Specialist in Indian Banking and Economic Research

Hemindra Hazari

A notable feature in <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a> and <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> (KMB) is the historical absence of any commercial banking expertise amongst the independent directors on the boards. The founders ( <a href="https://www.smartkarma.com/entities/housing-development-finance" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener">HDFC Limited (HDFC IN) </a>and Uday Kotak) and the Nomination and Remuneration Committee in both banks, as a deliberate strategy, have tried to ensure that only non-independent directors have commercial banking expertise. This is unusual, as other private sector banks such as <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank Ltd (ICICIBC IN)</a>, <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a>,  <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> and <a href="https://www.smartkarma.com/entities/federal-bank-ltd" target="_blank" data-smartkarma-citation="entities:11784:1" rel="noopener">Federal Bank (FB IN)</a> have former commercial bankers as independent directors on their boards.Banking, being a specialised and highly regulated sector with an economy-wide systemic impact, needs that some directors have commercial banking expertise separate and distinct from the executive.The absence of such independent functional expertise on the board is a sign that the executive/controlling shareholders do not want to be challenged or to have close oversight in the banks’ core area of operations. HDFC Bank and KMB are poster banners for private sector banking in India, with a combined market capitalisation of US$ 159 bn. They have achieved this without the presence of former commercial bankers as independent directors. Both Aditya Puri (erstwhile HDFC Bank CEO) and Uday Kotak maintained an iron-clad grip on asset quality, which is visible in their track record of profitability and stock market valuation. However, banking should not be individual-based, but based on appropriate systems. A diversified board of directors, including those with commercial banking expertise independent of the executive, should be mandatory in all banks. Regardless of their track record and valuation, banks which deliberately exclude such critical functional expertise on their boards must be hauled up by the Reserve Bank of India, credit rating analysts and the capital markets. The fact that HDFC Bank and KMB have rewarded shareholders manifold without such independent expertise on their boards should not be an excuse for such an anomaly to continue, nor should it be replicated in other banks.

A notable feature in HDFC Bank (HDFCB IN) and Kotak Mahindra Bank (KMB IN) (KMB) is the historical absence of any commercial banking expertise amongst the independent directors on the boards. The founders ( HDFC Limited (HDFC IN) and Uday Kotak) and the Nomination and Remuneration Committee in both banks, as a deliberate strategy, have tried to ensure that only non-independent directors have commercial banking expertise. This is unusual, as other private sector banks such as ICICI Bank Ltd (ICICIBC IN), Axis Bank Ltd (AXSB IN),  Indusind Bank (IIB IN) and Federal Bank (FB IN) have former commercial bankers as independent directors on their boards.Banking, being a specialised and highly regulated sector with an economy-wide systemic impact, needs that some directors have commercial banking expertise separate and distinct from the executive.The absence of such independent functional expertise on the board is a sign that the executive/controlling shareholders do not want to be challenged or to have close oversight in the banks’ core area of operations. HDFC Bank and KMB are poster banners for private sector banking in India, with a combined market capitalisation of US$ 159 bn. They have achieved this without the presence of former commercial bankers as independent directors. Both Aditya Puri (erstwhile HDFC Bank CEO) and Uday Kotak maintained an iron-clad grip on asset quality, which is visible in their track record of profitability and stock market valuation. However, banking should not be individual-based, but based on appropriate systems. A diversified board of directors, including those with commercial banking expertise independent of the executive, should be mandatory in all banks. Regardless of their track record and valuation, banks which deliberately exclude such critical functional expertise on their boards must be hauled up by the Reserve Bank of India, credit rating analysts and the capital markets. The fact that HDFC Bank and KMB have rewarded shareholders manifold without such independent expertise on their boards should not be an excuse for such an anomaly to continue, nor should it be replicated in other banks.

HDFC Bank and KMB Carefully Select Independent Directors - For Their Lack of Banking Knowledge

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Another Abysmal Result: Bank of Baroda (BOB.IN) [BOB] reported FY 1Q22 results of INR 12.1 bn, improving from the loss of INR 10.5 bn in FY 4Q21. However, on an operating basis, we note that linked quarter results improved to INR 2.6 bn versus a loss of INR 1,4 bn in FY 4Q21; and *Poor Reserve Cover Worsens:  Net new NPLs accelerated to INR 25.7 bn or 15.4% annualized versus INR 13.5 bn or 11.2% annualized at FY 4Q21. By our calculation, however, BOB’s reserves still remain light by INR 300 bn or nearly six years of FY 1Q22 earnings.

