1 Nut Morgan Stanley and Goldman Sachs Can't Crack

Financial Times is reporting that Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) have abandoned efforts to obtain full-on banking licenses in India, which would have allowed them to expand their operations significantly beyond what they are now. 

While this will not likely have much impact on either bank's profitability in the short term, long term, the Indian market is an important place to be for just about any company: bank or otherwise.

Thanks, but no thanks
The Reserve Bank of India is India's central bank. By most accounts, RBI doesn't make it easy for foreign banks to operate there. Regulations can be "onerous," and include strictures like making sure a third of all lending goes to "priority sector" clients, like farmers. And banking in India is heavily dominated by the state.

Commercial banking licenses would have allowed both Morgan and Goldman to pursue potentially profitable lines of business, including fixed income and foreign-exchange trading. Each already does a significant amount of business in institutional equities and investment advising in the country, as well as mergers and acquisitions. According to Dealogic, Morgan and Goldman made the top three in M&A activity there for 2012.

In 2012, Morgan seemed to be making progress on its commercial banking license, getting an agreement with RBI "in principle," which would have let it open "at least one branch." Pretty generous, eh? Goldman applied for its commercial banking license way back in 2010 and has heard very little on it since.

As you can imagine, both banks are frustrated with their lack of progress toward their commercial banking licenses, and have either officially notified regulators that they don't want to further pursue them, or have just quietly stopped lobbying for them. Ironically, India's finance minister told the FT just this week that "foreign banks are welcome to come to India."

Per the FT, India has been a hard nut for even the biggest banks to crack. Citigroup, HSBS, and Standard Chartered all have commercial banking licenses there, which means they can operate more than two-dozen branches.

Zen finance
It used to be that the BRICS countries -- Brazil, Russia, India, China, and South Africa -- were all you heard about. The BRICS were supposed to be the panacea to stagnant growth in the world's mature economies. Their hot economies were, naturally, going to cool down at some point no matter what happened, but the financial crash hurried that along.

Still, the BRICS economies are among the fastest growing in the world and are only growing in influence. As such, any company serious about growth has to get active in some, if not all the BRICS, at some point.

India and friends might be going through a less-than-white-hot phase right now, but these are still the countries where the bulk of non-western growth is going to come from. With India and China's combined population alone of more than 2.5 billion -- more than a third of the world's population --  and with both heartily embracing free-market economics in their own ways, how could it be otherwise?

What this move by both Morgan Stanley and Goldman Sachs boils down to is, for the moment, the Indian commercial-banking nut just isn't worth breaking their collective teeth on. With the world economy still recovering from 2008's financial crash, the return isn't there now for the time and money involved.

But it will be. That is certain. And with the head of India's central bank promising reforms in the country's banking sector , it's worth Morgan and Goldman practicing a little Zen finance, hanging back, and biding their time.

Right now, Goldman Sachs has a P/E of just a little more than 10. With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or if finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether Goldman Sachs is a buy today, check out The Motley Fool's premium research report on the Wall Street titan. For instant access, click here now.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2227906, ~/Articles/ArticleHandler.aspx, 9/30/2014 12:05:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement