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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

After trading at a premium of just over 10% for a long time, <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd" target="_blank" data-smartkarma-citation="entities:559:1" rel="noopener">HDFC Bank (ADR) (HDB US)</a> is now trading at a 20% premium to <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> with the spike coming in the last couple of weeks during which time the volumes on the ADR have been higher than normal.While there may be more flow coming on the ADR, we feel that the premium should peak in the near future and recommend selling the ADR, buying the local shares (or the single stock futures) and hedging the USDINR FX. With local shares available to foreign investors, existing holders of ADRs should look to switch to the local line.In this Insight, we look at the ADR premium, the shareholding pattern on <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>, the ADR headroom, the FPI holding on HDFC Bank, and catalysts that could take the premium higher or lower.

After trading at a premium of just over 10% for a long time, HDFC Bank (ADR) (HDB US) is now trading at a 20% premium to HDFC Bank (HDFCB IN) with the spike coming in the last couple of weeks during which time the volumes on the ADR have been higher than normal.While there may be more flow coming on the ADR, we feel that the premium should peak in the near future and recommend selling the ADR, buying the local shares (or the single stock futures) and hedging the USDINR FX. With local shares available to foreign investors, existing holders of ADRs should look to switch to the local line.In this Insight, we look at the ADR premium, the shareholding pattern on HDFC Bank (HDFCB IN), the ADR headroom, the FPI holding on HDFC Bank, and catalysts that could take the premium higher or lower. 

HDFC Bank ADR - Too High a Premium to Pay

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

*Solid Results In FY 2Q21: Kotak Mahindra Bank (KMB.IN) [Kotak] reported a fairly stellar FY 2Q21 earnings result of INR 21.8 bn – exceeding FY 1Q21 results by INR 9.3 bn or 75.5% - a high quality beat of consensus as well; and*Strong Credit Metrics Across The Board: Gross NPLs were flattish linked quarter, while net new NPLs increased just INR 1.1 bn or 7.6% on an annualized basis. Further, despite the loss provisioning decline of INR 5.9 bn (61.7%), loss reserves at KMB increased INR 2.8 bn (7.4%) as NCOs continue to decelerate.

*Solid Results In FY 2Q21: Kotak Mahindra Bank (KMB.IN) [Kotak] reported a fairly stellar FY 2Q21 earnings result of INR 21.8 bn – exceeding FY 1Q21 results by INR 9.3 bn or 75.5% - a high quality beat of consensus as well; and*Strong Credit Metrics Across The Board: Gross NPLs were flattish linked quarter, while net new NPLs increased just INR 1.1 bn or 7.6% on an annualized basis. Further, despite the loss provisioning decline of INR 5.9 bn (61.7%), loss reserves at KMB increased INR 2.8 bn (7.4%) as NCOs continue to decelerate. 

Kotak Mahindra Bank – Surprisingly Strong Performance

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Aditya Puri, the iconic first CEO of <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>, will finally step down on October 26, 2020 after 26 years at the helm. In this period he rightly deserves the credit for making HDFC Bank India’s most valuable bank, with a market capitalisation of US$ 92.1 bn, and the largest private sector bank in India. His leadership qualities, banking <a href="https://www.linkedin.com/pulse/12-lessons-from-grand-master-banking-mr-aditya-puri-aseem-dhru/" target="_blank" rel="noopener">acumen</a>  and ability to predict change in trends at an early stage insulated the bank from the pitfalls that befell the rest of the banking industry in India.  His single minded dedication to profit maximisation ensured HDFC Bank’s premium valuation on the capital market. While commentators have highlighted his positive attributes, stakeholders and the public should also be aware of his Achilles Heel, namely a history of non-compliance to banking norms and regulation, which was publicly visible when he was heading Citibank’s corporate business in India in 1990. The ruthlessly efficient business model he implemented in HDFC Bank brought with it certain unsavoury aspects of banking: non-compliance with regulatory norms, practices highlighted by the <a href="https://www.cobrapost.com/blog/investigation%20hdfc-bank-introduction/949" target="_blank" rel="noopener">Cobrapost expose</a>, the <a href="https://hemindrahazari.com/2020/09/20/us-firms-class-action-suits-hdfc-banks-auto-loan-malpractices-have-hit-the-fan/" target="_blank" rel="noopener">mis-selling</a> of products to unsuspecting customers, the high pressure on lower level staff to achieve ambitious targets and the lack of transparency to stakeholders on important developments such as  irregularities at the bank and the sudden  <a href="https://hemindrahazari.com/2020/07/13/another-top-executive-leaves-hdfc-bank-but-dont-try-finding-the-news-in-the-media/" target="_blank" rel="noopener">exits</a>  of senior staff. Sashidhar Jagdisan, Puri’s handpicked successor, inherits a strong banking platform geared towards shareholder returns and growth, but he should ensure that HDFC Bank avoids the fate of Wells Fargo, a bank much admired by Puri before it suffered setbacks due to mis-selling and poor adherence to regulatory norms.

