Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at <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>. One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a>. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-yes-stressed-deposit-flight-simulation" target="_blank" data-smartkarma-citation="insights:44213" rel="noopener">Yes-Stressed Deposit Flight Simulation</a>.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-missing-deposit-miasma-1-year-after-yes-bank-s-silent-run" target="_blank" data-smartkarma-citation="insights:45438" rel="noopener">Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run</a>.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank (YES IN). One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see Stable Deposits and Costs 1-Year After the Yes Bank Silent Run. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see Yes-Stressed Deposit Flight Simulation.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

India-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (StanLn)</a> Legacy Tier 1 is on fire. This is in keeping with a mad bid for anything trading below par, including some of our recent favorites such as <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> and the Turkish Bank complex.  However, while other bonds are getting a bid from the incongruous combination of lower-forever interest rates and vaccine now expectations, the rationale for the StanLn Legacy Tier 1 bonds is different. That is correct, it’s different this time. Famous last words?StanLn Legacy Tier 1 instruments are increasingly trading on the expectation of a tender offer. These securities are ineligible as Additional Tier 1 instruments post 2021 and have less than perfect Libor replacement language in their prospectuses. This is raising expectations that investors will be paid to tender their securities.A tender offer, albeit more likely than not, is not a certainty. The potential timing of any offer is also highly uncertain, although higher interest rates negatively impact the value of potential interest rate swap gains in each security. The swap gain argument suggests a tender offer sooner rather than later.We see additional price upside, albeit limited. At the same time, these bonds could underperform materially if not subject to a tender offer within the next 18 months.

Standard Chartered (StanLn) Legacy Tier 1 is on fire. This is in keeping with a mad bid for anything trading below par, including some of our recent favorites such as Yes Bank (YES IN) and the Turkish Bank complex.  However, while other bonds are getting a bid from the incongruous combination of lower-forever interest rates and vaccine now expectations, the rationale for the StanLn Legacy Tier 1 bonds is different. That is correct, it’s different this time. Famous last words?StanLn Legacy Tier 1 instruments are increasingly trading on the expectation of a tender offer. These securities are ineligible as Additional Tier 1 instruments post 2021 and have less than perfect Libor replacement language in their prospectuses. This is raising expectations that investors will be paid to tender their securities.A tender offer, albeit more likely than not, is not a certainty. The potential timing of any offer is also highly uncertain, although higher interest rates negatively impact the value of potential interest rate swap gains in each security. The swap gain argument suggests a tender offer sooner rather than later.We see additional price upside, albeit limited. At the same time, these bonds could underperform materially if not subject to a tender offer within the next 18 months.

Standard Chartered Legacy Tier 1 Is on Fire

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

“What is the robbing of a bank compared to the founding of one?” – Bertolt BrechtAn internal working group (IWG) of the Reserve Bank of India (RBI) to review ownership guidelines and corporate structure for Indian private sector banks has <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50695" target="_blank" rel="noopener">recommended</a> that large industrial houses be allowed to establish banks. This, it says, could be done after making necessary amendments to the Banking Regulation Act, 1949 to deal with connected lending and linkages between banks and non-financial group entities, and strengthening the supervisory mechanism for conglomerates. The IWG’s recommendation overturns the regulator’s stance since bank nationalisation in 1969, despite the RBI having consistently argued till now for barring the entry of industrial houses into banking. This development portends the further concentration of economic power in India, gives scope for non-transparent structures, and poses a potential threat to financial stability.  Even under the existing financial regime, the RBI was unable to detect at an early stage the connected lending which felled large regulated financial entities like IL&amp;FS, <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> (Rana Kapoor and his entities held 10.6% as on end September 2018), Punjab and Maharashtra Co-operative Bank and <a href="https://www.smartkarma.com/entities/dewan-housing-finance-corp" target="_blank" data-smartkarma-citation="entities:8142:1" rel="noopener">Dewan Housing Finance (DEWH IN)</a> (DHFL) (promoter holding 39%). Will it be able to effectively regulate and monitor large, complex industrial houses which are well versed in disguising financial transactions through a vast web of opaque domestic and foreign-based entities? Another recommendation by the IWG is to raise the founders’ stake in banks, over a 15 year timespan, from the current 15% to 26% of the paid-up voting equity share capital of the bank. This recommendation effectively normalises the unique <a href="https://hemindrahazari.com/2020/02/17/defy-regulator-win-3-3-bn-kotak-laughs-all-the-way-to-the-bank/" target="_blank" rel="noopener">exception</a> the RBI conceded to Uday Kotak and Kotak Mahindra Bank (KMB) on January 30, 2020, and extends it to all the other private sector banks.Sadly, both these recommendations by the IWG raise a significant question mark on the credibility of the RBI. Recent developments in the telecommunications and airport infrastructure sectors, and the general preferential treatment meted to top corporate houses, heighten concerns of crony capitalism and the growing and intrusive influence of large corporates in policy formulation. That an IWG of the RBI can boldly recommend a reversal of a 50 year regulatory policy without presenting a detailed argument tarnishes the reputation of the RBI. That it first permits Uday Kotak 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) to remain non-compliant with RBI regulations, then carves out an exception for Kotak, later invites him as a consultant to the IWG, and finally recommends that the policy be changed for everyone else as well, reflects poorly on the RBI. Events in India have demonstrated the erosion of institutions and the unabashed concentration of political and economic power. The recommendations by the RBI’s IWG are to be seen through this lens.

