Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

Creeping Denationalisation of India’s Banking Sector

India Financials

Saumya Agarwal

Equity Bottom-Up

City Union Bank, the oldest Private sector Bank in India, has been focused on providing credit to the small and medium businesses in South India. Despite being a regional bank, its stock commands premium valuation vis-à-vis many other private sector banks. What is driving the superior valuation for this South- India focused Bank?

City Union Bank, the oldest Private sector Bank in India, has been focused on providing credit to the small and medium businesses in South India. Despite being a regional bank, its stock commands premium valuation vis-à-vis many other private sector banks. What is driving the superior valuation for this South- India focused Bank?

City Union Bank: What Is Driving Premium Valuation for This Oldest Private Sector Bank?

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.<a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBLTB)</a> 5% coupon and <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (BNKEA)</a> 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFLIN)</a> 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank's (ICICIBC IN)</a> and <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank's (CBKIN)</a> debt curve sold off while <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank of India's (SBIIN)</a> notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see <a href="https://www.smartkarma.com/insights/bank-credit-compass-regime-change-may-limit-the-annual-january-bounce" target="_blank" data-smartkarma-citation="insights:46712" rel="noopener">Bank Credit Compass: Regime Change May Limit the Annual January Bounce</a>. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.Bangkok Bank's (BBLTB) 5% coupon and Bank of East Asia's (BNKEA) 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. Indiabulls Housing Finance's (IHFLIN) 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. ICICI Bank's (ICICIBC IN) and Canara Bank's (CBKIN) debt curve sold off while State Bank of India's (SBIIN) notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see Bank Credit Compass: Regime Change May Limit the Annual January Bounce. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

Nearly a year after <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://hemindrahazari.com/2020/01/09/axis-bank-hollowing-out-the-crucial-role-of-the-cro/" target="_blank" rel="noopener">truncated</a> the responsibilities of its Chief Risk Officer (CRO) by transferring corporate credit risk to the role of the newly created Chief Credit Officer (CCO) who reported only to the CEO, <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>has <a href="https://archives.nseindia.com/corporate/HDFCBANK_14122020145644_SEIntimationCRO.pdf" target="_blank" rel="noopener">decided</a>  to go a step further. It has transferred corporate and retail credit risk to a similarly newly created role of a CCO (no business targets), who will report only to the CEO, and transferred the earlier CRO to the CCO post. HDFC Bank also <a href="https://twitter.com/MDahariya/status/1341597883225825285?s=20" target="_blank" rel="noopener">shifted</a> individuals in the CRO handling credit risk to the CCO, and made the latter accountable for credit decisions.  The rationale provided by HDFC Bank is that in its future credit expansion it wants greater underwriting focus and accountability and therefore wants an experienced individual to accept responsibility for the CCO post who will report to the CEO.In Indian banks credit risk is the major risk and in HDFC Bank credit risk assets constitute 83% of total risk weighted assets. In this organisational restructuring, the CRO will only be left with non-credit risk management and secondary credit risk-related functions like stress testing the credit portfolio, concentration risk and determining limits (such as sector, group, company, geography).  For some inexplicable reason, even the <a href="https://www.linkedin.com/in/sameer-ratolikar-13b1725/?originalSubdomain=in" target="_blank" rel="noopener">Chief Information Risk Officer</a>  has been made to report to the CCO. Therefore the CRO’s role in HDFC Bank has been drastically downsized.The new CRO at HDFC Bank maintains his prior designation of senior executive vice-president, while the earlier CRO had the designation of group head. This change has downgraded the position of the CRO within the senior management. As HDFC Bank’s own disclosures reveal, while the earlier CRO’s experience, age, and remuneration was similar to the others in the senior management, the new CRO is the junior-most in all these parameters.  For most practical purposes, the erstwhile CRO post has been re-named “CCO”, with one crucial difference: he does not report to the Board’s Risk Management Committee, but only to the CEO. It appears that creating the new designation, and maintaining a stripped-down CRO post as well, merely serves to confuse the public and distract from the nature of this disturbing change.The Basle Committee and the Reserve Bank of India (RBI) have been trying to enhance the role of the CRO (<a href="https://www.bis.org/bcbs/publ/d328.pdf" target="_blank" rel="noopener">here</a> and <a href="https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10948" target="_blank" rel="noopener">here</a>) and insulate the CRO from business and even pressure from the CEO, by making the post report to the risk management committee of the board with a dotted line reporting to the CEO. It is perplexing that, at the same time, two prominent private sector banks in India, with full support of their boards of directors, are undermining the foundations of the CRO by taking away (in Axis Bank only corporate credit risk) the core credit risk function.

