India Financials

Saumya Agarwal

Equity Bottom-Up

Last month, IDBI Bank announced the draft scheme for setting off its accumulated losses against the Share Premium account balance. As per IDBI Bank, this accounting re-arrangement will help represent its true financial position and also benefit shareholders in the long run. Though not commonly used, this kind of accounting exercise is not 'first-of-its-kind' for an Indian Bank. Can this accounting move really be a game changer for IDBI Bank?

Last month, IDBI Bank announced the draft scheme for setting off its accumulated losses against the Share Premium account balance. As per IDBI Bank, this accounting re-arrangement will help represent its true financial position and also benefit shareholders in the long run. Though not commonly used, this kind of accounting exercise is not 'first-of-its-kind' for an Indian Bank. Can this accounting move really be a game changer for IDBI Bank?

IDBI Bank: Can ‘setting-Off’ the Accumulated Losses Be a Game Changer for IDBI Bank?

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Macroeconomics

The stock market has responded euphorically to India’s central government budget for the fiscal year 2021-22 (April-March). The question is: does this indicate that investors anticipate a revival of investment, employment, and GDP growth? Paradoxically, it may not. While investment in the macroeconomic sense may not increase, and GDP may take some time to come back to its pre-Covid levels, it appears that the market is unconcerned. The reason is that it anticipates a rise in corporate profits as a result of the measures in the budget, and it is excited about the government’s tough stance regarding reforms.During a severe economic slowdown, such as what India is currently facing, large scale privatisation of the public sector is unlikely to stimulate growth. The private sector typically is focused on short-term profits, and in an environment where aggregate demand is constricted and capacity utilisation is low, the private sector cannot be expected to undertake capital expenditure. It is only the government and government-owned companies which can play a counter-cyclical role in the economy in a downturn. The privatisation of the public sector would likely result in cost cutting to generate higher profits, instead of stimulating the economy. The Indian prime minister’s statement in parliament that “improper words against the private sector…[and] the culture of abusing the private sector” may not be tolerated indicates that the government now aims to bring about a major change in the political culture of India. Indeed, just as various dissidents, protesters and even comedians have been charged with serious offences against the state, it is possible that those alleging private corporate firms with corruption may face similar charges. This is intended to carry through unpopular reform measures with a minimum of opposition.Given the vulnerable state of some government banks, the proposed privatisation of two government banks may not yield much revenue. In such a scenario the purpose of privatisation may be to send a signal to international investors and the capital market of the government’s tough reform credentials, rather to raise substantial budgetary resources. The central role now given to the private sector as “wealth creators” at the vanguard of the economy may not result in the stated outcome of higher investments, employment and growth. But it may boost corporate profits, especially at the top of the corporate sector, even if the rest of the economy may actually decline. It is this boost to corporate profits that appears to have enthused the share market.

The stock market has responded euphorically to India’s central government budget for the fiscal year 2021-22 (April-March). The question is: does this indicate that investors anticipate a revival of investment, employment, and GDP growth? Paradoxically, it may not. While investment in the macroeconomic sense may not increase, and GDP may take some time to come back to its pre-Covid levels, it appears that the market is unconcerned. The reason is that it anticipates a rise in corporate profits as a result of the measures in the budget, and it is excited about the government’s tough stance regarding reforms.During a severe economic slowdown, such as what India is currently facing, large scale privatisation of the public sector is unlikely to stimulate growth. The private sector typically is focused on short-term profits, and in an environment where aggregate demand is constricted and capacity utilisation is low, the private sector cannot be expected to undertake capital expenditure. It is only the government and government-owned companies which can play a counter-cyclical role in the economy in a downturn. The privatisation of the public sector would likely result in cost cutting to generate higher profits, instead of stimulating the economy. The Indian prime minister’s statement in parliament that “improper words against the private sector…[and] the culture of abusing the private sector” may not be tolerated indicates that the government now aims to bring about a major change in the political culture of India. Indeed, just as various dissidents, protesters and even comedians have been charged with serious offences against the state, it is possible that those alleging private corporate firms with corruption may face similar charges. This is intended to carry through unpopular reform measures with a minimum of opposition.Given the vulnerable state of some government banks, the proposed privatisation of two government banks may not yield much revenue. In such a scenario the purpose of privatisation may be to send a signal to international investors and the capital market of the government’s tough reform credentials, rather to raise substantial budgetary resources. The central role now given to the private sector as “wealth creators” at the vanguard of the economy may not result in the stated outcome of higher investments, employment and growth. But it may boost corporate profits, especially at the top of the corporate sector, even if the rest of the economy may actually decline. It is this boost to corporate profits that appears to have enthused the share market.

Boost to “Wealth Creators” May Not Boost Investment, Employment and GDP

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

IDBI bank, which entered the RBI’s Prompt Corrective Action (PCA) regime in 2017, is now showing some signs of a turnaround, particularly on the Capital front. The Bank has also started reporting modest profits since Q4FY20. However, deep -seated woes persist on the Balance sheet. In this long road to recovery can IDBI Bank demonstrate progress on a sustained basis?

IDBI bank, which entered the RBI’s Prompt Corrective Action (PCA) regime in 2017, is now showing some signs of a turnaround, particularly on the Capital front. The Bank has also started reporting modest profits since Q4FY20. However, deep -seated woes persist on the Balance sheet. In this long road to recovery can IDBI Bank demonstrate progress on a sustained basis?

IDBI Bank - It Is Going to Be a Long and an Arduous Road to Recovery

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

There have been several false starts. There were times when many presumed the bad loan cycle was about to end. It could have been with the PSU bank recap plan. It could have been with a new government budget. It could have been with new guidelines on stressed assets. But the reality is that without fundamental relief to debtors, without improving economic growth,  credit metrics should continue to deteriorate. Now at 3Q20 it is once again clear, that there is as yet, no relief in sight.

