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

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: We calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: We calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

With the Reserve Bank of India (RBI) imposing a <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51650" target="_blank" rel="noopener">penalty</a> of Rs 100 mn (US$ 1.4 mn) 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 curtain has finally come down on the considerable irregularities (around 2014-2019) in the bank’s automobile loan division. After verifying a whistleblower’s <a href="https://twitter.com/MDahariya/status/1273101932782137347?s=20" target="_blank" rel="noopener">tweets</a>  (June 17, 2020), this analyst  highlighted (on July 4, 2020)  the <a href="https://hemindrahazari.com/2020/07/04/nothing-to-see-here-move-along-radio-silence-over-departure-of-two-top-hdfc-bank-executives/" target="_blank" rel="noopener">unusual</a> departures of two senior HDFC Bank executives, one of whom was in-charge of automobile loans, and exposed the complete lack of transparency by the bank on their exits. Even though the whistleblower tagged <a href="https://twitter.com/mdahariya/status/1273134673162645508?lang=en" target="_blank" rel="noopener">prominent</a>  banking editors in the media in his initial tweets, they <a href="https://hemindrahazari.com/2020/09/30/hdfc-bank-where-ignorance-is-bliss-block-whistleblowers-on-twitter/" target="_blank" rel="noopener">refused</a> to pursue the story. It was only when Bloomberg ‘<a href="https://www.bloombergquint.com/business/hdfc-bank-is-said-to-probe-lending-practices-at-vehicle-unit" target="_blank" rel="noopener">broke</a>’ the news (July 13, 2020) that the story got traction in the media and the RBI launched its investigation. There are many lessons to be drawn by stakeholders from this episode.<ol>
<li>Normally, when a regulator finds a violation, it calculates the gains derived from such operations and the monetary penalty is a multiple of the illegitimate gain, to deter such activity in the future. It is difficult to believe that over the course of 5 years the bank made gains of less than Rs 100 mn on this practice. Thus the RBI has levied a pittance of a penalty on HDFC Bank.</li>
<li>The bundling of the Global Positioning System (GPS) device with the automobile loan was approved by the bank, which received a <a href="https://twitter.com/MDahariya/status/1307619778186670080?s=20" target="_blank" rel="noopener">commission</a>  for each sale. Hence it was not the work of errant junior bank officials. This indicates that senior bank officials were to be held responsible for approving and facilitating the sale of a non-financial product by the bank in violation of  <a href="https://indiankanoon.org/doc/392253/#:~:text=Section%206(2)%20in%20BANKING%20REGULATION%20ACT%2C1949&amp;text=(2)%20No%20banking%20company%20shall,sub%2Dsection%20(1)." target="_blank" rel="noopener">Section 6(2)</a> of the Banking Regulation Act, 1949 (BRA).</li>
<li>HDFC Bank had poor compliance and vigilance controls which overlooked for some years the fact that bank officials in the automobile loans department were being <a href="https://twitter.com/MDahariya/status/1305355107870085120?s=20" target="_blank" rel="noopener">incentivised</a> by Trackpoint GPS Pvt. Ltd., a third party, for meeting sales targets and selling its GPS in contravention of <a href="https://indiankanoon.org/doc/500401/" target="_blank" rel="noopener">Section 10</a> of the BRA.</li>
<li>High performers, especially direct reportees to the CEO, need to be carefully monitored for compliance. HDFC Bank has to look into the role of Ashok Khanna, former Group Head, Automobile Loans (directly reporting to then CEO, Aditya Puri). How could Khanna have been unaware of the irregularities in his department which he headed for many years, and why did the board of directors grant him annual extensions after the bank’s official retirement date for staff? (He finally retired/was denied further extension on March 31, 2020.)</li>
<li>Regardless of the pedigree of the company and its Chief Executive Officer (CEO), stakeholders must question and assess the claims of the senior management and demand more transparency from the company.</li>
<li>Stakeholders and the regulator must pay attention to whistle blowers and look into their claims.</li>
<li>The sentinels of the ‘free-market’, namely, the business media, sell-side and credit rating analysts are unlikely to take the lead in investigating the claims of whistle blowers when it pertains to prominent companies and their ‘iconic’ CEOs.</li>
<li>Bank customers who have been mis-sold products are unlikely to get any relief from the banking regulator.</li>
<li>The class action suit <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">filed</a> in the United States of America will be strengthened by the RBI’s penalty on HDFC Bank for the irregularities in its automobile loan division</li>
<li>
RBI’s penalty on HDFC Bank, and the regular updates by the whistleblower, indicate that stakeholders should look beyond a premium valuation on the capital market, consistent growth in earnings and superior asset quality ("best in class") to evaluate the quality of a company.  The fact that the regulator itself has credited the whistleblower complaint lends considerable weight to the whistleblower in question, whom HDFC Bank had tried its best to <a href="https://twitter.com/MDahariya/status/1399211870175694854?s=20" target="_blank" rel="noopener">discredit</a> . Aditya Puri (the previous CEO) had a <a href="https://hemindrahazari.com/2020/10/25/time-to-junk-the-less-savoury-parts-of-the-legacy-of-hdfc-banks-iconic-ceo/" target="_blank" rel="noopener">history</a> of compliance issues, and the irregularities which took place under his watch were grave. Despite this, one hopes that Sashidhar Jagdisan (the present CEO) takes compliance as seriously as achieving business targets, and such incidents are not repeated in the future.</li>
</ol>

