Expect nothing, live frugally on surprise.

Thursday, October 23, 2008

Wall Street woes, India’s opportunity

Much has been said in recent times about the reasons for the credit crisis that has hit Wall Street. But little has been said so far about what it means and what investment opportunities this crisis presents, especially for Indian investors and Indian companies. the ongoing shake-up of the US banking industry, three of the top five US investment banks have gone down under the burden of their exposures to bad assets. The consolidation is not limited to investment banks. Over a hundred banks are exposed to the subprime crisis and on the “troubled list” of the US Federal Deposit Insurance Company (FDIC), with the latest casualties being Washington Mutual, the largest US savings and loan company, and Wachovia, one of the largest US commercial banks.Many other banks are being hit by the crisis despite strong balance sheets, and more consolidation is, therefore, expected to take place in the US banking sector. The stocks of National City Corporation of Cleveland, one of the largest banks in the US in terms of deposits, mortgages and home equity lines of credit, Sovereign Bancorp, a mid-Atlantic lender and one of the largest US savings and loan companies, and Fifth Third Bancorp, a Cincinnati-based regional bank, were hit very hard as investors worried about their prospects.These developments have resulted in the emergence of a small number of very large “universal banks”, which control approximately one-third of the total amount of deposits in the US, who are looking for additional cash infusions to shore up their capital, especially from third party investors at attractive valuations. Smaller banks are also looking for additional funds, resulting in attractive investment opportunities in the US banking sector as a whole.Interestingly, the Treasury-led financial sector bailout that was approved recently may, due to provisions such as limits on executive compensation for troubled institutions that avail of the Treasury bailout facility, make private capital from foreign investors more attractive to such troubled institutions.The changing investment banking landscape in the US is opening the door to boutique Indian investment banks that have a strong investment advisory and research presence to expand in the US. At the same time, under increasing fire from the public over the financial cost of the bailout to US taxpayers, regulators are expected to encourage equity investments by third parties, including foreign investors, in the US banking system. Regulatory approvals for these investments are expected to be processed on an expedited basis.The insurance sector is also expected to change quite fundamentally following the demise of the world’s largest insurer, AIG. Changes are already afoot and there is much greater pressure to substitute the current 50-state insurance regulatory patchwork with a unified Federal regulatory oversight framework. In addition to consolidation in the insurance sector, a stronger focus on pure-play insurance businesses is expected, compared to diversified financial services companies, which should result in the shedding of non-insurance businesses.Companies in non-financial sectors laden with debt are also viewed as bigger risks by their banks and are facing increasing difficulties in securing financing. Similarly, small businesses are finding it extremely hard to get credit from banks and are increasingly turning to angel investors, suppliers and personal credit cards for financing.With the focus of Indian investors and companies on value investments, it is expected that there will be significant amounts of new and attractive investment opportunities, especially in the $25-50-million (Rs 120-240 crore) range in various sectors like IT/ITES, outsourced healthcare, pharmaceuticals, automotives, textiles, chemicals, energy and power.Today, cash is king .and cash-rich Indian companies, thus, enjoy a strategic advantage.


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