There have been several false starts. There were times when many presumed the bad loan cycle was about to end. It could have been with the PSU bank recap plan. It could have been with a new government budget. It could have been with new guidelines on stressed assets. But the reality is that without fundamental relief to debtors, without improving economic growth,  credit metrics should continue to deteriorate. Now at 3Q20 it is once again clear, that there is as yet, no relief in sight.

India

Canara Bank Ltd. provides a full range of banking services throughout India. The Group's activities include retail banking, commercial and personal banking, investment management, treasury & NRI services, cash management and assorted ATM facilities.

Union Bank of India Limited provides a full range of banking services throughout India. The Company's activities include retail banking, commercial and personal banking, investment management, treasury and NRI services, cash management and assorted ATM facilities. Union Bank has an online tele-banking facility for all its core banking customers.

YES BANK Limited provides banking services. The Bank offers deposits, personal loans, e-banking, trade finance, corporate, and business banking services. YES BANK serves the food and agribusiness, life sciences, healthcare, biotechnology, telecommunications, media, information technology, and infrastructure development industries in India.

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

Indian Bank is a full service bank owned by the Government of India. The Bank offers a wide range of services including a foreign currency banking unit at Colombo and specialized overseas branches at Chennai, Bangalore, and Mumbai exclusively for handling foreign exchange  transactions arising out of export, import, remittances and non resident Indian business.

Punjab National Bank provides financial services such as corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. The Company provides services to domestic conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies.

Bank of Baroda owns and operates commercial banks in India.  The Group's banks provide the traditional forms of banking services, including CD's, Credit Card services and a variety of car loans, in addition to gold banking and a range of insurance services.  The Group also owns IBU International Finance Limited, an international banking company in Hong Kong.

UCO Bank provides a full range of banking services throughout India. UCO Bank operates over 1,700 banking branches in India, as well as four branches in overseas locations.

Indian Overseas Bank operates some 1,429 banking branches in India, as well as six branches in overseas locations.  The Group's banks provide loan and deposit schemes, Internet banking, and a full range of banking services.

Bank of India, through its subsidiaries, provides corporate, commercial, personal banking, retail, rural, and development banking.  The Group specializes its services towards corporate and medium businesses, in addition to upmarket retail customers.

Bank of the Philippine Islands, through its subsidiaries, provides commercial banking services. The Company's products includes ATM, debit card system, credit card, electronic cash card, internet platform and other services.

BDO Unibank Inc provides banking services. The Bank offers saving accounts, investment, loans, credit and debit cards, remittance, insurance, and trade financing services. BDO Unibank serves customers in Philippines.

Bank for Investment and Development of Vietnam provides commercial banking services. The Company offers deposits, personal loans, e-banking, guarantees, and trade finance for customers, corporate, and financial institutions. Bank for Investment also offers foreign exchange, money market, derivatives, and debt market services.

First Financial Holding Co., Ltd. is a holding company.  Through its subsidiaries, the Company accepts deposits, provides loans and discount, letters of credit, and guarantee services, invests in marketable securities, provides securities brokerage and investment services, as well as provides insurance services.

Shinkin Central Bank is a central bank for shinkin banks nationwide, operating as a cooperative financial institution.  The Bank has developed businesses in a variety of fields that contribute the shinkin banking industry.  The Bank's services include enhancement of the credit standing, efficient use of shikin bank's surplus funds, and settlement of domestic exchange transaction.

Taiwan Cooperative Financial Holding, through subsidiaries, offers financial services.  The Company offers commercial banking, asset management, bills finance, and securities brokerage services.

Hua Nan Financial Holdings Co., Ltd. is a holding company. Through its subsidiaries, the Company conducts commercial banking, savings, trust, and international banking businesses. In addition, the Group also provides insurance services and acts as a dealer, broker, and underwriter for financial securities.

Hua Nan Financial Holdings Co Ltd. (2880 TT)

First Horizon National Corporation, through its subsidiaries, provides a range of financial services. The Company offers a variety of commercial banking services and also conducts mortgage banking, capital markets, and transaction processing.

PT Bank Negara Indonesia (Persero) Tbk is a state-owned bank that conducts commercial and consumer banking services.

Hana Financial Group Inc., in accordance with Financial Holding Companies Act, was established on December 1, 2005, through stock transfer with the former shareholders of its subsidiaries in order to provide management services and financing to associated companies.

IDBI Bank Limited provides a range of banking and financial services. The Bank's services include fund-based operations, such as venture capital and fee-based activities, which include merchant banking and debenture trusteeship.

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IDBI Bank Ltd (IDBI IN)

IDBI Bank: Can ‘setting-Off’ the Accumulated Losses Be a Game Changer for IDBI Bank?

IDBI Bank announced the draft scheme for setting off its accumulated losses against the Share Premium account balance. Can such an accounting...

Saumya Agarwal

Boost to “Wealth Creators” May Not Boost Investment, Employment and GDP

Post budget euphoria in market on account of anticipation of rise in select large corporate profits rather than revival in investments, employment...

Hemindra Hazari

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

IDBI Bank - It Is Going to Be a Long and an Arduous Road to Recovery

IDBI bank entered the PCA regime in 2017 and is now showing some signs of a turnaround. However, deep -seated woes persist and the road ahead will...

Saumya Agarwal

India Banks – No End in Sight

There have been several false starts. There were times when many presumed the bad loan cycle was about to end. It could have been with the PSU bank...

Daniel Tabbush

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