With the Reserve Bank of India (RBI) imposing a penalty of Rs 100 mn (US$ 1.4 mn) on HDFC Bank (HDFCB IN) , the curtain has finally come down on the considerable irregularities (around 2014-2019) in the bank’s automobile loan division. After verifying a whistleblower’s tweets  (June 17, 2020), this analyst  highlighted (on July 4, 2020)  the unusual departures of two senior HDFC Bank executives, one of whom was in-charge of automobile loans, and exposed the complete lack of transparency by the bank on their exits. Even though the whistleblower tagged prominent  banking editors in the media in his initial tweets, they refused to pursue the story. It was only when Bloomberg ‘broke’ the news (July 13, 2020) that the story got traction in the media and the RBI launched its investigation. There are many lessons to be drawn by stakeholders from this episode.
Normally, when a regulator finds a violation, it calculates the gains derived from such operations and the monetary penalty is a multiple of the illegitimate gain, to deter such activity in the future. It is difficult to believe that over the course of 5 years the bank made gains of less than Rs 100 mn on this practice. Thus the RBI has levied a pittance of a penalty on HDFC Bank.
The bundling of the Global Positioning System (GPS) device with the automobile loan was approved by the bank, which received a commission  for each sale. Hence it was not the work of errant junior bank officials. This indicates that senior bank officials were to be held responsible for approving and facilitating the sale of a non-financial product by the bank in violation of  Section 6(2) of the Banking Regulation Act, 1949 (BRA).
HDFC Bank had poor compliance and vigilance controls which overlooked for some years the fact that bank officials in the automobile loans department were being incentivised by Trackpoint GPS Pvt. Ltd., a third party, for meeting sales targets and selling its GPS in contravention of Section 10 of the BRA.
High performers, especially direct reportees to the CEO, need to be carefully monitored for compliance. HDFC Bank has to look into the role of Ashok Khanna, former Group Head, Automobile Loans (directly reporting to then CEO, Aditya Puri). How could Khanna have been unaware of the irregularities in his department which he headed for many years, and why did the board of directors grant him annual extensions after the bank’s official retirement date for staff? (He finally retired/was denied further extension on March 31, 2020.)
Regardless of the pedigree of the company and its Chief Executive Officer (CEO), stakeholders must question and assess the claims of the senior management and demand more transparency from the company.
Stakeholders and the regulator must pay attention to whistle blowers and look into their claims.
The sentinels of the ‘free-market’, namely, the business media, sell-side and credit rating analysts are unlikely to take the lead in investigating the claims of whistle blowers when it pertains to prominent companies and their ‘iconic’ CEOs.
Bank customers who have been mis-sold products are unlikely to get any relief from the banking regulator.
The class action suit filed in the United States of America will be strengthened by the RBI’s penalty on HDFC Bank for the irregularities in its automobile loan division

RBI’s penalty on HDFC Bank, and the regular updates by the whistleblower, indicate that stakeholders should look beyond a premium valuation on the capital market, consistent growth in earnings and superior asset quality ("best in class") to evaluate the quality of a company.  The fact that the regulator itself has credited the whistleblower complaint lends considerable weight to the whistleblower in question, whom HDFC Bank had tried its best to discredit . Aditya Puri (the previous CEO) had a history of compliance issues, and the irregularities which took place under his watch were grave. Despite this, one hopes that Sashidhar Jagdisan (the present CEO) takes compliance as seriously as achieving business targets, and such incidents are not repeated in the future.


HDFC Bank Penalty: RBI Strokes HDFC Bank on the Knuckles

*Poor Result: Bank of Baroda (BOB.IN) [BOB] reported a FY 4Q21 loss of INR 10.5 bn, quite a reversal of fortune from the gains of INR 10.6 bn in FY 3Q21. Several factors drove BOB’s poor performance: a) net interest income declined INR 3.7 bn (5.0%) linked quarter driven by NIM expansion of 5 bp to 2.72% while the loan book only grew 0.2%; b) a loss provision increase of INR 1.5 bn (4.4%) despite further weakness in lending; an operating expense increase of INR 3.9 bn (7.3%) driven primarily by other costs which increased INR 3.1 bn (13.8%) – pushing BOB’s C/I ratio 3.2% higher to 63.2%; and the write-down of INR 33.1 bn in un-utilized DTAs; and*Poor Reserve Cover: Further, net new NPLs remain elevated at INR 13.5 bn or 11.2% annualized. Keep in mind, a bank with over 8% of NPLs is typically considered an insolvent institution. By our calculation, however, BOB’s reserves still remain light by INR 293 bn or nearly 12 quarters of pre-tax earnings.

