Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Thematic (Sector/Industry)

<ul>
<li>We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward</li>
<li>We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios</li>
<li>We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs</li>
<li>We highlight <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> as a restructuring and earnings recovery story, and <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> for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see <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> as an attractive value play, despite its lighter core capital ratio</li>
<li>We are cautious on <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank (CBK IN)</a>, seeing it as a potential value trap; at first look, <a href="https://www.smartkarma.com/entities/bandhan-bank-ltd" target="_blank" data-smartkarma-citation="entities:26705:1" rel="noopener">Bandhan Bank Ltd (BANDHAN IN)</a> looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios</li>
<li>Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns</li>
</ul>


We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward
We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios
We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs
We highlight Axis Bank Ltd (AXSB IN) as a restructuring and earnings recovery story, and HDFC Bank (HDFCB IN) for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see State Bank Of India (SBIN IN) as an attractive value play, despite its lighter core capital ratio
We are cautious on Canara Bank (CBK IN), seeing it as a potential value trap; at first look, Bandhan Bank Ltd (BANDHAN IN) looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios
Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns


Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

Specialist in Indian Banking and Economic Research

Hemindra Hazari

The Securities and Exchange Board of India (SEBI)’s <a href="https://www.sebi.gov.in/enforcement/orders/aug-2021/order-in-the-matter-of-kotak-mahindra-asset-management-company-ltd-_52130.html" target="_blank" rel="noopener">order</a>  penalising Kotak Mahindra Mutual Fund (Kotak MF), a subsidiary of <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> (KMB) provides an in-depth insight normally unavailable to the public on how imprudently investment decisions are taken by so called professionals in marquee firms who are managing public funds in a fiduciary capacity. The indictment by SEBI shows Kotak MF in a poor light and also casts a spot light on Kotak Mahindra AMC's high profile chairman, Uday Kotak who is also founder-CEO, KMB.Even though investors ultimately (after some delay) recovered their funds, the SEBI order exposes the unprofessional conduct of the concerned debt fund managers and the Investment Committee (IC), in Kotak MF in investing in dubious debt instruments of companies which had no financial ability to pay back the principal and where equity shares was the only security. That such a high-risk transaction conformed to the investment policy of  Kotak MF is a cause for significant concern for all debt investors of Kotak mutual fund schemes. In a shocking revelation, thoroughly exposing Kotak MF’s Investment Policy, the SEBI order <a href="https://www.sebi.gov.in/enforcement/orders/aug-2021/order-in-the-matter-of-kotak-mahindra-asset-management-company-ltd-_52130.html" target="_blank" rel="noopener">notes</a>  that the company’s IC on March 7, and May 18, 2016 was <blockquote>not aware of the issuer entity even on the date of approving the proposal to invest in the ZCNCDs [zero coupon non-convertible debentures]. (para 40, p. 34) </blockquote>Such was the professionalism on Kotak MF’s IC that they approved an investment in a corporate entity whose identity they did not know and consequently had no clue about its financials. They did so as documented in its approval note solely on the belief that,<blockquote>repayment of our exposures will, in all probability, be funded through a refinance. We take comfort from the reputation and track record of Essel Group in general and fundamentals, liquidity and performance of Zee shares. (ibid)</blockquote>Although KMB has historically reported strong asset quality, an added concern is that Kotak AMC is a subsidiary of the bank and when Kotak MF  follows such appalling credit appraisal/underwriting practices under its chairman Uday Kotak, can the bank where Kotak is the founder-CEO also be following similar practices where belief overrides financial fundamentals and where the decision-makers invest blindly?The SEBI order is an eye-opener in how investment decisions are taken at mutual funds and as Uday Kotak is the chairman of Kotak AMC, regulators especially, SEBI and the Reserve Bank of India should consider whether such conduct conforms to the fit and proper criteria for managing public money in a fiduciary capacity.

