Specialist in Indian Banking and Economic Research

Hemindra Hazari

Government banks have been derided for indulging in ‘phone banking’ (being instructed on the telephone by ruling party politicians and civil bureaucrats to lend to specific unworthy companies). But what the Enforcement Directorate’s (ED) affidavit in the Delhi Court (as disclosed by the media -- <a href="https://www.hindustantimes.com/india-news/71-loans-given-in-kapoor-s-tenure-turned-bad-ed-101633976406867.html" target="_blank" rel="noopener">here</a> and <a href="https://economictimes.indiatimes.com/industry/banking/finance/enforcement-directorate-says-bank-loan-fraud-was-mutually-beneficial-to-avantha-yes-bank/articleshow/86699558.cms?from=mdr" target="_blank" rel="noopener">here</a>)  reveals is that senior executives from the private sector <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> were no different from their government counterparts. The only difference is that the concerned senior executives at Yes Bank were excessively paid, and were highly qualified persons from premier institutions, as compared with government bankers. The ED’s charge sheet alleges that senior executives at Yes Bank knowingly engaged in sham transactions, and the accused Yes Bank officials put the onus on the transactions on the now jailed Rana Kapoor, the erstwhile founder-Chief Executive Officer (CEO), Yes Bank. Despite their educational qualifications, previous work experience and the senior positions they held, they allowed themselves to  be reduced to being low-paid clerks – or worse, since the latter at least know enough not to engage in fraudulent transactions. The entire edifice of Yes Bank’s credit appraisal, independent risk management and board oversight was a myth, as nobody recorded strong objections to giving loans to a shell company and structuring a product whose sole objective was a spurious show of compliance with regulatory guidelines.   Stakeholders, media and analysts rarely get to see the inner working of a bank and how loans are appraised, independently evaluated by risk management and subsequently monitored. The ED’s affidavit, as reported by the media, provides such a rare inside knowledge view of how a poor quality loan for a dubious purpose was conceived, structured and approved by an over-qualified and overpaid team, solely on the basis of instructions from the CEO. What is equally disturbing, but also telling, is that three of the accused have left the bank, and have taken up fresh engagements with their new organisations – who, presumably, were impressed with these persons’ work credentials at Yes Bank, and wanted them to continue the same practices for their new employers.What is worrying is that Yes Bank’s practice of having senior executives with impressive qualifications, stellar resumes, and imposing titles, knowingly engaging in such transactions may not be the exception in the private financial sector. Regulatory agencies have investigated or are currently investigating similar transactions at <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">Indusind Bank</a>, <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">Aditya Birla Finance</a>, <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-an-eur44-million-loan-from-stanchart-put-murugappas-cg-power-between-sebi-and-a-hard-place/primearticleshow/83285540.cms" target="_blank" rel="noopener">Standard Chartered Bank</a> and <a href="https://hemindrahazari.com/2021/08/31/sebi-exposes-kotak-mahindra-mutual-funds-policy-of-investing-blindly/" target="_blank" rel="noopener">Kotak Mahindra Mutual Fund</a>. This indicates that the situation may be systemic. It appears that, for all their experience and seniority, key senior executives in the private financial sector are paid inflated packages precisely for engaging in the intellectually undemanding task of ‘phone banking’. The valuations of private financial firms may need to be reassessed in the light of these disclosures.

