Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

Even though non-bank finance companies (NBFCs) dedicated to providing loans against gold ornaments are highly profitable and enjoy significant net interest margins (NIMs), stakeholders should be concerned about the vulnerability of their branches to robberies. The spate of robberies indicates that thieves are specifically targeting branches because they follow inadequate security protocols for the substantial gold ornaments they hold in custody for their customers. Examining the robberies reported in the media indicates that each of the targeted branches held gold valued at a minimum of Rs 100 mn (equivalent to atleast 25 kgs of gold ornaments). The fact that a robbery of a single branch can yield so much, and that they have poor security protocols in place, makes them an attractive target for thieves. The average metropolitan bank branches (excluding currency chests), in contrast, have superior security protocols, while normally holding far less amounts of cash in their branches (as excess cash is immediately transferred to currency chests).While the gold ornaments held in NBFC branches are insured, robberies are a law and order issue, especially when staff and members of the public are injured or killed during such robberies. If such robberies continue because NBFCs do not want to improve the security arrangements (for cost reasons), the police will be compelled to intervene and insist NBFCs invest in the necessary security protocols (strongrooms, armed guards, CCTVs being operational 24x7, technology) failing which the police will close branches to maintain law and order.In general, in the business of loans against gold, the credit, market and liquidity risks are taken care of by the nature of the commodity gold, and management therefore are to focus on operational risk management. The spate of robberies and the poor state of security protocols indicate that managements, for cost reasons, are ignoring these critical issues as they believe insurance will cover the risk. Stakeholders in NBFCs specialising in gold lending should be cognizant of the poor operational risk management, especially the poor security arrangements in the branches, which are attracting robberies. They must insist that these companies invest in the necessary protocols before the state decides to intervene.

Even though non-bank finance companies (NBFCs) dedicated to providing loans against gold ornaments are highly profitable and enjoy significant net interest margins (NIMs), stakeholders should be concerned about the vulnerability of their branches to robberies. The spate of robberies indicates that thieves are specifically targeting branches because they follow inadequate security protocols for the substantial gold ornaments they hold in custody for their customers. Examining the robberies reported in the media indicates that each of the targeted branches held gold valued at a minimum of Rs 100 mn (equivalent to atleast 25 kgs of gold ornaments). The fact that a robbery of a single branch can yield so much, and that they have poor security protocols in place, makes them an attractive target for thieves. The average metropolitan bank branches (excluding currency chests), in contrast, have superior security protocols, while normally holding far less amounts of cash in their branches (as excess cash is immediately transferred to currency chests).While the gold ornaments held in NBFC branches are insured, robberies are a law and order issue, especially when staff and members of the public are injured or killed during such robberies. If such robberies continue because NBFCs do not want to improve the security arrangements (for cost reasons), the police will be compelled to intervene and insist NBFCs invest in the necessary security protocols (strongrooms, armed guards, CCTVs being operational 24x7, technology) failing which the police will close branches to maintain law and order.In general, in the business of loans against gold, the credit, market and liquidity risks are taken care of by the nature of the commodity gold, and management therefore are to focus on operational risk management. The spate of robberies and the poor state of security protocols indicate that managements, for cost reasons, are ignoring these critical issues as they believe insurance will cover the risk. Stakeholders in NBFCs specialising in gold lending should be cognizant of the poor operational risk management, especially the poor security arrangements in the branches, which are attracting robberies. They must insist that these companies invest in the necessary protocols before the state decides to intervene.

Why Have Gold Loan NBFCs Become Low Hanging Fruit for Robbers?

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Credit risk markets remained decoupled between the US and Asia as spreads on US Caa-rated entities continued to defy gravity. The risk-on wave continued to swell through US risk asses on additional positive vaccine news. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, spreads on the US Caa-rated complex tightened to inside Asia’s HY index for the first time since 2014. Is it time to sell the Caa bull market?  Treasury Secretary Mnuchin’s decision to cancel several underutilized emergency Fed programs at the end of the year may raise expectations for the Fed to expand its asset purchase program or target its purchases more directly along the Treasury curve at its December meeting. We are set-up for disappointment.  Against this background, Asia’s HY Additional Tier 1 underperformed Subordinated and Senior Unsecured securities as near-term global growth concerns outweighed vaccine progress. Most of the underperforming bond were issued over the last three months. This suggests these may have been issued at the top of the market, in spread terms. Amongst Additional Tier 1 bonds, Hong Kong-headquartered banks led advances. <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (23 HK)</a> announcement that it would call its 5.5% coupon December-callable AT1 bond aided sentiment. We first recommended that investors overweight this security in mid-February within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-overweight-short-call-at1-on-refinancing-ability" target="_blank" data-smartkarma-citation="insights:36787" rel="noopener">Bank of East Asia: Overweight Short-Call AT1 on Refinancing Ability</a> and recently re-iterated this call within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Bank of East Asia: Buy the Inefficient Capital Securities</a>. Victory lap over.Concurrently, Turkish HY Senior Unsecured bank bonds again materially outperformed their global peers following delivery of a more orthodox monetary policy regime. Nonetheless, Turkish bank bonds continue to trade wide of similarly rated entities in other emerging markets.  Given the starting point for a potential Turkish bank bond rally, we anticipate a virus versus vaccine market immunity in Turkish-bank bonds returns over the near term.   Over US$13 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. Amongst higher-yield issued securities, the UK Co-operative Bank’s Caa1 rated bond makes India’s <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance's (IIFL IN)</a> US$-bond look cheap in comparison. However, unlike India where every bank rescue requires a liability moratorium, the Co-operative Bank resolution three years ago was not damaging to the financial system. India’s rescue 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> this week is no exception. For our views on this please see: <a href="https://www.smartkarma.com/insights/lakshmi-vilas-bank-dbs-rescue-is-a-wasted-option" target="_blank" data-smartkarma-citation="insights:45471" rel="noopener">Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option</a>.US$-debt issuance should be slowed by the upcoming US holiday on Thursday. We could see a short-lived resurgence in early December and then drift sideways until heavy issuance re-emerges in January.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets.

