Specialist in Indian Banking and Economic Research

Hemindra Hazari

It was unfortunate that <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>decided to provide selective disclosure at a <a href="https://www.bseindia.com/xml-data/corpfiling/AttachHis/bb1870e3-1806-443f-8dc0-c81358e0d28a.pdf" target="_blank" rel="noopener">conference call</a> hosted by Jefferies. Only 63 institutional investors participated on the evening of December 9, 2020, where the bank publicly disclosed what went wrong at its recent digital outages. More importantly, in the opinion of this analyst, it provided market sensitive information in the form of the time span it would take to rectify some of the information technology issues raised by the Reserve Bank of India (RBI).  The bank disclosed the conference audio link to the exchanges nearly 16 hours later (at the latter half of the trading day). Such sensitive information should have been disclosed via a specially arranged press conference followed by an analyst conference, instead of providing such information to an exclusive audience of 63 institutional investors. Pertinently, HDFC Bank’s share price on December 10 closed 1.5% lower than the previous day, as compared with a 0.4% fall in the Nifty-50. This analyst understands that in future the Bank will disburse such information through a wider dissemination rather than such selective disclosure.At the conference call, the Bank acknowledged that its critical disaster recovery system required manual intervention to be activated, and that it would take 3 weeks for the automation to be implemented. This is a very important disclosure as this was not communicated to customers in its  <a href="https://v1.hdfcbank.com/htdocs/common/other/download/app1.html" target="_blank" rel="noopener">'Forget Cash...Go Digital'</a>  publicity campaign or in its ‘Digital 2.0’ strategy to stakeholders. It is disappointing that even though the RBI released guidelines for Business Continuity Planning (BCP) in <a href="https://www.rbi.org.in/SCRIPTs/BS_CircularIndexDisplay.aspx?Id=6366" target="_blank" rel="noopener">April 2011</a>, more than 9 years later, India’s most valuable bank, which markets its digital prowess, has been found to being so exposed and vulnerable at its backbone of banking operations.

It was unfortunate that HDFC Bank (HDFCB IN) decided to provide selective disclosure at a conference call hosted by Jefferies. Only 63 institutional investors participated on the evening of December 9, 2020, where the bank publicly disclosed what went wrong at its recent digital outages. More importantly, in the opinion of this analyst, it provided market sensitive information in the form of the time span it would take to rectify some of the information technology issues raised by the Reserve Bank of India (RBI).  The bank disclosed the conference audio link to the exchanges nearly 16 hours later (at the latter half of the trading day). Such sensitive information should have been disclosed via a specially arranged press conference followed by an analyst conference, instead of providing such information to an exclusive audience of 63 institutional investors. Pertinently, HDFC Bank’s share price on December 10 closed 1.5% lower than the previous day, as compared with a 0.4% fall in the Nifty-50. This analyst understands that in future the Bank will disburse such information through a wider dissemination rather than such selective disclosure.At the conference call, the Bank acknowledged that its critical disaster recovery system required manual intervention to be activated, and that it would take 3 weeks for the automation to be implemented. This is a very important disclosure as this was not communicated to customers in its  'Forget Cash...Go Digital'  publicity campaign or in its ‘Digital 2.0’ strategy to stakeholders. It is disappointing that even though the RBI released guidelines for Business Continuity Planning (BCP) in April 2011, more than 9 years later, India’s most valuable bank, which markets its digital prowess, has been found to being so exposed and vulnerable at its backbone of banking operations.

Selective Disclosure of Sensitive Information? HDFC Bank’s Conference Call on Its Digital Outages

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES Bank's (YES IN)</a> US$-bond hit par-value recently. Par is plenty for investors. Having delivered 20 price points in return since our Buy recommendation, pre-rescue in February, Smartkarma readers should be satiated with this above average return. Upside is now much less likely, although temporarily pricing slightly over par could occur during the next few months. As such, we move to Underweight YES Bank’s 3 ¾% coupon Nov. 2023 maturity bond, from Overweight on a relative value basis.We put YES Bank’s recent bond outperformance down to a combination of a broad risk asset rally and positive news flow plus the lack of negative news regarding the recovery of the institution. The Reserve Bank of India’s take-over of <a href="https://www.smartkarma.com/entities/lakshmi-vilas-bank-ltd" target="_blank" data-smartkarma-citation="entities:17552:1" rel="noopener">Lakshmi Vilas Bank (LVB IN)</a> has both removed the spotlight from YES Bank and reminded investors that this entity was rescued.Delivery on management’s restructuring goals remains to be seen while headwinds build for India, post-COVID-19. As such, with less than two-years to maturity and spreads at less than one-half their levels of one-year ago, now is not the time to jump in. We believe it is time to lighten allocation to this security and reposition elsewhere.