*Poor Result: Bank of Baroda (BOB.IN) [BOB] reported a FY 4Q21 loss of INR 10.5 bn, quite a reversal of fortune from the gains of INR 10.6 bn in FY 3Q21. Several factors drove BOB’s poor performance: a) net interest income declined INR 3.7 bn (5.0%) linked quarter driven by NIM expansion of 5 bp to 2.72% while the loan book only grew 0.2%; b) a loss provision increase of INR 1.5 bn (4.4%) despite further weakness in lending; an operating expense increase of INR 3.9 bn (7.3%) driven primarily by other costs which increased INR 3.1 bn (13.8%) – pushing BOB’s C/I ratio 3.2% higher to 63.2%; and the write-down of INR 33.1 bn in un-utilized DTAs; and*Poor Reserve Cover: Further, net new NPLs remain elevated at INR 13.5 bn or 11.2% annualized. Keep in mind, a bank with over 8% of NPLs is typically considered an insolvent institution. By our calculation, however, BOB’s reserves still remain light by INR 293 bn or nearly 12 quarters of pre-tax earnings.

Bank of Baroda – No Light In This Tunnel

India Financials

Saumya Agarwal

Thematic (Sector/Industry)

A year into the pandemic, Indian Banks have emerged with better-than- expected Gross NPA levels and huge Covid buffers at end  FY21.  With India's vaccination coverage at ~200 million or ~15% of total population and a sustained decline in daily count of fresh infections, many of the uncertainties are  receding. A downward bias on credit costs is now increasingly likely, and should augur well for Banks.

A year into the pandemic, Indian Banks have emerged with better-than- expected Gross NPA levels and huge Covid buffers at end  FY21.  With India's vaccination coverage at ~200 million or ~15% of total population and a sustained decline in daily count of fresh infections, many of the uncertainties are  receding. A downward bias on credit costs is now increasingly likely, and should augur well for Banks.

Indian Banks- Downward Bias on Credit Costs, as Uncertainties Recede

While <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>  has recovered from its corporate non-performing asset (NPA) crisis, it seems to be in the midst of a management attrition problem, partly explained by significant <a href="https://thewire.in/banking/will-axis-bank-right-the-ship-with-its-mid-level-management-shake-up" target="_blank" rel="noopener">sackings</a> in FY2020. Staff turnover levels have been steadily rising in FY2018 – FY2020 (data for FY2021 not yet released). What is worrying is the attrition is across management strata, and covering all age groups. In our sample of banks ( <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> , Axis Bank, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> and <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> ) which disclose this data, only Yes Bank has worse attrition than Axis Bank, which is understandable given Yes Bank’s precarious situation till FY2020.It is commendable of both Axis Bank and Yes Bank to have voluntarily provided detailed disclosure of attrition (unlike <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank Ltd (ICICIBC IN)</a> and <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> , which provided no disclosures in this regard), enabling a meaningful analysis. The consistent rise in attrition in Axis Bank is a serious human resource (HR) problem reflecting on the bank’s <a href="https://www.axisbank.com/media-centre/board-of-directors" target="_blank" rel="noopener">board of directors</a>. Responding to a query posed by this analyst on this subject, the bank has stated that it “does not comment on internal administrative matters”. This analyst believes the high attrition can be attributed to (i) sackings, (ii) poor selection practices by the Human Resources division (responsibility of <a href="https://www.linkedin.com/in/rajesh-dahiya-4911961/?originalSubdomain=in" target="_blank" rel="noopener">Rajesh Dahiya</a>  since June 2010) in identifying appropriate candidates (especially at the entry level of sales where attrition was a shocking 69% in FY2020), (iii) excessive pressure to meet over ambitious targets, (iv) difficult working conditions, (v) poor training and (vi) inadequate resources for its staff.Axis Bank’s FY2020 annual report maintains that “its employees remain the most critical drivers for growth and success” and are the “catalyst which builds talent”. However, inexplicably, the board of directors have presided over large-scale staff attrition and allowed the attrition to keep rising. Amitabh Chaudhry took over as Chief Executive Officer (CEO), Axis Bank on January 1, 2019, and in the first week of April, 2019  <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/axis-bank-asks-more-than-50-mid-level-managers-to-leave/articleshow/68731729.cms?utm_source=whatsapp_app&amp;utm_medium=social&amp;utm_campaign=socialsharebuttons" target="_blank" rel="noopener">media reports</a> indicated significant forced removals. It is surprising that lower levels of management bore the brunt while senior executives closely associated with the previous CEO’s strategy got away. Banking is all about trust, and customers become uncomfortable when there is a constant churn of staff who service them. Nor is it healthy for any institution to have a high and consistently increasing attrition, which is a symptom of an underlying problem and signifies waste of expenditures incurred in hiring and training staff. It is also surprising that credit rating analysts have not red flagged this development. These issues can no longer be tucked away in some obscure corner in a company’s website, but will have to be mandatorily included in company’s annual reports from FY2023 as per SEBI’s <a href="https://www.sebi.gov.in/media/press-releases/may-2021/sebi-issues-circular-on-business-responsibility-and-sustainability-reporting-by-listed-entities-_50097.html" target="_blank" rel="noopener">recent</a>  business responsibility social reporting (BRSR).  By then one hopes the board of directors at Axis Bank would have woken up and addressed this critical issue.