Government banks have been derided for indulging in ‘phone banking’ (being instructed on the telephone by ruling party politicians and civil bureaucrats to lend to specific unworthy companies). But what the Enforcement Directorate’s (ED) affidavit in the Delhi Court (as disclosed by the media -- here and here)  reveals is that senior executives from the private sector Yes Bank (YES IN) were no different from their government counterparts. The only difference is that the concerned senior executives at Yes Bank were excessively paid, and were highly qualified persons from premier institutions, as compared with government bankers. The ED’s charge sheet alleges that senior executives at Yes Bank knowingly engaged in sham transactions, and the accused Yes Bank officials put the onus on the transactions on the now jailed Rana Kapoor, the erstwhile founder-Chief Executive Officer (CEO), Yes Bank. Despite their educational qualifications, previous work experience and the senior positions they held, they allowed themselves to  be reduced to being low-paid clerks – or worse, since the latter at least know enough not to engage in fraudulent transactions. The entire edifice of Yes Bank’s credit appraisal, independent risk management and board oversight was a myth, as nobody recorded strong objections to giving loans to a shell company and structuring a product whose sole objective was a spurious show of compliance with regulatory guidelines.   Stakeholders, media and analysts rarely get to see the inner working of a bank and how loans are appraised, independently evaluated by risk management and subsequently monitored. The ED’s affidavit, as reported by the media, provides such a rare inside knowledge view of how a poor quality loan for a dubious purpose was conceived, structured and approved by an over-qualified and overpaid team, solely on the basis of instructions from the CEO. What is equally disturbing, but also telling, is that three of the accused have left the bank, and have taken up fresh engagements with their new organisations – who, presumably, were impressed with these persons’ work credentials at Yes Bank, and wanted them to continue the same practices for their new employers.What is worrying is that Yes Bank’s practice of having senior executives with impressive qualifications, stellar resumes, and imposing titles, knowingly engaging in such transactions may not be the exception in the private financial sector. Regulatory agencies have investigated or are currently investigating similar transactions at Indusind Bank, Aditya Birla Finance, Standard Chartered Bank and Kotak Mahindra Mutual Fund. This indicates that the situation may be systemic. It appears that, for all their experience and seniority, key senior executives in the private financial sector are paid inflated packages precisely for engaging in the intellectually undemanding task of ‘phone banking’. The valuations of private financial firms may need to be reassessed in the light of these disclosures.

Yes Men at Yes Bank, and Elsewhere: ‘Phone Banking’ in the Private Sector

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

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 2Q22 ahead of its officially scheduled October 16, 2021 earnings release. The highlights were solely related to growth of lending and deposits; and*See No Evil: Nothing was discussed regarding HDFCB’s abysmal credit quality metrics from FY 1Q22, which likely will remain a true headache. At FY 1Q22, net new NPLs actually increased 153% on an annualized basis which is quite worrisome.  We would also be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 316 bn or nearly a year of operating results.

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 2Q22 ahead of its officially scheduled October 16, 2021 earnings release. The highlights were solely related to growth of lending and deposits; and*See No Evil: Nothing was discussed regarding HDFCB’s abysmal credit quality metrics from FY 1Q22, which likely will remain a true headache. At FY 1Q22, net new NPLs actually increased 153% on an annualized basis which is quite worrisome.  We would also be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 316 bn or nearly a year of operating results. 

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOMATO IN)</a> will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. Zomato (ZOMATO IN) will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

*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.

*Poor 2Q21 Result: DBS Group Holdings (DBS.SP) [DBS] reported 2Q21 results of SGD 1.7 bn, decreasing SGD 304  mn (15.1%) on a linked quarter basis. The weaker results were driven primarily by an overall revenue decline, a loan provision increase, and a higher tax rate;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. By our calculation, and given the NCOs of SGD 69 mn, we find that net new NPLs have re-accelerated – up SGD 266 mn or increasing 18.0% annualized versus SGD 85 mn or 5.6% in 1Q21. We feel that reserves should be shored up in the neighborhood of SGD 2.5bn – amounting now to about two quarters of operating results; and *Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

*Poor 2Q21 Result: DBS Group Holdings (DBS.SP) [DBS] reported 2Q21 results of SGD 1.7 bn, decreasing SGD 304  mn (15.1%) on a linked quarter basis. The weaker results were driven primarily by an overall revenue decline, a loan provision increase, and a higher tax rate;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. By our calculation, and given the NCOs of SGD 69 mn, we find that net new NPLs have re-accelerated – up SGD 266 mn or increasing 18.0% annualized versus SGD 85 mn or 5.6% in 1Q21. We feel that reserves should be shored up in the neighborhood of SGD 2.5bn – amounting now to about two quarters of operating results; and *Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

India

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.

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Yes Bank (YES IN)

Yes Men at Yes Bank, and Elsewhere: ‘Phone Banking’ in the Private Sector

It appears that, for all their experience & seniority, key senior executives in the pvt financial sector are paid inflated packages precisely for...

Hemindra Hazari

HDFC Bank – No Credit

HDFC BANK: HDFCB provided a balance sheet growth update for FY 2Q22. Nothing was discussed regarding HDFCB’s challenged credit quality nor its low...

Thomas J. Monaco

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

Halfway through the review period, we take a look at stocks that could migrate across the large, mid and small cap segments. With over US$100bn of...

Brian Freitas

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

DBS Group Holdings – Bad Print

DBS: DBS QOQ 2Q21 results declined 15.1% due to poor revenues and higher provisions. We worry that DBS has not caught the LVB risk, net new NPLs re...

Thomas J. Monaco

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