“What is the robbing of a bank compared to the founding of one?” – Bertolt BrechtAn internal working group (IWG) of the Reserve Bank of India (RBI) to review ownership guidelines and corporate structure for Indian private sector banks has recommended that large industrial houses be allowed to establish banks. This, it says, could be done after making necessary amendments to the Banking Regulation Act, 1949 to deal with connected lending and linkages between banks and non-financial group entities, and strengthening the supervisory mechanism for conglomerates. The IWG’s recommendation overturns the regulator’s stance since bank nationalisation in 1969, despite the RBI having consistently argued till now for barring the entry of industrial houses into banking. This development portends the further concentration of economic power in India, gives scope for non-transparent structures, and poses a potential threat to financial stability.  Even under the existing financial regime, the RBI was unable to detect at an early stage the connected lending which felled large regulated financial entities like IL&amp;FS, Yes Bank (YES IN) (Rana Kapoor and his entities held 10.6% as on end September 2018), Punjab and Maharashtra Co-operative Bank and Dewan Housing Finance (DEWH IN) (DHFL) (promoter holding 39%). Will it be able to effectively regulate and monitor large, complex industrial houses which are well versed in disguising financial transactions through a vast web of opaque domestic and foreign-based entities? Another recommendation by the IWG is to raise the founders’ stake in banks, over a 15 year timespan, from the current 15% to 26% of the paid-up voting equity share capital of the bank. This recommendation effectively normalises the unique exception the RBI conceded to Uday Kotak and Kotak Mahindra Bank (KMB) on January 30, 2020, and extends it to all the other private sector banks.Sadly, both these recommendations by the IWG raise a significant question mark on the credibility of the RBI. Recent developments in the telecommunications and airport infrastructure sectors, and the general preferential treatment meted to top corporate houses, heighten concerns of crony capitalism and the growing and intrusive influence of large corporates in policy formulation. That an IWG of the RBI can boldly recommend a reversal of a 50 year regulatory policy without presenting a detailed argument tarnishes the reputation of the RBI. That it first permits Uday Kotak and Kotak Mahindra Bank (KMB IN) (KMB) to remain non-compliant with RBI regulations, then carves out an exception for Kotak, later invites him as a consultant to the IWG, and finally recommends that the policy be changed for everyone else as well, reflects poorly on the RBI. Events in India have demonstrated the erosion of institutions and the unabashed concentration of political and economic power. The recommendations by the RBI’s IWG are to be seen through this lens.

RBI’s IWG Recommends Foxes Be Put in Charge of Chicken Coops: Cites Foxes’ Experience & Expertise

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

In this, the third of several short insights in our Yes Bank Deposit Run Anniversary Series, we incorporate deposits that are not captured in Liquidity Coverage Ratio (LCR) reports to clear the miasma of really occurred at <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>.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank. One major assumption is that only deposits which may be withdrawn on demand, or within the next 30 days are at risk of deposit flight. Only these deposits are captured in the LCR report. As such, we incorporate deposits that are not captured in LCR reports and compare these missing deposits to deposit costs. We then assess the “Missing Deposit” adjusted LCR ratio at each US$-issuing bank to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a> for more details.In our second insight on this matter, we adjusted LCR assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank to derive “Yes-stressed” resultant LCRs for each institution. We then assessed this Yes-Stressed LCR relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-yes-stressed-deposit-flight-simulation" target="_blank" data-smartkarma-citation="insights:44213" rel="noopener">Yes-Stressed Deposit Flight Simulation</a> for more details. In follow-up insights we further stress the reported LCRs for possible Covid-19 related payment delinquencies and then combined these elements for apocalypse scenario analysis.

In this, the third of several short insights in our Yes Bank Deposit Run Anniversary Series, we incorporate deposits that are not captured in Liquidity Coverage Ratio (LCR) reports to clear the miasma of really occurred at Yes Bank (YES IN).LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank. One major assumption is that only deposits which may be withdrawn on demand, or within the next 30 days are at risk of deposit flight. Only these deposits are captured in the LCR report. As such, we incorporate deposits that are not captured in LCR reports and compare these missing deposits to deposit costs. We then assess the “Missing Deposit” adjusted LCR ratio at each US$-issuing bank to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see Stable Deposits and Costs 1-Year After the Yes Bank Silent Run for more details.In our second insight on this matter, we adjusted LCR assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank to derive “Yes-stressed” resultant LCRs for each institution. We then assessed this Yes-Stressed LCR relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see Yes-Stressed Deposit Flight Simulation for more details. In follow-up insights we further stress the reported LCRs for possible Covid-19 related payment delinquencies and then combined these elements for apocalypse scenario analysis.

India-Headquartered Banks: Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run

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-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios

COVID-19 adjusted LCRs exhibit an almost perfectly negative correlation with India-headquartered bank bond spreads. This is the 4’th of several...

Hank Calenti, CFA

Standard Chartered Legacy Tier 1 Is on Fire

Standard Chartered Legacy Tier 1 are catching a bid on tender offer expectations. Ineligible as capital post 2021, imperfect Libor replacement...

Hank Calenti, CFA

RBI’s IWG Recommends Foxes Be Put in Charge of Chicken Coops: Cites Foxes’ Experience & Expertise

“What is the robbing of a bank compared to the founding of one?” – Bertolt Brecht. If RBI's IWG recommendation is accepted it will institutionalise...

Hemindra Hazari

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

India-Headquartered Banks: Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run

Deposits not captured in Liquidity Coverage Ratio reports broke Yes Bank. We stress India-headquartered banks for this miasma in the 3’rd insight...

Hank Calenti, CFA

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