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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOMATO IN)</a> will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. Zomato (ZOMATO IN) will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

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.

*Credibility Gap Widens: LIC Housing Finance (LICHF.IN) [LIC] reported FY 1Q22 bottom-line results of INR 1.5 bn, declining INR 2.5 bn (61.5%) linked quarter. Negative operating jaws, were the culprit, as costs increased INR 469 mn (21.1%) whilst revenues declined INR 2.6 bn (16.7%); and*Very Negative Credit Delta: Despite the limited NCOs, net new NPLs at LIC still skyrocketed INR 44.7 bn or 190.3% on an annualized basis linked quarter significantly accelerating from a very high INR 12.6 bn (62.0%) during FY 4Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 158 bn to the reserve – which amounts to 78% of stated equity at just 50% cover of NPLs.

*Credibility Gap Widens: LIC Housing Finance (LICHF.IN) [LIC] reported FY 1Q22 bottom-line results of INR 1.5 bn, declining INR 2.5 bn (61.5%) linked quarter. Negative operating jaws, were the culprit, as costs increased INR 469 mn (21.1%) whilst revenues declined INR 2.6 bn (16.7%); and*Very Negative Credit Delta: Despite the limited NCOs, net new NPLs at LIC still skyrocketed INR 44.7 bn or 190.3% on an annualized basis linked quarter significantly accelerating from a very high INR 12.6 bn (62.0%) during FY 4Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 158 bn to the reserve – which amounts to 78% of stated equity at just 50% cover of NPLs.

LIC Housing Finance – Unmitigated Disaster

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Pay obscene salaries to a favoured few, completely out of sync with the already inflated salary structure in the industry, silently watch as they bring the bank to near collapse – this was <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> ’s policy for senior management. It is not surprising that this was done under the earlier CEO, Rana Kapoor. The surprise is that the some of the grossly overpaid mismanagers were gracefully allowed to continue in their posts under the new owners, the <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>-led consortium, including prominent names in private financial capital. <a href="https://www.linkedin.com/in/agraashish/?originalSubdomain=in" target="_blank" rel="noopener">Ashish Agarwal</a> , the current Head-Wholesale Banking and the former Chief Risk Officer (CRO), who was also in charge of corporate credit appraisal, earned a salary (including staggered bonus) of nearly Rs 72 mn in FY2018, significantly higher than peers who were managing much larger balance sheets. Agarwal, who played a critical role in appraising and approving dodgy credit, has been allowed by the new board of  <a href="https://www.yesbank.in/about-us/our-team" target="_blank" rel="noopener">directors</a> to continue (like some of his senior colleagues) on a reduced remuneration. It is shocking that the new consortium of owners, which includes <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/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a>, <a href="https://www.smartkarma.com/entities/housing-development-finance-corporation" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener">HDFC Limited (HDFC IN), </a><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/housing-development-finance-corporation" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener"> </a> and others, continues to employ an individual with such a track record. While Rana Kapoor, the erstwhile CEO, was the main culprit, extravagantly paid individuals like Ashish Agarwal made their own contributions to the downfall of the bank by failing to raise stringent objections, complain directly to the banking regulator or resign from the bank. The attractive financial package that such individuals were rewarded with by a servile Nominations and Remuneration Committee compromised professionalism, and an incompetent/complicit Credit and Risk Management Committees failed in its oversight responsibilities.  Supposedly, the free market rewards superior performance and punishes non-performance, but this role of the free market appears to have bypassed Yes Bank and its new board of directors.

Pay obscene salaries to a favoured few, completely out of sync with the already inflated salary structure in the industry, silently watch as they bring the bank to near collapse – this was Yes Bank (YES IN) ’s policy for senior management. It is not surprising that this was done under the earlier CEO, Rana Kapoor. The surprise is that the some of the grossly overpaid mismanagers were gracefully allowed to continue in their posts under the new owners, the State Bank Of India (SBIN IN)-led consortium, including prominent names in private financial capital. Ashish Agarwal , the current Head-Wholesale Banking and the former Chief Risk Officer (CRO), who was also in charge of corporate credit appraisal, earned a salary (including staggered bonus) of nearly Rs 72 mn in FY2018, significantly higher than peers who were managing much larger balance sheets. Agarwal, who played a critical role in appraising and approving dodgy credit, has been allowed by the new board of  directors to continue (like some of his senior colleagues) on a reduced remuneration. It is shocking that the new consortium of owners, which includes Axis Bank Ltd (AXSB IN), Kotak Mahindra Bank (KMB IN), HDFC Limited (HDFC IN), ICICI Bank Ltd (ICICIBC IN)  and others, continues to employ an individual with such a track record. While Rana Kapoor, the erstwhile CEO, was the main culprit, extravagantly paid individuals like Ashish Agarwal made their own contributions to the downfall of the bank by failing to raise stringent objections, complain directly to the banking regulator or resign from the bank. The attractive financial package that such individuals were rewarded with by a servile Nominations and Remuneration Committee compromised professionalism, and an incompetent/complicit Credit and Risk Management Committees failed in its oversight responsibilities.  Supposedly, the free market rewards superior performance and punishes non-performance, but this role of the free market appears to have bypassed Yes Bank and its new board of directors.

Yes Bank’s New Owners Keep Overpaid Mismanagers in Place

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

India

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.

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Yes Bank (YES IN)

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

Halfway through the review period, we take a look at stocks that could migrate across the large, mid and small cap segments. With over US$100bn of...

Brian Freitas

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

LIC Housing Finance – Unmitigated Disaster

LIC HOUSING: LIC's FY 1Q22 bottom-line results declined 61.5% linked quarter due to negative operating jaws. Net new NPLs skyrocketed 190.3%...

Thomas J. Monaco

Yes Bank’s New Owners Keep Overpaid Mismanagers in Place

In Yes Bank’s fall, while Rana Kapoor was the main culprit, he was ably assisted by his handsomely paid favoured few in critical posts, some like...

Hemindra Hazari

Bajaj Finance – Just BAFfling

BAJAJ FINANCE: Bajaj posted a QOQ FY 1Q22 results decline 25.6% driven by credit weakness in Consumer. Net new NPLs increased at 281% annualized...

Thomas J. Monaco

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