beyondbrics

Shares in Housing Development Finance Corporation, the Indian mortgage lender, plunged by up to 6.3 per cent on Friday after Citigroup sold its entire 9.9 per cent stake for Rs95.5bn ($1.9bn).

The deal will help the US group focus its resources on its own operations and meet tough new international capital rules at a time when there was little prospect of turning the long-held HDFC minority holding into anything more substantial.

Citi offered its 145.26m shares in a block range of Rs630-Rs703 and sold the stock at Rs657.6, a 6.2 per cent discount to Thursday’s closing price. After falling as low as Rs657.5 in early trading in Mumbai, HDFC recovered a bit to trade later at 668.70, around 4.5 per cent down on the day.

The fall contributed to a weakening in the Indian market, which saw the Bombay Stock Exchange’s Sensex index slip 0.5 per cent to 17,991, putting it on track to record its first weekly fall in eight weeks. India’s Economic Times said:  “Lenders such as ICICI Bank and HDFC Bank were among the big losers as market expectations for a rate cut in March was tempered by the rally in world oil prices, which could make it difficult for the central bank to ease policy.”

Citigroup, which said it was making a pretax profit of $1.1bn on the HDFC sale,  is pulling out of a seven-year-old investment on which it has roughly tripled its money before tax. Citi first invested in HDFC in 2005, but acquired the majority of its stake when it bought Standard Life’s 9.3 per cent stake in the business for $673m in 2006.

At one stage the bank owned more than 11.4 per cent of the lender but it sold a 1.5 per cent stake in June 2011, at the time earning a pre-tax profit of $160m.

James Crabtree wrote for the FT that the move by Citi raises questions over the future of some of its other equity investments, such as a stake in China’s Guangzhou Development Bank, which it bought in a push for “strategic” international financial investments led by former chief executive Chuck Prince.

Bloomberg reported that Citi joins other European and US banks in selling Asian assets in response to tightening global capital rules. Citi said the HDFC disposal was part of its “ongoing capital planning efforts”.

HSBC, Europe’s largest bank, this week told customers it was pulling out of consumer banking in Japan. Late last year, Goldman Sachs raised $1.1bn selling stock in Industrial & Commercial Bank of China, one of the country’s top lenders, while Bank of America sold 10.4bn shares of China Construction Bank for a $1.8bn profit.

Mumbai bankers are sure that the sale won’t have a particularly big impact on HDFC, which has long enjoyed a reputation as one of India’s best-run financial groups.

Vaibhav Agarwal, a banking analyst at Angel Broking, told Neil Munshi of beyondbrics:

To us there is not any real major implication, I think it’s more of an internal decision from Citi – for HDFC there would not be any material implications. HDFC has been performing quite consistently even in the recent past, and over a period of years it’s got an unbeatable track record in the financial sector in general. So we don’t really believe the premium that it commands will come down.

The moral is that although the deal shows that the trials and tribulation of big western banks can have a dramatic impact on emerging markets, the EMs can survive the drama.

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