Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

When most analyze <a href="https://www.smartkarma.com/entities/558" target="_blank" data-smartkarma-citation="entities:558:1">HDFC Bank (HDFCB IN)</a>, there is little emphasis on its non-banking finance company (NBFC) subsidiary, HDB Financial Services (HDBFS). Perhaps in the current environment, this is more important than ever. At the same time, where HDFC Bank’s subsidiary has had significant growth in recent periods, where this begins to change, it has important implications. Most do not believe HDFC Bank can ever show poor earnings growth, let alone high bad loans and credit costs. We disagree. As India’s second largest bank, it is  beholden to the macro economic overlay; even if delayed or not clearly visible. We wonder if HDBFS’s latest figures showing just 1% gross profit growth, is one sign of this?

When most analyze HDFC Bank (HDFCB IN), there is little emphasis on its non-banking finance company (NBFC) subsidiary, HDB Financial Services (HDBFS). Perhaps in the current environment, this is more important than ever. At the same time, where HDFC Bank’s subsidiary has had significant growth in recent periods, where this begins to change, it has important implications. Most do not believe HDFC Bank can ever show poor earnings growth, let alone high bad loans and credit costs. We disagree. As India’s second largest bank, it is  beholden to the macro economic overlay; even if delayed or not clearly visible. We wonder if HDBFS’s latest figures showing just 1% gross profit growth, is one sign of this?

India Banks – HDFC Bank Subsidiary Stalled Profit

With the Reserve Bank of India (RBI) now effectively run by the government, there are likely to be discernable red flags ahead. We must expect that banks like <a href="https://www.smartkarma.com/entities/160" target="_blank" data-smartkarma-citation="entities:160:1">State Bank Of India (SBIN IN)</a> and others will overtly act as providers of liquidity. This will be both to struggling companies but also cash-strapped non-banking finance companies (NBFCs). In quarterly data this should show up in bank-specific figures, monetary numbers but also in corporate debt levels. It will be interesting to see if debt levels rise more for fragile indebted companies than others. Defaults should rise as well. This is because companies now realize that the government is running credit creation to support debtors, and will find it unjust to service a loan when others are not being penalized for default; at the margin they will choose not to pay. This goes to the well-known situation that occurred in Thailand after the 1997 crisis where the term was coined ‘can pay, won’t pay’ for these types of debtors.

With the Reserve Bank of India (RBI) now effectively run by the government, there are likely to be discernable red flags ahead. We must expect that banks like State Bank Of India (SBIN IN) and others will overtly act as providers of liquidity. This will be both to struggling companies but also cash-strapped non-banking finance companies (NBFCs). In quarterly data this should show up in bank-specific figures, monetary numbers but also in corporate debt levels. It will be interesting to see if debt levels rise more for fragile indebted companies than others. Defaults should rise as well. This is because companies now realize that the government is running credit creation to support debtors, and will find it unjust to service a loan when others are not being penalized for default; at the margin they will choose not to pay. This goes to the well-known situation that occurred in Thailand after the 1997 crisis where the term was coined ‘can pay, won’t pay’ for these types of debtors.

Equity Bottom-Up

With recently reported 83% profit growth in 2Q19 YoY for <a href="https://www.smartkarma.com/entities/768" target="_blank" data-smartkarma-citation="entities:768:1">Axis Bank Ltd (AXSB IN)</a>, one can believe that credit metrics are improving. This would be a mistake. What is missing from the bank’s earnings release is its sharp rise in doubtful 2 and doubtful 3 loans, in the period. There is a clear migration from pass and substandard loans to worse non-performing loan (NPL) buckets. This makes the bank’s decline in credit costs questionable. Axis Bank has seen a decidedly worsening in the mix of its NPLs over the past year; the NPL cycle continues its grind, even at private banks.

With recently reported 83% profit growth in 2Q19 YoY for Axis Bank Ltd (AXSB IN), one can believe that credit metrics are improving. This would be a mistake. What is missing from the bank’s earnings release is its sharp rise in doubtful 2 and doubtful 3 loans, in the period. There is a clear migration from pass and substandard loans to worse non-performing loan (NPL) buckets. This makes the bank’s decline in credit costs questionable. Axis Bank has seen a decidedly worsening in the mix of its NPLs over the past year; the NPL cycle continues its grind, even at private banks.

Axis Bank – Optimistic Headlines Mislead

Global Asset Allocation, Politics & Governance, Ecstrat

John-Paul Smith

Global Asset Allocation, Politics & Governance

Ecstrat

Ecstrat is a consultancy advising on asset allocation between global equity markets, with a focus on the intersection of governments, geopolitics, governance and markets.
 