YES Bank's (YES IN) US$-bond hit par-value recently. Par is plenty for investors. Having delivered 20 price points in return since our Buy recommendation, pre-rescue in February, Smartkarma readers should be satiated with this above average return. Upside is now much less likely, although temporarily pricing slightly over par could occur during the next few months. As such, we move to Underweight YES Bank’s 3 ¾% coupon Nov. 2023 maturity bond, from Overweight on a relative value basis.We put YES Bank’s recent bond outperformance down to a combination of a broad risk asset rally and positive news flow plus the lack of negative news regarding the recovery of the institution. The Reserve Bank of India’s take-over of Lakshmi Vilas Bank (LVB IN) has both removed the spotlight from YES Bank and reminded investors that this entity was rescued.Delivery on management’s restructuring goals remains to be seen while headwinds build for India, post-COVID-19. As such, with less than two-years to maturity and spreads at less than one-half their levels of one-year ago, now is not the time to jump in. We believe it is time to lighten allocation to this security and reposition elsewhere. 

YES Bank: Par Is Plenty- Move to Underweight

The Reserve Bank of India’s (RBI) decision to temporarily put a halt to all digital launches 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>’s financial products and also cease all new issuances of credit cards by the bank brings to the fore the huge reputational risk on account of the bank ignoring its technology issues. But further, it impacts its future revenue, especially from its highly lucrative credit cards business. The bank is the market leader in credit cards, with a 31.4% share by card spend, and its 3 month average (July-September) addition was 136,044 cards per month, which is the likely loss to the bank as rivals compete for these additional cards in the following months. In FY2020, <a href="https://www.hdfcbank.com/content/bbp/repositories/723fb80a-2dde-42a3-9793-7ae1be57c87f/?path=/Footer/About%20Us/Investor%20Relation/Detail%20PAges/inverstor%20relation/PDF%27s/Q3FY20%20Rev.pdf" target="_blank" rel="noopener">95%</a> of customers initiated transactions via its digital (internet and mobile) channel and as on September 30, the bank had consolidated assets of US$ 225 bn. In <a href="https://hemindrahazari.com/2019/12/09/hdfc-banks-digital-disaster-no-recovery-plan/" target="_blank" rel="noopener">December 2019</a>, this analyst was one of the few to highlight the obvious deficiencies in HDFC Bank’s digital operations, the lack of clear and relevant communication to the public and to customers by the bank, and, most worryingly, the absence of a disaster recovery plan, which should have been taken up on a war footing by the bank’s board of directors.The RBI’s order specifies that the “Bank’s board examines the lapses and fixes accountability”, which indicates that in the past year the HDFC Bank’s high profile <a href="https://www.hdfcbank.com/personal/about-us/corporate-governance/composition-of-the-board" target="_blank" rel="noopener">board of directors</a> has not given this issue the importance it deserves by examining the cause for the failure of its digital operations, and the remedial actions to be adopted to prevent its recurrence; nor has it fixed accountability. A professional board would have given such a basic task high priority soon after the lengthy digital outages of last December. That it takes a humiliating public directive from the banking regulator to remind the HDFC Bank’s Board to do its job is indicative of the corporate governance practiced in India’s most valuable bank.