Aditya Puri, the iconic first CEO of HDFC Bank (HDFCB IN), will finally step down on October 26, 2020 after 26 years at the helm. In this period he rightly deserves the credit for making HDFC Bank India’s most valuable bank, with a market capitalisation of US$ 92.1 bn, and the largest private sector bank in India. His leadership qualities, banking acumen  and ability to predict change in trends at an early stage insulated the bank from the pitfalls that befell the rest of the banking industry in India.  His single minded dedication to profit maximisation ensured HDFC Bank’s premium valuation on the capital market. While commentators have highlighted his positive attributes, stakeholders and the public should also be aware of his Achilles Heel, namely a history of non-compliance to banking norms and regulation, which was publicly visible when he was heading Citibank’s corporate business in India in 1990. The ruthlessly efficient business model he implemented in HDFC Bank brought with it certain unsavoury aspects of banking: non-compliance with regulatory norms, practices highlighted by the Cobrapost expose, the mis-selling of products to unsuspecting customers, the high pressure on lower level staff to achieve ambitious targets and the lack of transparency to stakeholders on important developments such as  irregularities at the bank and the sudden  exits  of senior staff. Sashidhar Jagdisan, Puri’s handpicked successor, inherits a strong banking platform geared towards shareholder returns and growth, but he should ensure that HDFC Bank avoids the fate of Wells Fargo, a bank much admired by Puri before it suffered setbacks due to mis-selling and poor adherence to regulatory norms.

Time to Junk the Less Savoury Parts of the Legacy of HDFC Bank’s Iconic CEO

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

<ul>
<li>GEM managers strengthen Indian exposure during the recent market turbulence.  Average weights now stand at 9.61%, up from a low of 8.69% at the end of March 2020.</li>
<li>Ownership levels have increased across Energy, Consumer Discretionary, Health Care and Tech sectors but decreased in Utilities, Real Estate, Materials and Financials.  </li>
<li>
<a href="https://www.smartkarma.com/entities/reliance-industries-ltd" target="_blank" data-smartkarma-citation="entities:198:1" rel="noopener">Reliance Industries (RIL IN)</a> makes leadership challenge, closing in on <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> as India's most widely held stock.</li>
<li>Recent ownership increases have pushed <a href="https://www.smartkarma.com/entities/reliance-industries-ltd" target="_blank" data-smartkarma-citation="entities:198:1" rel="noopener">Reliance Industries (RIL IN)</a> to the 3rd most widely invested stock and the largest Indian holding on an average weight basis. </li>
</ul>Analysis taken from our Global Emerging Markets research, covering 243 EM active funds with combined AUM of $370bn.


GEM managers strengthen Indian exposure during the recent market turbulence.  Average weights now stand at 9.61%, up from a low of 8.69% at the end of March 2020.
Ownership levels have increased across Energy, Consumer Discretionary, Health Care and Tech sectors but decreased in Utilities, Real Estate, Materials and Financials.  

Reliance Industries (RIL IN) makes leadership challenge, closing in on HDFC Bank (HDFCB IN) as India's most widely held stock.
Recent ownership increases have pushed Reliance Industries (RIL IN) to the 3rd most widely invested stock and the largest Indian holding on an average weight basis. 
Analysis taken from our Global Emerging Markets research, covering 243 EM active funds with combined AUM of $370bn.