While Axis Bank Ltd (AXSB IN)  has recovered from its corporate non-performing asset (NPA) crisis, it seems to be in the midst of a management attrition problem, partly explained by significant sackings in FY2020. Staff turnover levels have been steadily rising in FY2018 – FY2020 (data for FY2021 not yet released). What is worrying is the attrition is across management strata, and covering all age groups. In our sample of banks ( HDFC Bank (HDFCB IN) , Axis Bank, Indusind Bank (IIB IN) and Yes Bank (YES IN) ) which disclose this data, only Yes Bank has worse attrition than Axis Bank, which is understandable given Yes Bank’s precarious situation till FY2020.It is commendable of both Axis Bank and Yes Bank to have voluntarily provided detailed disclosure of attrition (unlike ICICI Bank Ltd (ICICIBC IN) and Kotak Mahindra Bank (KMB IN) , which provided no disclosures in this regard), enabling a meaningful analysis. The consistent rise in attrition in Axis Bank is a serious human resource (HR) problem reflecting on the bank’s board of directors. Responding to a query posed by this analyst on this subject, the bank has stated that it “does not comment on internal administrative matters”. This analyst believes the high attrition can be attributed to (i) sackings, (ii) poor selection practices by the Human Resources division (responsibility of Rajesh Dahiya  since June 2010) in identifying appropriate candidates (especially at the entry level of sales where attrition was a shocking 69% in FY2020), (iii) excessive pressure to meet over ambitious targets, (iv) difficult working conditions, (v) poor training and (vi) inadequate resources for its staff.Axis Bank’s FY2020 annual report maintains that “its employees remain the most critical drivers for growth and success” and are the “catalyst which builds talent”. However, inexplicably, the board of directors have presided over large-scale staff attrition and allowed the attrition to keep rising. Amitabh Chaudhry took over as Chief Executive Officer (CEO), Axis Bank on January 1, 2019, and in the first week of April, 2019  media reports indicated significant forced removals. It is surprising that lower levels of management bore the brunt while senior executives closely associated with the previous CEO’s strategy got away. Banking is all about trust, and customers become uncomfortable when there is a constant churn of staff who service them. Nor is it healthy for any institution to have a high and consistently increasing attrition, which is a symptom of an underlying problem and signifies waste of expenditures incurred in hiring and training staff. It is also surprising that credit rating analysts have not red flagged this development. These issues can no longer be tucked away in some obscure corner in a company’s website, but will have to be mandatorily included in company’s annual reports from FY2023 as per SEBI’s recent  business responsibility social reporting (BRSR).  By then one hopes the board of directors at Axis Bank would have woken up and addressed this critical issue.

Why Are Axis Bank’s Directors Mum About the Extraordinary Staff Churn?

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 – Rose Colored Glasses

HDFC BANK: A competitor hosted a recent conference call with HDFCB. It chose to focus on numerous items not having to do with credit. The longer...

Thomas J. Monaco

HDFC Bank Penalty: RBI Strokes HDFC Bank on the Knuckles

The irregularities which took place under Puri's watch were grave. Despite this, one hopes that Sashi Jagdisan (the present CEO) takes compliance...

Hemindra Hazari

Bank of Baroda – No Light In This Tunnel

BANK OF BARODA: BOB reported a FY 4Q21 loss of INR 10.5 bn. Net new NPLs remain elevated at 11.2% annualized. BOB’s reserves still remain light by...

Thomas J. Monaco

Indian Banks- Downward Bias on Credit Costs, as Uncertainties Recede

Indian Banks have braved the first wave well and built huge Covid related provisions. With many of the uncertainties receding, there is a downward...

Saumya Agarwal

Why Are Axis Bank’s Directors Mum About the Extraordinary Staff Churn?

Stakeholders, including credit rating agencies, need to be concerned with such high attrition rates in Axis Bank, as banking is staff intensive,...

Hemindra Hazari

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