Specialist in Indian Banking and Economic Research

Hemindra Hazari

On the opening date of Vedanta’s delisting offer (October 5, 2020), <a href="https://www.smartkarma.com/entities/icici-securities-ltd" target="_blank" data-smartkarma-citation="entities:26737:1" rel="noopener">Icici Securities (ISEC IN)</a> (I-Sec) issued a results research note on <a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a> with the following bizarre statement: “Vedanta has highlighted the SEBI [The Securities and Exchange Board of India] approved book value (ex the revaluation reserves) of Rs 89.3/share.” I-Sec, a listed subsidiary of <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> , is an investment bank and sell-side firm. The report was authored by <a href="https://www.linkedin.com/in/abhijit-mitra-aa795846/?originalSubdomain=in" target="_blank" rel="noopener">Abhijit Mitra</a> (with 8 1/2 years sell-side experience) and Udaykiran Paluri. Even a novice analyst would know that a company’s accounts are certified by the auditor, and the capital market regulator has no role to approve or disapprove a company’s book value.In any credible sell-side firm, the maker-checker (or “four eyes”) principle requires that a supervisory analyst approve the research note prior to publication. Normally, an editor reviews the note for grammar, sentence construction, logic and overall flow. An experienced sell-side editor would have rectified the “SEBI approved” phrase, as the terminology is not used in sell-side research. In a domestic firm like I-Sec <a href="https://www.linkedin.com/in/manoj-menon-8ab8712/?originalSubdomain=in" target="_blank" rel="noopener">Manoj Menon</a>, as the head of institutional research, should have signed off as the supervisory analyst, and this phrase should have been immediately flagged. All research reports also have to be approved by the compliance department prior to publication. It is a mystery how in a prominent sell-side firm, majority-owned by a leading bank, such a phrase slipped through these quality control measures.Despite being a listed company, I-Sec has displayed a complete lack of transparency in clarifying how such an appalling lapse took place. SEBI directed the company to issue a public statement, which was carried in the prominent newspapers, whereby the company acknowledged that the phrase should read as “Vedanta has highlighted that the FY20 book value is Rs 89.3/share.” I-Sec declined to clarify to the media as well as to this writer how its internal systems could have failed, permitting such a statement to be published in a research report.An alternative explanation is that, even though I-Sec was not involved in the Vedanta delisting offer as an investment bank, it was trying to support the founders of Vedanta by persuading the company’s minority shareholders that, since the regulator had “approved” the book value, it was an appropriate floor price for the issue. Media <a href="https://www.pressreader.com/india/business-standard/20201009/282050509529492" target="_blank" rel="noopener">reports</a>, citing sources, say that SEBI may launch a probe on the timing of the I-Sec report. The Vedanta delisting offer was controversial, as the management depressed the book value by taking huge write-offs of Rs 174 bn. Moreover, the management had chosen not to pass on the dividend of Hindustan Zinc to shareholders, contrary to the promises in its dividend distribution policy.Whatever the explanation, the credibility of I-Sec, and particularly its research, has been tarnished by this episode. To date no action has been taken on the concerned officials who had approved the phrase. The public ignominy of issuing an erratum in prominent media agencies may just be the beginning, and further penalties may lie in store.

On the opening date of Vedanta’s delisting offer (October 5, 2020), Icici Securities (ISEC IN) (I-Sec) issued a results research note on Vedanta Ltd (VEDL IN) with the following bizarre statement: “Vedanta has highlighted the SEBI [The Securities and Exchange Board of India] approved book value (ex the revaluation reserves) of Rs 89.3/share.” I-Sec, a listed subsidiary of ICICI Bank Ltd (ICICIBC IN) , is an investment bank and sell-side firm. The report was authored by Abhijit Mitra (with 8 1/2 years sell-side experience) and Udaykiran Paluri. Even a novice analyst would know that a company’s accounts are certified by the auditor, and the capital market regulator has no role to approve or disapprove a company’s book value.In any credible sell-side firm, the maker-checker (or “four eyes”) principle requires that a supervisory analyst approve the research note prior to publication. Normally, an editor reviews the note for grammar, sentence construction, logic and overall flow. An experienced sell-side editor would have rectified the “SEBI approved” phrase, as the terminology is not used in sell-side research. In a domestic firm like I-Sec Manoj Menon, as the head of institutional research, should have signed off as the supervisory analyst, and this phrase should have been immediately flagged. All research reports also have to be approved by the compliance department prior to publication. It is a mystery how in a prominent sell-side firm, majority-owned by a leading bank, such a phrase slipped through these quality control measures.Despite being a listed company, I-Sec has displayed a complete lack of transparency in clarifying how such an appalling lapse took place. SEBI directed the company to issue a public statement, which was carried in the prominent newspapers, whereby the company acknowledged that the phrase should read as “Vedanta has highlighted that the FY20 book value is Rs 89.3/share.” I-Sec declined to clarify to the media as well as to this writer how its internal systems could have failed, permitting such a statement to be published in a research report.An alternative explanation is that, even though I-Sec was not involved in the Vedanta delisting offer as an investment bank, it was trying to support the founders of Vedanta by persuading the company’s minority shareholders that, since the regulator had “approved” the book value, it was an appropriate floor price for the issue. Media reports, citing sources, say that SEBI may launch a probe on the timing of the I-Sec report. The Vedanta delisting offer was controversial, as the management depressed the book value by taking huge write-offs of Rs 174 bn. Moreover, the management had chosen not to pass on the dividend of Hindustan Zinc to shareholders, contrary to the promises in its dividend distribution policy.Whatever the explanation, the credibility of I-Sec, and particularly its research, has been tarnished by this episode. To date no action has been taken on the concerned officials who had approved the phrase. The public ignominy of issuing an erratum in prominent media agencies may just be the beginning, and further penalties may lie in store.