The Securities and Exchange Board of India (SEBI)’s order  penalising Kotak Mahindra Mutual Fund (Kotak MF), a subsidiary of Kotak Mahindra Bank (KMB IN) (KMB) provides an in-depth insight normally unavailable to the public on how imprudently investment decisions are taken by so called professionals in marquee firms who are managing public funds in a fiduciary capacity. The indictment by SEBI shows Kotak MF in a poor light and also casts a spot light on Kotak Mahindra AMC's high profile chairman, Uday Kotak who is also founder-CEO, KMB.Even though investors ultimately (after some delay) recovered their funds, the SEBI order exposes the unprofessional conduct of the concerned debt fund managers and the Investment Committee (IC), in Kotak MF in investing in dubious debt instruments of companies which had no financial ability to pay back the principal and where equity shares was the only security. That such a high-risk transaction conformed to the investment policy of  Kotak MF is a cause for significant concern for all debt investors of Kotak mutual fund schemes. In a shocking revelation, thoroughly exposing Kotak MF’s Investment Policy, the SEBI order notes  that the company’s IC on March 7, and May 18, 2016 was not aware of the issuer entity even on the date of approving the proposal to invest in the ZCNCDs [zero coupon non-convertible debentures]. (para 40, p. 34) Such was the professionalism on Kotak MF’s IC that they approved an investment in a corporate entity whose identity they did not know and consequently had no clue about its financials. They did so as documented in its approval note solely on the belief that,repayment of our exposures will, in all probability, be funded through a refinance. We take comfort from the reputation and track record of Essel Group in general and fundamentals, liquidity and performance of Zee shares. (ibid)Although KMB has historically reported strong asset quality, an added concern is that Kotak AMC is a subsidiary of the bank and when Kotak MF  follows such appalling credit appraisal/underwriting practices under its chairman Uday Kotak, can the bank where Kotak is the founder-CEO also be following similar practices where belief overrides financial fundamentals and where the decision-makers invest blindly?The SEBI order is an eye-opener in how investment decisions are taken at mutual funds and as Uday Kotak is the chairman of Kotak AMC, regulators especially, SEBI and the Reserve Bank of India should consider whether such conduct conforms to the fit and proper criteria for managing public money in a fiduciary capacity.  

SEBI Exposes Kotak Mahindra Mutual Fund’s Policy of Investing Blindly

A notable feature in <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> 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> (KMB) is the historical absence of any commercial banking expertise amongst the independent directors on the boards. The founders ( <a href="https://www.smartkarma.com/entities/housing-development-finance" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener">HDFC Limited (HDFC IN) </a>and Uday Kotak) and the Nomination and Remuneration Committee in both banks, as a deliberate strategy, have tried to ensure that only non-independent directors have commercial banking expertise. This is unusual, as other private sector banks such as <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>, <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>,  <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/federal-bank-ltd" target="_blank" data-smartkarma-citation="entities:11784:1" rel="noopener">Federal Bank (FB IN)</a> have former commercial bankers as independent directors on their boards.Banking, being a specialised and highly regulated sector with an economy-wide systemic impact, needs that some directors have commercial banking expertise separate and distinct from the executive.The absence of such independent functional expertise on the board is a sign that the executive/controlling shareholders do not want to be challenged or to have close oversight in the banks’ core area of operations. HDFC Bank and KMB are poster banners for private sector banking in India, with a combined market capitalisation of US$ 159 bn. They have achieved this without the presence of former commercial bankers as independent directors. Both Aditya Puri (erstwhile HDFC Bank CEO) and Uday Kotak maintained an iron-clad grip on asset quality, which is visible in their track record of profitability and stock market valuation. However, banking should not be individual-based, but based on appropriate systems. A diversified board of directors, including those with commercial banking expertise independent of the executive, should be mandatory in all banks. Regardless of their track record and valuation, banks which deliberately exclude such critical functional expertise on their boards must be hauled up by the Reserve Bank of India, credit rating analysts and the capital markets. The fact that HDFC Bank and KMB have rewarded shareholders manifold without such independent expertise on their boards should not be an excuse for such an anomaly to continue, nor should it be replicated in other banks.

A notable feature in HDFC Bank (HDFCB IN) and Kotak Mahindra Bank (KMB IN) (KMB) is the historical absence of any commercial banking expertise amongst the independent directors on the boards. The founders ( HDFC Limited (HDFC IN) and Uday Kotak) and the Nomination and Remuneration Committee in both banks, as a deliberate strategy, have tried to ensure that only non-independent directors have commercial banking expertise. This is unusual, as other private sector banks such as ICICI Bank Ltd (ICICIBC IN), Axis Bank Ltd (AXSB IN),  Indusind Bank (IIB IN) and Federal Bank (FB IN) have former commercial bankers as independent directors on their boards.Banking, being a specialised and highly regulated sector with an economy-wide systemic impact, needs that some directors have commercial banking expertise separate and distinct from the executive.The absence of such independent functional expertise on the board is a sign that the executive/controlling shareholders do not want to be challenged or to have close oversight in the banks’ core area of operations. HDFC Bank and KMB are poster banners for private sector banking in India, with a combined market capitalisation of US$ 159 bn. They have achieved this without the presence of former commercial bankers as independent directors. Both Aditya Puri (erstwhile HDFC Bank CEO) and Uday Kotak maintained an iron-clad grip on asset quality, which is visible in their track record of profitability and stock market valuation. However, banking should not be individual-based, but based on appropriate systems. A diversified board of directors, including those with commercial banking expertise independent of the executive, should be mandatory in all banks. Regardless of their track record and valuation, banks which deliberately exclude such critical functional expertise on their boards must be hauled up by the Reserve Bank of India, credit rating analysts and the capital markets. The fact that HDFC Bank and KMB have rewarded shareholders manifold without such independent expertise on their boards should not be an excuse for such an anomaly to continue, nor should it be replicated in other banks.