Nearly a year after Axis Bank Ltd (AXSB IN)truncated the responsibilities of its Chief Risk Officer (CRO) by transferring corporate credit risk to the role of the newly created Chief Credit Officer (CCO) who reported only to the CEO, HDFC Bank (HDFCB IN) has decided  to go a step further. It has transferred corporate and retail credit risk to a similarly newly created role of a CCO (no business targets), who will report only to the CEO, and transferred the earlier CRO to the CCO post. HDFC Bank also shifted individuals in the CRO handling credit risk to the CCO, and made the latter accountable for credit decisions.  The rationale provided by HDFC Bank is that in its future credit expansion it wants greater underwriting focus and accountability and therefore wants an experienced individual to accept responsibility for the CCO post who will report to the CEO.In Indian banks credit risk is the major risk and in HDFC Bank credit risk assets constitute 83% of total risk weighted assets. In this organisational restructuring, the CRO will only be left with non-credit risk management and secondary credit risk-related functions like stress testing the credit portfolio, concentration risk and determining limits (such as sector, group, company, geography).  For some inexplicable reason, even the Chief Information Risk Officer  has been made to report to the CCO. Therefore the CRO’s role in HDFC Bank has been drastically downsized.The new CRO at HDFC Bank maintains his prior designation of senior executive vice-president, while the earlier CRO had the designation of group head. This change has downgraded the position of the CRO within the senior management. As HDFC Bank’s own disclosures reveal, while the earlier CRO’s experience, age, and remuneration was similar to the others in the senior management, the new CRO is the junior-most in all these parameters.  For most practical purposes, the erstwhile CRO post has been re-named “CCO”, with one crucial difference: he does not report to the Board’s Risk Management Committee, but only to the CEO. It appears that creating the new designation, and maintaining a stripped-down CRO post as well, merely serves to confuse the public and distract from the nature of this disturbing change.The Basle Committee and the Reserve Bank of India (RBI) have been trying to enhance the role of the CRO (here and here) and insulate the CRO from business and even pressure from the CEO, by making the post report to the risk management committee of the board with a dotted line reporting to the CEO. It is perplexing that, at the same time, two prominent private sector banks in India, with full support of their boards of directors, are undermining the foundations of the CRO by taking away (in Axis Bank only corporate credit risk) the core credit risk function.  

HDFC Bank: Honey, I Shrunk the Chief Risk Officer

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFL IN)</a> 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's  (23 HK)</a> 2024 callable AT1 outperformed while <a href="https://www.smartkarma.com/entities/siam-commercial-bank-pub-co" target="_blank" data-smartkarma-citation="entities:214:1" rel="noopener">Siam Commercial Bank's (SCB TB)</a> 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: <a href="https://www.smartkarma.com/insights/bank-credit-weekly-fed-spikes-while-the-ecb-sweetens-the-punch-bowl" target="_blank" data-smartkarma-citation="insights:46524" rel="noopener">Fed Spikes While the ECB Sweetens the Punch Bowl</a>.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, Indiabulls Housing Finance's (IHFL IN) 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, Bank of East Asia's  (23 HK) 2024 callable AT1 outperformed while Siam Commercial Bank's (SCB TB) 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

India

Axis Bank Limited provides a full range of banking services throughout India. The Group's activities include retail banking, investment management, merchant banking, treasury and NRI services, cash and credit management services, and ATM facilities.

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Axis Bank Ltd (AXSB IN)

Creeping Denationalisation of India’s Banking Sector

With foreign investors holding majority ownership of major private banks; & with such private banks increasing their market share, it is difficult...

Hemindra Hazari

City Union Bank: What Is Driving Premium Valuation for This Oldest Private Sector Bank?

City Union Bank, the oldest Private sector Bank in India has been commanding premium valuation vis-à-vis many other private sector banks. What is...

Saumya Agarwal

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

Duration desires drove performance over the holiday shortened week. A US Senate leadership change could negatively impact the market as Goldilocks...

Hank Calenti, CFA

HDFC Bank: Honey, I Shrunk the Chief Risk Officer

HDFC Bank with full support of its boards of directors, has undermined the foundations of the Chief Risk Officer by taking away the core credit...

Hemindra Hazari

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

Asia’s AT1, Subordinated and high yield Senior Unsecured bonds outperformed over the holiday shortened week. Thin markets were directionless, so we...

Hank Calenti, CFA

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