The Reserve Bank of India’s (RBI) decision to temporarily put a halt to all digital launches of HDFC Bank (HDFCB IN)’s financial products and also cease all new issuances of credit cards by the bank brings to the fore the huge reputational risk on account of the bank ignoring its technology issues. But further, it impacts its future revenue, especially from its highly lucrative credit cards business. The bank is the market leader in credit cards, with a 31.4% share by card spend, and its 3 month average (July-September) addition was 136,044 cards per month, which is the likely loss to the bank as rivals compete for these additional cards in the following months. In FY2020, 95% of customers initiated transactions via its digital (internet and mobile) channel and as on September 30, the bank had consolidated assets of US$ 225 bn. In December 2019, this analyst was one of the few to highlight the obvious deficiencies in HDFC Bank’s digital operations, the lack of clear and relevant communication to the public and to customers by the bank, and, most worryingly, the absence of a disaster recovery plan, which should have been taken up on a war footing by the bank’s board of directors.The RBI’s order specifies that the “Bank’s board examines the lapses and fixes accountability”, which indicates that in the past year the HDFC Bank’s high profile board of directors has not given this issue the importance it deserves by examining the cause for the failure of its digital operations, and the remedial actions to be adopted to prevent its recurrence; nor has it fixed accountability. A professional board would have given such a basic task high priority soon after the lengthy digital outages of last December. That it takes a humiliating public directive from the banking regulator to remind the HDFC Bank’s Board to do its job is indicative of the corporate governance practiced in India’s most valuable bank.

HDFC Bank’s Digital Irresponsibility: RBI’s Novel Penalty Hits Where It Hurts

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 Bottom-Up

SBI Cards & Payment Services / Equity Bottom-Up

<div><a href="https://www.smartkarma.com/entities/sbi-cards-payment-services-limited" target="_blank" data-smartkarma-citation="entities:28662:1" rel="noopener">SBI Cards (SBICARD IN)</a> is India's second largest credit card issuer with a market share of 18.7% in terms of number of cards outstanding. SBI Cards is a subsidiary of <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 (SBIN IN)</a>, India’s largest commercial bank, and has Carlyle as its second largest share holder.</div><div>The stock made a tepid debut in the market in Mar 2020, owing to the timing being closely aligned with the COVID-19 onslaught. Its now trading above its listing price, and its operations are normalising. Furthermore, its largest competitor and the market leader in credit cards, <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> was recently barred by the banking regulator from issuing credit cards.</div>

SBI Cards (SBICARD IN) is India's second largest credit card issuer with a market share of 18.7% in terms of number of cards outstanding. SBI Cards is a subsidiary of State Bank Of India (SBIN IN), India’s largest commercial bank, and has Carlyle as its second largest share holder.The stock made a tepid debut in the market in Mar 2020, owing to the timing being closely aligned with the COVID-19 onslaught. Its now trading above its listing price, and its operations are normalising. Furthermore, its largest competitor and the market leader in credit cards, HDFC Bank (HDFCB IN) was recently barred by the banking regulator from issuing credit cards.

2021 High Conviction - SBI Cards & Payments - Multiple Tailwinds, Including Biggest Peers Recent Ban

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at <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>. One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a>. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-yes-stressed-deposit-flight-simulation" target="_blank" data-smartkarma-citation="insights:44213" rel="noopener">Yes-Stressed Deposit Flight Simulation</a>.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-missing-deposit-miasma-1-year-after-yes-bank-s-silent-run" target="_blank" data-smartkarma-citation="insights:45438" rel="noopener">Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run</a>.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank (YES IN). One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see Stable Deposits and Costs 1-Year After the Yes Bank Silent Run. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see Yes-Stressed Deposit Flight Simulation.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

India-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios

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)

Selective Disclosure of Sensitive Information? HDFC Bank’s Conference Call on Its Digital Outages

HDFC Bank provided sensitive information in the form of the time span it would take to rectify some of the IT issues raised by the RBI at a sell...

Hemindra Hazari

YES Bank: Par Is Plenty- Move to Underweight

Despite incredibly poor asset quality, goals that are years from being realized and liquidity which remains well overstated, YES Bank’s US$-bond...

Hank Calenti, CFA

HDFC Bank’s Digital Irresponsibility: RBI’s Novel Penalty Hits Where It Hurts

That it takes a humiliating public directive from the banking regulator to remind the HDFC Bank’s Board to do its job is indicative of the...

Hemindra Hazari

2021 High Conviction - SBI Cards & Payments - Multiple Tailwinds, Including Biggest Peers Recent Ban

SBI Cards is India's second largest credit card issuer with a market share of 18.7%. SBI Cards is a subsidiary of State Bank Of India (SBIN IN)...

Sumeet Singh

India-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios

COVID-19 adjusted LCRs exhibit an almost perfectly negative correlation with India-headquartered bank bond spreads. This is the 4’th of several...

Hank Calenti, CFA

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