India Financials

Saumya Agarwal

Equity Bottom-Up

ICICI Bank, India’s second largest private sector Bank, reported its Q4FY21 results today.In what appears to be an interesting contrast, India’s two largest private sector Banks have been driving growth in two diametrically opposite directions. ICICI bank continues to be a retail-dominant bank and drive growth in the Retail segment while its competitor and India’s largest private sector Bank (HDFC Bank) has transformed into a corporate-focused bank amid the pandemic, while driving growth in the Corporate segment.  However, Profits increased manifold for ICICI bank, in Q4FY21, led by strong revenue drivers and moderation in credit costs. Asset quality of the Retail portfolio remains manageable even as the Bank has built ample provision cover.

ICICI Bank, India’s second largest private sector Bank, reported its Q4FY21 results today.In what appears to be an interesting contrast, India’s two largest private sector Banks have been driving growth in two diametrically opposite directions. ICICI bank continues to be a retail-dominant bank and drive growth in the Retail segment while its competitor and India’s largest private sector Bank (HDFC Bank) has transformed into a corporate-focused bank amid the pandemic, while driving growth in the Corporate segment.  However, Profits increased manifold for ICICI bank, in Q4FY21, led by strong revenue drivers and moderation in credit costs. Asset quality of the Retail portfolio remains manageable even as the Bank has built ample provision cover. 

ICICI Bank Q4FY21- India’s Two Largest Private Sector Banks Driving Growth in 2 Different Directions

Specialist in Indian Banking and Economic Research

Hemindra Hazari

<a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a>’s decision to <a href="https://www.citigroup.com/citi/investor/data/qer121.pdf?ieNocache=351" target="_blank" rel="noopener">withdraw</a>  from consumer banking in 13 geographies, including India, and focus instead on corporate/institutional banking, is a lesson in missed opportunities, at least in the case of India. Citi India was the pioneer in consumer banking, in products such as mortgages and credit cards, but it flourished when there were only government banks. The post-1991 entry of the new private banks in India which concentrated on the retail and corporate customers of foreign banks, and the post-Lehman crisis in 2008, heralded the decline of foreign banks in India. The present market capitalisation of the new private banks, and their significant footfall in retail banking in India, highlight the missed opportunity by foreign banks like Citi. The Reserve Bank of India (RBI) provided the foreign banks an opportunity from <a href="https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR936SC1113.pdf" target="_blank" rel="noopener">2013</a>  to set up Indian subsidiaries which could unfetter their network shackles and expand their branches, which is necessary for consumer banking, but the foreign banks preferred not to get tied down by the other regulatory and social commitments. Instead they focused on hiring direct sales agents to grow their consumer book. Although Citi developed a premium retail clientele franchise, the lack of a broader retail network and intense competition impeded their growth in retail. They preferred to remain focused on the corporate portfolio where, using their global balance sheet, creating structured products and handling treasury and foreign exchange transactions, they managed a lucrative business. Citi’s 5% market share in credit cards remains the jewel in its retail consumer franchise in India, and its monthly credit card spends per customer are at the top of the league, and close to HDFC Bank. Many players are eyeing Citibank’s market share in credit cards and it remains to be seen whether Citi offloads it on a standalone basis, or sells it with its other retail franchise in India, or sells all 13 geographies to a global player.

Citigroup Inc (C US)’s decision to withdraw  from consumer banking in 13 geographies, including India, and focus instead on corporate/institutional banking, is a lesson in missed opportunities, at least in the case of India. Citi India was the pioneer in consumer banking, in products such as mortgages and credit cards, but it flourished when there were only government banks. The post-1991 entry of the new private banks in India which concentrated on the retail and corporate customers of foreign banks, and the post-Lehman crisis in 2008, heralded the decline of foreign banks in India. The present market capitalisation of the new private banks, and their significant footfall in retail banking in India, highlight the missed opportunity by foreign banks like Citi. The Reserve Bank of India (RBI) provided the foreign banks an opportunity from 2013  to set up Indian subsidiaries which could unfetter their network shackles and expand their branches, which is necessary for consumer banking, but the foreign banks preferred not to get tied down by the other regulatory and social commitments. Instead they focused on hiring direct sales agents to grow their consumer book. Although Citi developed a premium retail clientele franchise, the lack of a broader retail network and intense competition impeded their growth in retail. They preferred to remain focused on the corporate portfolio where, using their global balance sheet, creating structured products and handling treasury and foreign exchange transactions, they managed a lucrative business. Citi’s 5% market share in credit cards remains the jewel in its retail consumer franchise in India, and its monthly credit card spends per customer are at the top of the league, and close to HDFC Bank. Many players are eyeing Citibank’s market share in credit cards and it remains to be seen whether Citi offloads it on a standalone basis, or sells it with its other retail franchise in India, or sells all 13 geographies to a global player.   

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div>In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal. We also recap our earlier ideas and recommend exiting a position where there are gains and the price ratio is near a turning point.</div><div>These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.</div><div>
These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.
Over the last couple of months, our pair trades have returned 2.54% on average.
</div>

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal. We also recap our earlier ideas and recommend exiting a position where there are gains and the price ratio is near a turning point.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.
These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.
Over the last couple of months, our pair trades have returned 2.54% on average.


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

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.   

Thematic (Sector/Industry)

In quite an innovative move, the Government of India amended the Insolvency and Bankruptcy code (IBC) 2016, by promulgating an ordinance to provide pre-packaged resolution for micro, small and medium Enterprises (MSME’s). The move is expected to create a win-win situation for the MSME debtor and creditor alike. Banks with sizeable exposure to the MSME segment and/or  higher stress in the segment stand to benefit the most , from this amendment.

In quite an innovative move, the Government of India amended the Insolvency and Bankruptcy code (IBC) 2016, by promulgating an ordinance to provide pre-packaged resolution for micro, small and medium Enterprises (MSME’s). The move is expected to create a win-win situation for the MSME debtor and creditor alike. Banks with sizeable exposure to the MSME segment and/or  higher stress in the segment stand to benefit the most , from this amendment. 

The ‘Pre-Pack’ Scheme for MSME: Which Banks Have the Most Stressed MSME Portfolio ?

India

ICICI Bank Limited operates as a bank. The Bank offers saving accounts, loans, debit, credit cards, insurance, investments, mortgages, and online banking services. ICICI Bank serves customers worldwide.

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ICICI Bank Ltd (ICICIBC IN)

ICICI Bank Q4FY21- India’s Two Largest Private Sector Banks Driving Growth in 2 Different Directions

In what appears to be an interesting study of contrast, India’s two largest private sector Banks are driving growth in two different directions,...

Saumya Agarwal

While Citi Slept

Citi's decision to withdraw from consumer banking in 13 geographies, including India, and focus on corp./institutional banking, is a lesson in...

Hemindra Hazari

Pair Trading Ideas - Asian Financials

We highlight potential trades among liquid large cap Asian financial stocks that are correlated and exhibit mean reversion. We recommend closing...

Brian Freitas

HDFC Bank – Big Credit Disappointment

HDFC BANK: HDFCB released a disappointing FY 4Q21 bottom-line, declining 6.5% QOQ, due higher provisions and costs. Net new NPLs increased 130.4%...

Thomas J. Monaco

The ‘Pre-Pack’ Scheme for MSME: Which Banks Have the Most Stressed MSME Portfolio ?

The Government has amended the IBC code 2016 to provide pre-packaged resolution for MSME's. Banks with sizeable exposure to MSME and /or the...

Saumya Agarwal

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