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?

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

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

*New Circular, New Loopholes: The Reserve Bank of India (RBI) has proposed capping non-bank financial company (NBFC) dividend payout ratios to a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

*New Circular, New Loopholes: The Reserve Bank of India (RBI) has proposed capping non-bank financial company (NBFC) dividend payout ratios to a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

Reserve Bank of India – Nothing Changes

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Home First Finance / Equity Capital Markets

<div>Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company aims to raise around US$200m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.</div><div>HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.</div><div>
However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.
I have covered various aspects of the deal in, <a href="https://www.smartkarma.com/insights/home-first-finance-pre-ipo-riding-on-affordable-housing" target="_blank" rel="noopener">Home First Finance Pre-IPO - Riding on affordable housing</a>. In this note I’ll talk about the updates from the company’s re-filed DRHP.
</div>

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company aims to raise around US$200m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.
However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.
I have covered various aspects of the deal in, Home First Finance Pre-IPO - Riding on affordable housing. In this note I’ll talk about the updates from the company’s re-filed DRHP.


Home First Finance Pre-IPO - Earnings Not Showing the COVID Strain but Other Metrics Are

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)

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

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

Reserve Bank of India – Nothing Changes

RESERVE BANK OF INDIA: New proposed dividend cap on Nonbank financials companies, while trying to rein-in systemic risk, is laden with loopholes.

Thomas J. Monaco

Home First Finance Pre-IPO - Earnings Not Showing the COVID Strain but Other Metrics Are

Home First Finance is an affordable housing finance company targeting first time home buyers. It aims to raise US$200m in its India IPO. It is...

Sumeet Singh

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