Currying Favour with Vedanta? I-Sec Report’s Appalling Lapse

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank (KBANK TB)</a> issued an AT1 bond, following the successful placement two weeks ago by <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBL TB)</a>. We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see <a href="https://www.smartkarma.com/insights/thai-bank-capital-constraints-debt-capital-issuance-needs-and-potential-impacts" target="_blank" data-smartkarma-citation="insights:43884" rel="noopener">Thai Bank Capital Constraints and Debt Issuance Needs</a> as well as <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, Kasikornbank (KBANK TB) issued an AT1 bond, following the successful placement two weeks ago by Bangkok Bank (BBL TB). We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see Thai Bank Capital Constraints and Debt Issuance Needs as well as Thai Bank Capital and Chronic COVID-19 Sensitivity.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

Approximately one-year ago, India-headquartered <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

Approximately one-year ago, India-headquartered Yes Bank (YES IN) began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

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

Thematic (Sector/Industry)

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.. On October 5th, the Supreme Court required additional information on the case; and   *Further Clarification Expected October 13th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on October 13th – and are hopeful that this will be the final hearing.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.. On October 5th, the Supreme Court required additional information on the case; and   *Further Clarification Expected October 13th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on October 13th – and are hopeful that this will be the final hearing.  

Reserve Bank of India - No Good Deed Goes Unpunished

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

In our Macro Overview of Global fund positioning, we cover the following: <ul>
<li>Managers raise EMEA Overweight, hit max underweight in US.</li>
<li>Taiwan key beneficiary of COVID rebalance, India sees outflows.</li>
<li>Cross country exodus seen in Financials/Energy.  Materials reverse long-term decline.</li>
<li>Active managers move towards defensive and secular growth sectors and out of cyclicals.</li>
<li>UK Energy stocks see decline, Dutch Tech stocks continue to attract new investment.</li>
</ul>Taken from our Global fund analysis, covering 391 active global funds with combined AUM of $800bn.

In our Macro Overview of Global fund positioning, we cover the following: 
Managers raise EMEA Overweight, hit max underweight in US.
Taiwan key beneficiary of COVID rebalance, India sees outflows.
Cross country exodus seen in Financials/Energy.  Materials reverse long-term decline.
Active managers move towards defensive and secular growth sectors and out of cyclicals.
UK Energy stocks see decline, Dutch Tech stocks continue to attract new investment.
Taken from our Global fund analysis, covering 391 active global funds with combined AUM of $800bn.

Global Equity Positioning:  Macro Overview.  Raising EU Overweights, Taiwan Vs India, UK Decouples

India

ICICI Bank Limited operates as a bank. The Bank offers saving accounts, loans, debit, credit cards, insurance, investments, mortgages, and online banking services. ICICI Bank serves customers worldwide.

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ICICI Bank Ltd (ICICIBC IN)

Currying Favour with Vedanta? I-Sec Report’s Appalling Lapse

On the opening date of Vedanta’s delisting offer (October 5, 2020), ICICI Securities (I-Sec) issued a results research note on Vedanta with the...

Hemindra Hazari

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

A concise must-read on US$-risk sentiment derived from equity markets, rates, issuance, dollar levels and capital flows to frame near term Asia...

Hank Calenti, CFA

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary,...

Hank Calenti, CFA

Reserve Bank of India - No Good Deed Goes Unpunished

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing...

Thomas J. Monaco

Global Equity Positioning: Macro Overview. Raising EU Overweights, Taiwan Vs India, UK Decouples

In our Macro Overview of Global fund positioning, we cover the following: Managers raise EMEA Overweight, hit max underweight in US. Taiwan key...

Steven Holden

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