Credit risk markets remained decoupled between the US and Asia as spreads on US Caa-rated entities continued to defy gravity. The risk-on wave continued to swell through US risk asses on additional positive vaccine news. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, spreads on the US Caa-rated complex tightened to inside Asia’s HY index for the first time since 2014. Is it time to sell the Caa bull market?  Treasury Secretary Mnuchin’s decision to cancel several underutilized emergency Fed programs at the end of the year may raise expectations for the Fed to expand its asset purchase program or target its purchases more directly along the Treasury curve at its December meeting. We are set-up for disappointment.  Against this background, Asia’s HY Additional Tier 1 underperformed Subordinated and Senior Unsecured securities as near-term global growth concerns outweighed vaccine progress. Most of the underperforming bond were issued over the last three months. This suggests these may have been issued at the top of the market, in spread terms. Amongst Additional Tier 1 bonds, Hong Kong-headquartered banks led advances. Bank of East Asia's (23 HK) announcement that it would call its 5.5% coupon December-callable AT1 bond aided sentiment. We first recommended that investors overweight this security in mid-February within Bank of East Asia: Overweight Short-Call AT1 on Refinancing Ability and recently re-iterated this call within Bank of East Asia: Buy the Inefficient Capital Securities. Victory lap over.Concurrently, Turkish HY Senior Unsecured bank bonds again materially outperformed their global peers following delivery of a more orthodox monetary policy regime. Nonetheless, Turkish bank bonds continue to trade wide of similarly rated entities in other emerging markets.  Given the starting point for a potential Turkish bank bond rally, we anticipate a virus versus vaccine market immunity in Turkish-bank bonds returns over the near term.   Over US$13 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. Amongst higher-yield issued securities, the UK Co-operative Bank’s Caa1 rated bond makes India’s IIFL Finance's (IIFL IN) US$-bond look cheap in comparison. However, unlike India where every bank rescue requires a liability moratorium, the Co-operative Bank resolution three years ago was not damaging to the financial system. India’s rescue of Lakshmi Vilas Bank (LVB IN) this week is no exception. For our views on this please see: Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option.US$-debt issuance should be slowed by the upcoming US holiday on Thursday. We could see a short-lived resurgence in early December and then drift sideways until heavy issuance re-emerges in January.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets.

Bank Credit Weekly: Virus Vs. Vaccine: Time to Sell the Caa-Bull?

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

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme. 

Reserve Bank of India – The Fun Never Stops

Lakshmi Iyer, CFA

We reiterate our buy recommendation on bonds issued by <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Holdings (IIFL IN)</a> (USD bonds due '23). While spreads have tightened following the release of 2Q FY'21 results, we feel there is potential for further tightening. The upcoming sale of part of the real estate portfolio could also prove supportive.<div class="content-highlight">Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.</div>

We reiterate our buy recommendation on bonds issued by IIFL Holdings (IIFL IN) (USD bonds due '23). While spreads have tightened following the release of 2Q FY'21 results, we feel there is potential for further tightening. The upcoming sale of part of the real estate portfolio could also prove supportive.Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