HDFC Bank and KMB Carefully Select Independent Directors - For Their Lack of Banking Knowledge

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

*Another Abysmal Result: Bank of Baroda (BOB.IN) [BOB] reported FY 1Q22 results of INR 12.1 bn, improving from the loss of INR 10.5 bn in FY 4Q21. However, on an operating basis, we note that linked quarter results improved to INR 2.6 bn versus a loss of INR 1,4 bn in FY 4Q21; and *Poor Reserve Cover Worsens:  Net new NPLs accelerated to INR 25.7 bn or 15.4% annualized versus INR 13.5 bn or 11.2% annualized at FY 4Q21. By our calculation, however, BOB’s reserves still remain light by INR 300 bn or nearly six years of FY 1Q22 earnings.

*Another Abysmal Result: Bank of Baroda (BOB.IN) [BOB] reported FY 1Q22 results of INR 12.1 bn, improving from the loss of INR 10.5 bn in FY 4Q21. However, on an operating basis, we note that linked quarter results improved to INR 2.6 bn versus a loss of INR 1,4 bn in FY 4Q21; and *Poor Reserve Cover Worsens:  Net new NPLs accelerated to INR 25.7 bn or 15.4% annualized versus INR 13.5 bn or 11.2% annualized at FY 4Q21. By our calculation, however, BOB’s reserves still remain light by INR 300 bn or nearly six years of FY 1Q22 earnings.

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 Capital Markets

Aptus Value Housing Finance India / Equity Capital Markets

Aptus Value Housing Finance (AVHF) aims to raise around US$375m in its India IPO. The company is backed by a host of investors including WestBridge, Malabar Investments, Sequoia, Madison and Steadview CapitalAptus Value Housing Finance India Limited (AVHF) is a retail focussed housing finance company (HFC) primarily serving low and middle income self-employed customers in the rural and semi-urban markets in India. AVHF was one of the largest HFC’s in South India in terms of AUM, as of Mar 21. AVHF’s net interest income has grown by 38-55% pa over FY18-FY21, while its Pre-provision operating profit has done even better with 40-63% pa growth. Earnings growth has been driven by its rapid loan growth which has been between 28-58% pa over the past three years.Although loan growth has been slowing down and disbursements growth had already declined from 47% YoY in FY19 to just 2% YoY in FY21.In this note, we will look at the company’s past performance, run the deal through our ECM framework and talk about pricing

Aptus Value Housing Finance (AVHF) aims to raise around US$375m in its India IPO. The company is backed by a host of investors including WestBridge, Malabar Investments, Sequoia, Madison and Steadview CapitalAptus Value Housing Finance India Limited (AVHF) is a retail focussed housing finance company (HFC) primarily serving low and middle income self-employed customers in the rural and semi-urban markets in India. AVHF was one of the largest HFC’s in South India in terms of AUM, as of Mar 21. AVHF’s net interest income has grown by 38-55% pa over FY18-FY21, while its Pre-provision operating profit has done even better with 40-63% pa growth. Earnings growth has been driven by its rapid loan growth which has been between 28-58% pa over the past three years.Although loan growth has been slowing down and disbursements growth had already declined from 47% YoY in FY19 to just 2% YoY in FY21.In this note, we will look at the company’s past performance, run the deal through our ECM framework and talk about pricing

Aptus Value Housing Finance IPO - Valuation Is Too Rich, Especially with an Over-Capitalised Book

India

Kotak Mahindra Bank Limited is a full service commercial bank. The Bank offers a wide range of products and services such as personal, commercial, and corporate banking services, including deposit accounts, loans, and investments. Kotak Mahindra Bank serves customers in India.

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Kotak Mahindra Bank (KMB IN)

Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

Screening for ideas, we are positive on Axis Bank and HDFC Bank, and State Bank of India too; due to credit quality concerns, we are cautious on...

Victor Galliano

SEBI Exposes Kotak Mahindra Mutual Fund’s Policy of Investing Blindly

When Kotak MF follows poor underwriting under its chairman Uday Kotak, can KMB also be following similar practices where belief overrides...

Hemindra Hazari

HDFC Bank and KMB Carefully Select Independent Directors - For Their Lack of Banking Knowledge

The absence of independent commercial banking expertise on the board is a sign that the executive do not want to be challenged or to have close...

Hemindra Hazari

Bank of Baroda – More Capital Please

BANK OF BARODA: BOB reported FY 1Q22 operating results of INR 2.6 bn versus a loss of INR 1.4 bn in FY 4Q21. Net new NPLs accelerated to 15.4%...

Thomas J. Monaco

Aptus Value Housing Finance IPO - Valuation Is Too Rich, Especially with an Over-Capitalised Book

Aptus Value Housing Finance aims to raise around US$375m in its India IPO. It is backed by a host of investors including WestBridge, Malabar...

Sumeet Singh

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