India:  Confidence Returns Among EM Active Managers

<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>  1HFY2021 results is a study in contrasts to its non-bank finance company (NBFC) subsidiary, HDB Financial Services (HDB). While the standalone bank reported a 19% yoy growth in net profits, HDB’s  profits collapsed by an alarming 94% yoy (HDB reports only half-yearly performance). The dichotomy in performance lucidly highlights the concentration of stress in both entities, with HDB customers apparently being far worse off than HDFC Bank standalone. It appears the Covid-19 lockdown has taken a heavier toll on the higher-risk portfolio of HDB, especially on its Loan against Property (LAP) and commercial vehicle loans. It is now clear why HDB in a non-transparent and inhumane manner decided to <a href="https://hemindrahazari.com/2020/05/18/hdfc-banks-downsizing-programme-disturbing-lack-of-humanity-and-transparency/" target="_blank" rel="noopener">remove staff</a>  in April 2020, as the management were aware of the problem at an early stage. Pertinently, while HDB’s staff costs in 1HFY2021 declined 4% yoy, the bank’s standalone staff costs rose 10.6% yoy. On the results <a href="https://www.youtube.com/watch?v=-1QghaLEdsI" target="_blank" rel="noopener">conference call</a> while outgoing CEO, Aditya Puri reassured investors that the bank had not removed staff, and had even given increments and bonuses, it appears the HDB staff were treated differently in this period. It is also unfortunate that in its results call held on October 17, none of the senior business heads at HDFC Bank, who spoke at length reassuring investors that all was well on their respective fronts, chose to mention the disastrous performance at HDB, which appears to have borne the full brunt of the Covid-19 lockdown (one analyst, though, did query the bank on HDB’s poor performance). Indeed the management commentary on the call was in direct contradiction to HDB’s financial performance. HDB's valuation (prior to 1HFY2021 results) has estimated to have declined by around 25% from 3 months ago, to nearly US$ 9 bn. After the results, the valuation should further reduce. HDB’s results is an early indicator of the performance of the NBFC sector during the lockdown and investors must exercise caution. Even though HDB’s loans are only around 5% of HDFC Bank’s consolidated loans, it is a relevant subsidiary in terms of valuation, and one hopes that in future under the leadership of Sashi Jagdisan, transparency and corporate governance improve in the bank.

HDFC Bank (HDFCB IN)  1HFY2021 results is a study in contrasts to its non-bank finance company (NBFC) subsidiary, HDB Financial Services (HDB). While the standalone bank reported a 19% yoy growth in net profits, HDB’s  profits collapsed by an alarming 94% yoy (HDB reports only half-yearly performance). The dichotomy in performance lucidly highlights the concentration of stress in both entities, with HDB customers apparently being far worse off than HDFC Bank standalone. It appears the Covid-19 lockdown has taken a heavier toll on the higher-risk portfolio of HDB, especially on its Loan against Property (LAP) and commercial vehicle loans. It is now clear why HDB in a non-transparent and inhumane manner decided to remove staff  in April 2020, as the management were aware of the problem at an early stage. Pertinently, while HDB’s staff costs in 1HFY2021 declined 4% yoy, the bank’s standalone staff costs rose 10.6% yoy. On the results conference call while outgoing CEO, Aditya Puri reassured investors that the bank had not removed staff, and had even given increments and bonuses, it appears the HDB staff were treated differently in this period. It is also unfortunate that in its results call held on October 17, none of the senior business heads at HDFC Bank, who spoke at length reassuring investors that all was well on their respective fronts, chose to mention the disastrous performance at HDB, which appears to have borne the full brunt of the Covid-19 lockdown (one analyst, though, did query the bank on HDB’s poor performance). Indeed the management commentary on the call was in direct contradiction to HDB’s financial performance. HDB's valuation (prior to 1HFY2021 results) has estimated to have declined by around 25% from 3 months ago, to nearly US$ 9 bn. After the results, the valuation should further reduce. HDB’s results is an early indicator of the performance of the NBFC sector during the lockdown and investors must exercise caution. Even though HDB’s loans are only around 5% of HDFC Bank’s consolidated loans, it is a relevant subsidiary in terms of valuation, and one hopes that in future under the leadership of Sashi Jagdisan, transparency and corporate governance improve in the bank.  

HDB’s Profit Collapse: Canary in the Coalmine for the NBFC Sector in the Lockdown?

India

HDFC Bank Ltd. offers a wide range of services to the global corporate sector. The Bank provides corporate banking and custodial services and is active in the treasury and capital markets. HDFC also markets project advisory services and capital market products such as Global Deposit Receipts, Euro currency loans, and Euro currency bonds.

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HDFC Bank (HDFCB IN)

HDFC Bank ADR - Too High a Premium to Pay

With the HDFC Bank ADR premium spiking to 20% in the last couple of weeks, we look at the ADR premium history and suggest scaling into a short ADR/...

Brian Freitas

Kotak Mahindra Bank – Surprisingly Strong Performance

KOTAK MAHINDRA BANK: Surprise, Surprise, Surprise. Both Credit Metrics and Ne Interest Income Improves As Risk Substantially Declines

Thomas J. Monaco

Time to Junk the Less Savoury Parts of the Legacy of HDFC Bank’s Iconic CEO

While commentators have highlighted Puri's positive attributes, stakeholders should also be aware of his Achilles Heel, namely a history of non...

Hemindra Hazari

India: Confidence Returns Among EM Active Managers

Global EM managers strengthen India exposure during the recent market turbulence. Ownership increases across Energy and Consumer Discretionary,...

Steven Holden

HDB’s Profit Collapse: Canary in the Coalmine for the NBFC Sector in the Lockdown?

HDFC Bank and its NBFC subsidiary HDB a study in contrasts indicating the huge hit the NBFC sector may take as a result of the Covid-19 lockdown.

Hemindra Hazari

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