, that is.

Since it spans multiple industries, the FORTUNE magazine uses revenues – not assets – to measure a company’s size. On this basis, the latest FORTUNE GLOBAL 500 list published on 23 July 2012* ranks India’s #1 bank SBI as the 285th biggest corporation in the world. My industry analysis – more on that in a bit – shows that SBI is placed at the 33rd spot among 48 banks that feature on this august list of the world’s 500 largest corporations. Debuting at the 498th rank in 2006 with US$ 13.755B in revenues, State Bank of India has nearly trebled in seven years to reach its current rank. With revenues of US$ 36.95B, the Indian banking giant is bigger than Goldman Sachs (US$ 36.793B), Commerzbank (US$ 29.235B) and Standard Chartered Bank (US$ 24.488B), to name a few well known industry stalwarts.

However, reckoned by assets, SBI’s US$ 360B places it well below China Merchant’s Bank, the smallest bank on this list that has an asset base of US$ 445B and revenues of US$ 22.093B.

SBI’s higher revenue rank on a lower asset base suggests that it turns over its assets at a greater rate than its industry peers. To verify this, I tried analyzing the banking industry list. Since I couldn’t find one in the magazine or on FORTUNE’s website, I developed an Excel-based model by myself (which can be downloaded from here). Turns out that I’m right. Out of the 48 banks featured in the GLOBAL 500 list, SBI ranks #7 on the Revenues:Assets metric (10%), which is much higher than its position on revenues (#33) or assets (#45).

While I’m no financial analyst, SBI’s superior Revenue:Asset ratio is probably explained by the relatively high Net Interest Margins (350 to 500 bps) prevalent in India compared to many other countries that are home to FORTUNE 500 banks. For the uninitiated, Net Interest Margin (NIM) is “a measure of the difference between the interest income generated by banks (from loans given to borrowers) … and the amount of interest paid out to their lenders (on deposits received from depositors), relative to the amount of their (interest-earning) assets”.

During SBI’s five year reign as a FORTUNE 500 company, no other Indian bank has made it to the GLOBAL 500 list. The wide gap in revenues between India’s second largest bank, ICICI BANK (US$ 13.812B), and the last company in the GLOBAL 500 list, MANPOWER (US$ 22.006B), might suggest that SBI is going to be the only Indian bank on the list for a long time. However, given the relative buoyancy of the Indian economy, that prediction could go awry. If the industry’s high NIM levels hold up in the coming years, there’s no ruling out the possibility that some other bank from India could become a FORTUNE 500 company sooner rather than later. We’ll see…

Full Disclosure: Apart from my present or past banking relationships with some of the banks mentioned in this blog post, I have no interest in them.

* For those of you looking up this list online, here’s a word of caution: Although it’s called RANK 2011 in the print version of the magazine, the corresponding online version of this list shows up by selecting 2012 – not 2011 – from the dropdown menu on the website.