*Another Abysmal Result: Bank of Baroda (BOB.IN) [BOB] reported FY 1Q22 results of INR 12.1 bn, improving from the loss of INR 10.5 bn in FY 4Q21. However, on an operating basis, we note that linked quarter results improved to INR 2.6 bn versus a loss of INR 1,4 bn in FY 4Q21; and *Poor Reserve Cover Worsens:  Net new NPLs accelerated to INR 25.7 bn or 15.4% annualized versus INR 13.5 bn or 11.2% annualized at FY 4Q21. By our calculation, however, BOB’s reserves still remain light by INR 300 bn or nearly six years of FY 1Q22 earnings.

Most private sector banks withhold the remuneration details of senior executives in the annual reports. However, shareholders can specifically request this <a href="https://www.mca.gov.in/Ministry/pdf/NCARules_Chapter13.pdf" target="_blank" rel="noopener">disclosure</a> from companies. The remuneration disclosure provides valuable information on the quantum of monetary compensation, revealing how senior managers have been appraised and compensated. In <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a>, the scale of remuneration reveals how <a href="https://www.indusind.com/iblogs/bloggers/mr-ramaswamy-meyyappan/" target="_blank" rel="noopener">Ramaswamy Meyyappan</a> (Chief Risk Officer) and the corporate credit team (initially led by <a href="https://www.linkedin.com/in/suhailchander/?originalSubdomain=in" target="_blank" rel="noopener">Suhail Chander</a> and subsequently by <a href="https://www.linkedin.com/in/roopa-satish-847139121/?originalSubdomain=in" target="_blank" rel="noopener">Roopa Satish</a>) were handsomely rewarded (FY2017-FY2019) for doing high-risk, poor quality loans to companies like <a href="https://hemindrahazari.com/2021/06/16/cg-power-loan-scandal-indusind-bank-pioneers-lending-without-documents-to-a-firm-with-no-assets/" target="_blank" rel="noopener">CG Middle East</a>   (US$ 40 mn in FY2018; the loan is being  investigated by the Securities and Exchange Board of India),  <a href="https://hemindrahazari.com/2019/04/25/indusind-bank-one-more-disturbing-lapse-of-judgment-by-the-banker-of-the-year/" target="_blank" rel="noopener">Sprit Infrapower</a> (Rs 5 bn loan to unlisted company of founders of Zee media in FY2019) and <a href="https://hemindrahazari.com/2018/10/17/are-indusind-banks-credit-and-risk-departments-run-by-financial-illiterates/" target="_blank" rel="noopener">IL&amp;FS</a>  (Rs 20 bn bridge loan in FY2019). Thereafter their remuneration declined in FY2020, and for some it recovered in FY2021. Indusind Bank has declined to provide any clarity on the reasons for the increase and decrease in individual remuneration. When corporate banking’s credit costs in FY2019 shot up by 4.6x and Profit Before Tax (PBT) of the division declined by 60% to Rs 6.6 bn, Roopa Satish, the Country Head – Corporate, Institutions and Investment Banking, remuneration increased by 16% to Rs 52.3 mn. In FY2020 her remuneration declined by 37% to Rs 32.9 mn.  More importantly, despite the significant financial and reputational loss to the bank from dodgy corporate loans, none of the concerned executives was sacked; the only apparent punishment was a reduction in their already inflated remuneration. These events demonstrate poor oversight by the important sub-committees of the board of directors such as Committee of Directors (CoD), Risk Management and the Nomination and Remuneration (NRC). The coterie, consisting of mainly former ABN AMRO Bank colleagues, are well protected from getting the axe.The lesson to stakeholders is that, when times are good, senior executives will be richly rewarded, and when times turn sour on account of their incompetence and/or complicity, they will still retain their jobs. The only punishment will be a reduction in their remuneration. As long as such individuals are blessed by the CEO, their jobs are secure, and there is negligible accountability for their disastrous acts which result in losses to the bank and to shareholders.