Over the past few years and more especially since the Great Financial Crisis (GFC), investors have become more focused on short-term market movements and real-time returns and have consequently neglected the analysis of the underlying structural themes that underpin longer term performance.
​
More specifically we believe that the evolution of governance-based relationships between investors, controlling shareholders, labour and the state is one of the primary determinants of both relative and absolute performance between individual equity markets.
 
We will endeavour to provide investors with some of the context surrounding governance-related issues which encompass many different disciplines including history, economics and political science, as well as the financial metrics which are the most obvious manifestation of the structural characteristics of each market.
 
We will pay particular attention to the shifts and potential inflection points for governance in individual markets as these are often the best lead indicators for both economic and market performance.

Cross Asset Strategy

<h2>India (neutral); bull and bear factors remain finely balanced before election</h2>The deterioration in India’s macro-economic ratios has continued apace with further rises in energy prices compounded by the fall in the value of the <a href="https://www.smartkarma.com/entities/22832" target="_blank" data-smartkarma-citation="entities:22832:1">INR (USDINR CURNCY)</a>. The most pronounced deterioration has occurred in the fiscal deficit which now stands at 6.5% or 7% and rising, if the regional deficits are fully accounted for, compared with an average of 5.5% during the 2009 to 2013 period with government debt standing at 70% of GDP.The current account deficit has also widened with forecasts up to 2.8% of GDP for the fiscal year ending in March 2019, but this still compares favourably with just under 5% recorded in 2013, whilst the current core CPI inflation rate of around 5.8% is significantly below the 10.1% average recorded between 2009 and 2013. The perception that the RBI is behind the curve in terms of monetary tightening, will begin to dissipate if UST yields and oil prices continue to fall.

India (neutral); bull and bear factors remain finely balanced before electionThe deterioration in India’s macro-economic ratios has continued apace with further rises in energy prices compounded by the fall in the value of the INR (USDINR CURNCY). The most pronounced deterioration has occurred in the fiscal deficit which now stands at 6.5% or 7% and rising, if the regional deficits are fully accounted for, compared with an average of 5.5% during the 2009 to 2013 period with government debt standing at 70% of GDP.The current account deficit has also widened with forecasts up to 2.8% of GDP for the fiscal year ending in March 2019, but this still compares favourably with just under 5% recorded in 2013, whilst the current core CPI inflation rate of around 5.8% is significantly below the 10.1% average recorded between 2009 and 2013. The perception that the RBI is behind the curve in terms of monetary tightening, will begin to dissipate if UST yields and oil prices continue to fall.

Asian Equity Markets (Ex-China) Overview; Korea, Taiwan and India

Indian Accounting Research Analyst, Trudence Capital Advisors

Nitin Mangal

Indian Accounting Research Analyst

In our report <a href="https://www.smartkarma.com/insights/knock-off-blindfolds-before-betting-on-bulls-n-bears" target="_blank" data-smartkarma-citation="insights:16571">Knock off Blindfolds Before Betting on Bulls 'n Bears</a>, we highlighted few blindfolds which will have a major impact on the Indian economy and stock market performance during the year. As highlighted in the report, the government has missed its fiscal deficit target, the Reserve Bank of India (RBI) has increased the Repo rate by 25 bps and the Indian currency has further depreciated and soaring to the lifetime high. Looking at the macroeconomic environment, we tried to look into various factors which may lead to a rating downgrade of India.

In our report Knock off Blindfolds Before Betting on Bulls 'n Bears, we highlighted few blindfolds which will have a major impact on the Indian economy and stock market performance during the year. As highlighted in the report, the government has missed its fiscal deficit target, the Reserve Bank of India (RBI) has increased the Repo rate by 25 bps and the Indian currency has further depreciated and soaring to the lifetime high. Looking at the macroeconomic environment, we tried to look into various factors which may lead to a rating downgrade of India.

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)

India Banks – HDFC Bank Subsidiary Stalled Profit

When most analyze HDFC Bank (HDFCB IN), there is little emphasis on its non-banking finance company (NBFC) subsidiary, HDB Financial Services...

Daniel Tabbush

India Banks – The Roadmap Ahead

With the Reserve Bank of India (RBI) now effectively run by the government, there are likely to be discernable red flags ahead. We must expect that...

Daniel Tabbush

Axis Bank – Optimistic Headlines Mislead

With recently reported 83% profit growth in 2Q19 YoY for Axis Bank Ltd (AXSB IN), one can believe that credit metrics are improving. This would be...

Daniel Tabbush

Asian Equity Markets (Ex-China) Overview; Korea, Taiwan and India

India (neutral); bull and bear factors remain finely balanced before electionThe deterioration in India’s macro-economic ratios has continued apace...

John-Paul Smith

Is India Rating Downgrade Inevitable?

In our report Knock off Blindfolds Before Betting on Bulls 'n Bears, we highlighted few blindfolds which will have a major impact on the Indian...

Nitin Mangal

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