We may be closer to market tights in terms of credit spreads than we expected one week ago. We are not convinced that the Fed can meet its new policy objective and keep long-term interest rates low enough to continue to weaken the US dollar, thereby stoking imported inflation. We suspect that credit spreads may start calm and then become more volatile as September passes.In this environment, holdings of cross-over rated Senior Unsecured bonds may be best for defensive positioning during periods of volatility. However, over time, and if the Fed delivers on a controlled interest rate environment, a more selective portfolio of higher beta Senior Unsecured as well as longer duration high yield and cross-over Subordinated and Additional Tier 1 debt should generate increased returns. We identify several of our recent top picks and pans within.   One upcoming announcement in September stands out amongst Asia-headquartered banks. The <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (23 HK)</a> will update the market on the status of its strategic review before the end of the month. This may have an outsized valuation impact on the firm’s Additional Tier 1 (AT1) securities. For our views on the potential business development outcomes from this review, please see: <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Bank of East Asia: Strategic Review to Set AT1 Value; Forewarned Is Forearmed</a>. For our views on how the strategic review may also result in a decision to better optimize the capital structure, please see: <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Bank of East Asia: Buy the Inefficient Capital Securities</a>. Globally, upside valuation impacts may also arise from new AT1 issuance as we detail in :<a href="https://www.smartkarma.com/insights/bank-credit-strategy-pre-positioning-for-at1-price-accretion" target="_blank" data-smartkarma-citation="insights:42050" rel="noopener">Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion</a>.During August, risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan). In fact, only 12 securities widened in option adjusted spread terms out of the 107 bonds that we track in the region. Put another way, for every bank bond that weakened, over 8 strengthened during the month in credit spread terms. Meanwhile, only two bonds widened by double digit levels month-on-month.China-centric bank bonds led in terms of spread tightening, including, and excluding, Hong Kong-based banks. High yield rated securities comprised six of the top ten with only one Senior Unsecured bond amongst the leaders. Additional Tier1 bonds issued by <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> stand out in terms of their over generous performance as we detail within. Meanwhile, India’s non-bank finance companies dominate the list of bonds underperforming over the month.

We may be closer to market tights in terms of credit spreads than we expected one week ago. We are not convinced that the Fed can meet its new policy objective and keep long-term interest rates low enough to continue to weaken the US dollar, thereby stoking imported inflation. We suspect that credit spreads may start calm and then become more volatile as September passes.In this environment, holdings of cross-over rated Senior Unsecured bonds may be best for defensive positioning during periods of volatility. However, over time, and if the Fed delivers on a controlled interest rate environment, a more selective portfolio of higher beta Senior Unsecured as well as longer duration high yield and cross-over Subordinated and Additional Tier 1 debt should generate increased returns. We identify several of our recent top picks and pans within.   One upcoming announcement in September stands out amongst Asia-headquartered banks. The Bank of East Asia (23 HK) will update the market on the status of its strategic review before the end of the month. This may have an outsized valuation impact on the firm’s Additional Tier 1 (AT1) securities. For our views on the potential business development outcomes from this review, please see: Bank of East Asia: Strategic Review to Set AT1 Value; Forewarned Is Forearmed. For our views on how the strategic review may also result in a decision to better optimize the capital structure, please see: Bank of East Asia: Buy the Inefficient Capital Securities. Globally, upside valuation impacts may also arise from new AT1 issuance as we detail in :Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion.During August, risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan). In fact, only 12 securities widened in option adjusted spread terms out of the 107 bonds that we track in the region. Put another way, for every bank bond that weakened, over 8 strengthened during the month in credit spread terms. Meanwhile, only two bonds widened by double digit levels month-on-month.China-centric bank bonds led in terms of spread tightening, including, and excluding, Hong Kong-based banks. High yield rated securities comprised six of the top ten with only one Senior Unsecured bond amongst the leaders. Additional Tier1 bonds issued by China Construction Bank H (939 HK) stand out in terms of their over generous performance as we detail within. Meanwhile, India’s non-bank finance companies dominate the list of bonds underperforming over the month.

Bank Credit Compass: September Expectations and August Performance in Asia

India

IIFL Holdings Limited is a financial services company and is engaged, through its subsidiaries, in the businesses of  non-banking finance, housing finance, wealth management, asset management, institutional & retail brokerage and investment banking. The Company is also a distributor of insurance and other financial products.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

IIFL Holdings (IIFL IN)

Why Have Gold Loan NBFCs Become Low Hanging Fruit for Robbers?

The spate of robberies indicates that thieves are specifically targeting branches because they follow inadequate security protocols for the gold...

Hemindra Hazari

Bank Credit Weekly: Virus Vs. Vaccine: Time to Sell the Caa-Bull?

Is it time to sell the Caa-bull market? Some AT1 bonds seem to be at a market top. We are set-up for disappointment. Nonetheless, we anticipate...

Hank Calenti, CFA

Reserve Bank of India – The Fun Never Stops

RESERVE BANK OF INDIA: Certain Borrowers Are Dis-Satisfied With "Interest On Interest Waiver" And Proposed Additional Modifications To RBI...

Thomas J. Monaco

IIFL Finance Ltd. - Reiterate Buy

IIFL bonds rose after it reported reported decent numbers for 2Q FY21. We foresee further spread tightening. The upcoming sale of the real estate...

Lakshmi Iyer, CFA

Bank Credit Compass: September Expectations and August Performance in Asia

We may be closer to market tights in terms of credit spreads than we expected one week ago. We are not convinced that the Fed can meet its new.. .

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)