Most private sector banks withhold the remuneration details of senior executives in the annual reports. However, shareholders can specifically request this disclosure from companies. The remuneration disclosure provides valuable information on the quantum of monetary compensation, revealing how senior managers have been appraised and compensated. In Indusind Bank (IIB IN), the scale of remuneration reveals how Ramaswamy Meyyappan (Chief Risk Officer) and the corporate credit team (initially led by Suhail Chander and subsequently by Roopa Satish) were handsomely rewarded (FY2017-FY2019) for doing high-risk, poor quality loans to companies like CG Middle East   (US$ 40 mn in FY2018; the loan is being  investigated by the Securities and Exchange Board of India),  Sprit Infrapower (Rs 5 bn loan to unlisted company of founders of Zee media in FY2019) and IL&amp;FS  (Rs 20 bn bridge loan in FY2019). Thereafter their remuneration declined in FY2020, and for some it recovered in FY2021. Indusind Bank has declined to provide any clarity on the reasons for the increase and decrease in individual remuneration. When corporate banking’s credit costs in FY2019 shot up by 4.6x and Profit Before Tax (PBT) of the division declined by 60% to Rs 6.6 bn, Roopa Satish, the Country Head – Corporate, Institutions and Investment Banking, remuneration increased by 16% to Rs 52.3 mn. In FY2020 her remuneration declined by 37% to Rs 32.9 mn.  More importantly, despite the significant financial and reputational loss to the bank from dodgy corporate loans, none of the concerned executives was sacked; the only apparent punishment was a reduction in their already inflated remuneration. These events demonstrate poor oversight by the important sub-committees of the board of directors such as Committee of Directors (CoD), Risk Management and the Nomination and Remuneration (NRC). The coterie, consisting of mainly former ABN AMRO Bank colleagues, are well protected from getting the axe.The lesson to stakeholders is that, when times are good, senior executives will be richly rewarded, and when times turn sour on account of their incompetence and/or complicity, they will still retain their jobs. The only punishment will be a reduction in their remuneration. As long as such individuals are blessed by the CEO, their jobs are secure, and there is negligible accountability for their disastrous acts which result in losses to the bank and to shareholders.

CEO’s Coterie: IndusInd’s High Flying High Risk Takers Reap Rich Rewards But Negligible Penalties

*ChallengesMount: HDFC Ltd (HDFC.IN) [HDFC] reported FY 1Q22 results of INR 30.0 bn, decreasing INR 1.8 bn (5.6%) on a linked quarter basis. However, core operating results came in at INR 24.7 bn, declining INR 2.7 bn (9.9%) over the same period – despite net interest income improving INR 819 mn  (2.0%) off of a 20 bp NIM improvement to 3.70% and managed loan growth of 0.2%; and*Credit Quality Worsens: Given the INR 5.0 bn in NCOs during FY 1Q22, net new NPLs accelerated to INR 19.0 bn and increased 65.5% on an annualized basis versus INR 3.6 bn or 14.2% on an annualized basis in FY 1Q21. We would have preferred that HDFC be even more vigilant given the continued growing uncertainty of COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 83 bn or over three quarters of core operating results.

*ChallengesMount: HDFC Ltd (HDFC.IN) [HDFC] reported FY 1Q22 results of INR 30.0 bn, decreasing INR 1.8 bn (5.6%) on a linked quarter basis. However, core operating results came in at INR 24.7 bn, declining INR 2.7 bn (9.9%) over the same period – despite net interest income improving INR 819 mn  (2.0%) off of a 20 bp NIM improvement to 3.70% and managed loan growth of 0.2%; and*Credit Quality Worsens: Given the INR 5.0 bn in NCOs during FY 1Q22, net new NPLs accelerated to INR 19.0 bn and increased 65.5% on an annualized basis versus INR 3.6 bn or 14.2% on an annualized basis in FY 1Q21. We would have preferred that HDFC be even more vigilant given the continued growing uncertainty of COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 83 bn or over three quarters of core operating results. 

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

India

Punjab National Bank provides financial services such as corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. The Company provides services to domestic conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies.

Canara Bank Ltd. provides a full range of banking services throughout India. The Group's activities include retail banking, commercial and personal banking, investment management, treasury & NRI services, cash management and assorted ATM facilities.

Bank of Baroda owns and operates commercial banks in India.  The Group's banks provide the traditional forms of banking services, including CD's, Credit Card services and a variety of car loans, in addition to gold banking and a range of insurance services.  The Group also owns IBU International Finance Limited, an international banking company in Hong Kong.

Union Bank of India Limited provides a full range of banking services throughout India. The Company's activities include retail banking, commercial and personal banking, investment management, treasury and NRI services, cash management and assorted ATM facilities. Union Bank has an online tele-banking facility for all its core banking customers.

IDBI Bank Limited provides a range of banking and financial services. The Bank's services include fund-based operations, such as venture capital and fee-based activities, which include merchant banking and debenture trusteeship.

