At a time when investment banks and broking firms are struggling with wafer-thin margins in the capital markets business, Edelweiss Financial Services has diversified into new areas to maintain its growth momentum. But Rashesh Shah, chairman of Edelweiss, tells Somasroy Chakraborty that the company is yet to decide if it would apply for a banking licence as its “hands are full”, following its entry into new lines of businesses. Edited excerpts:
Have the margins improved in the investment banking business?
Overall, the market is still slow. Margins have come down significantly. To give an example, in 2007-08, the pre-tax margin in investment banking business was around 40-45 per cent. Now, the industry is operating at zero to five per cent margin. As the sentiment improves, we expect margins would increase to 15-20 per cent and not go back to the 40 per cent level, we saw in the past.
Is it due to increased competition?
Competition has always been intense in the investment-banking business, irrespective of whether the market is good or bad. But one good thing is the market is now expanding beyond equity. A lot of transactions involving debt instruments are now happening. Also, many foreign players have scaled down their businesses. Earlier, foreigners had around 70 per cent market share. But, I think in the next two to three years, Indian banks and domestic investment banking firms would have 50 per cent share of the market.
What is your outlook on the Indian stock market?
The optimism has come back to a certain extent and liquidity is still very good. I think interest rate cut would be a big catalyst in reviving sentiments. We are hoping for one (rate cut) in January. The question is, would it be 25 basis points or 50 basis points.
You have diversified into new businesses in recent past. Do you also plan to set up a bank?
We have to wait for the final guidelines from the Reserve Bank of India (RBI). The board has decided that we must wait for the final guidelines before taking a decision. We do believe that India needs many more banks. We have given our feedback to RBI (on draft norms), asking them to ensure a level-playing field. But we have not made up our mind. Our hands are full. The housing finance business is growing very fast, while the life insurance business is doing well. It would keep us occupied for the next three to four years.
Why did you enter the life insurance space?
We realised that in India there are a lot of savings, which are not getting converted into investments. We are a nation of savers, but for investments we depend on foreigners. We think that insurance is the only real intermediation product that can convert savings into long-term investments. It offers a huge opportunity. It also allows us to systematically diversify our risks. For instance, in 2007-08, close to 80 per cent of our revenues came from capital markets business. This year, the contribution of capital markets business is expected to be around 15 per cent only.
But some of the Indian promoters who entered insurance space are now looking to exit the business. Will you adopt a similar strategy?
The firms that are looking to exit are not core financial services companies. But for us, it is core business. So, insurance is not just a new investment for us. We are actively involved in this business.
Then why did you agree to allow Tokio Marine to increase their stake in the life insurance joint venture to 49 per cent, once the foreign direct investment (FDI) rules are revised?
It was part of our agreement with Tokio Marine. We agreed because we felt that if a partner has substantial stake in the joint venture, then it will add value to the business.
Do you plan to enter the non-life insurance segment?
No, at least not in the near-term.