Indian Overseas Bank operates some 1,429 banking branches in India, as well as six branches in overseas locations.  The Group's banks provide loan and deposit schemes, Internet banking, and a full range of banking services.

YES BANK Limited provides banking services. The Bank offers deposits, personal loans, e-banking, trade finance, corporate, and business banking services. YES BANK serves the food and agribusiness, life sciences, healthcare, biotechnology, telecommunications, media, information technology, and infrastructure development industries in India.

UCO Bank provides a full range of banking services throughout India. UCO Bank operates over 1,700 banking branches in India, as well as four branches in overseas locations.

Indian Bank is a full service bank owned by the Government of India. The Bank offers a wide range of services including a foreign currency banking unit at Colombo and specialized overseas branches at Chennai, Bangalore, and Mumbai exclusively for handling foreign exchange  transactions arising out of export, import, remittances and non resident Indian business.

Bank of India, through its subsidiaries, provides corporate, commercial, personal banking, retail, rural, and development banking.  The Group specializes its services towards corporate and medium businesses, in addition to upmarket retail customers.

CIMB Group Holdings Berhad provides commercial banking and related financial services. The Company and its subsidiaries, operate as a regional universal bank offering a full range of financial products and services, covering corporate and investment banking, consumer banking, treasury, insurance and asset management.

Bank of the Philippine Islands, through its subsidiaries, provides commercial banking services. The Company's products includes ATM, debit card system, credit card, electronic cash card, internet platform and other services.

BDO Unibank Inc provides banking services. The Bank offers saving accounts, investment, loans, credit and debit cards, remittance, insurance, and trade financing services. BDO Unibank serves customers in Philippines.

Bank for Investment and Development of Vietnam provides commercial banking services. The Company offers deposits, personal loans, e-banking, guarantees, and trade finance for customers, corporate, and financial institutions. Bank for Investment also offers foreign exchange, money market, derivatives, and debt market services.

Bank of Nanjing Co., Ltd. operates commercial banking businesses. The Company offers deposits, loans, settlement, discounting, financial bond issuance, government bond underwriting, bank guarantee, and other related financial services. Bank of Nanjing provides services for enterprises and individuals.

First Financial Holding Co., Ltd. is a holding company.  Through its subsidiaries, the Company accepts deposits, provides loans and discount, letters of credit, and guarantee services, invests in marketable securities, provides securities brokerage and investment services, as well as provides insurance services.

E.Sun Financial Holding Company Ltd. is a holding company.  Through its subsidiaries, the Company provides banking, brokerage and dealer services.

Bank of Beijing Company Ltd. attracts deposits and offers commercial banking services.  The Bank offers short-, medium- and long-term loans, insurance, foreign exchange, international settlement, government bonds, and other products and services.

Shinkin Central Bank is a central bank for shinkin banks nationwide, operating as a cooperative financial institution.  The Bank has developed businesses in a variety of fields that contribute the shinkin banking industry.  The Bank's services include enhancement of the credit standing, efficient use of shikin bank's surplus funds, and settlement of domestic exchange transaction.

Taiwan Cooperative Financial Holding, through subsidiaries, offers financial services.  The Company offers commercial banking, asset management, bills finance, and securities brokerage services.

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

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Indusind Bank (IIB IN)

HDFC Bank and KMB Carefully Select Independent Directors - For Their Lack of Banking Knowledge

The absence of independent commercial banking expertise on the board is a sign that the executive do not want to be challenged or to have close...

Hemindra Hazari

Bank of Baroda – More Capital Please

BANK OF BARODA: BOB reported FY 1Q22 operating results of INR 2.6 bn versus a loss of INR 1.4 bn in FY 4Q21. Net new NPLs accelerated to 15.4%...

Thomas J. Monaco

CEO’s Coterie: IndusInd’s High Flying High Risk Takers Reap Rich Rewards But Negligible Penalties

The lesson to stakeholders: when times are good, senior executives will be richly rewarded, and when times turn sour on account of their...

Hemindra Hazari

HDFC Ltd – Just Getting Worse

HDFC: HDFC reported FY 1Q22 QOQ core result decline of 9.9%. Net new NPLs increased 65.5% annualized basis; HDFC’s reserve needs shoring up INR 83...

Thomas J. Monaco

Bajaj Finance – Just BAFfling

BAJAJ FINANCE: Bajaj posted a QOQ FY 1Q22 results decline 25.6% driven by credit weakness in Consumer. Net new NPLs increased at 281% annualized...

Thomas J. Monaco

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