India Morning Report: Portfolio investment highs let India story dominate

Investment percent gdp
Investment percent gdp (Photo credit: Wikipedia)

As investment flows confirm net positive investments in India on a regular daily basis, making the total for March closer to $3 Bln or close to $150 mln per day (INR 900 Crores) , India and Indonesia keep hopes alive for Global equities and EEM flows remain negative with exits from China, Japan and Korea closing out on any hope for recovery in North Asia with China remaining dull and Japans deficit imports coming at the cost of lower Exports being kept on deficit mirroring the phase of growth investments without concurrent investing flows.

 

6590 levels obviously proved daunting for India Inc and markets returned the gains out of the morning trades after a buoyant day for equities all around, looking for new levels not belying the sad events of 2012 for Corporate India Markets stay away from Banks as markets had a big open on Monday and new levels in private sector banks seem to wait for PSU banks that continue to be neglected for their larger than life NPA sores and aches.

 

Reasons for cheering the performance of Auto and metals however still seem t o be further ahea d on the road to recovery and have hardly earned their stripes. Bank License hopefuls that still include the Aditya Birla Group and a couple of other corporate houses are probably caught unaware by the extra scrutiny imposed by the Poll panel ahead of a new government in steed at the Center. RBI has enough reason to deny corporate houses a chance to play with the banking system but it may be difficult to deny claims of available NBFC models like Aditya Birla Money ( Diversified Financial Services ) AND M&M Financial Services ( Retail unsecured/Auto Lending ) after satisfying the NOHFC structure requirements, giving the CEntral Bank a tytough decision as it probably wants to hand over no more than 4-5 new opportunities

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India Morning Report: Markets digest a rate hike and the new Maruti equation

India Auto ExpoYou heard it in 2009, Suzuki may go it alone:

The 7th Maruti Suzuki plant in Gujarat adding capacities to its 1.75 mln cars from Gurgaon and Manesar which has already seen union troubles in the North, will actually belong to Suzuki in a new Wholly owned subsidiary and as royalty terms have not changed the new production available from Gujarat in 2015 will improve MSIL’s margins. MSIL already is the dominant component of Suzuki’s global sales. The markets are however punishing Maruti for the loss of faith , the automaker springing the surprise from its ranks mid afternoon yesterday. Today’s morning quotes will be 20% lower and likely fall a further 5% tomorrow though 1200 is improbable. A Suzuki coming into India alone means it may be planning exiting its Maruti investment except for its commitments to successive Indian governments over the years. Maruti trade is being closed within this series as speculators likely get ready for a short trade in the new series after having been farmed in the construction sector. The Gujarat plant will supply only to Maruti production

Biocon is back in Volume breakouts from the switchout in cash

Rate Hike

Markets will likely digest the rate hike given good liquidity, as mentioned in Bank Policy Tuesday yesterday however the 8.5% and lower yields will now wait till end 2014 and at least one quarter of good growth with strong positive investments. The higher rate environment may not translate into higher retail rates and credit expansion may also not be threatened, but was it required? Yields did move separately from Currency markets before policy and thus Policy rate hikes squeezed the exchange rate back to 62.50 levels

Airtel again, Idea bhi

Airtel is definitely back in the mix, changes at the top likely positive even for Manoj Kohli who finally moves to the new businesses invested from the Telecom win for the Mittals over the years. Idea’s ARPU gains despite revenue per minute dying means both Idea and RCOM are also likely to see long trades and Bharti remains the back bone of he market as IT and Pharma break down. Tomorrow would probably be ITC again and the day after that Bharti

Bharti PAT is up 20% on quarter and ARPUs to 195 frm 192 spectrum auctions stamp their market print on Feb 03 and Feb04(post announcements). Africa ARPUs are up 10c to $5.80 or INR 360.

Sell 6100 Puts

If you are finally tired of shorting the market and Ashwini baiting from your camp you may join in too but ahead of expiry, 6100 uts are likely to look tempting and markets will close 6100 with such a huge magnitude of newsflow  getting hope trades shucked off by early market moves last week and shorts on DLF , Unitech and HDIL would likely be the biggest winners of the series. The days trading would likely see a similar mood sneaking into 6200 uts , which however is a function of the other market forces discussed with a 40 point increase in NIFTY being par and leaves tthe markets at 6160 and markets may not want to control further BEAR GREED till todays close whence the 6200 trade still rewards that additional risk

Banks are a big buy

10,600 seems to have done it for the Banknifty and investors are likely to stay glued to ICICI and HDFC Bank on the rise. Axis Bank fell 3% yesterday at the fag end of the correction ( on markets breakdown post Maruti announcements) ICICI Bank reports with India Starbucks (Tata Global) . Starbucks ma also prefer a new 100% investment in India after 25 stores have opened with Tatas.

After ICICI Bank’s clean sweep today, tomorrow will see earnings from Hero sandwiched by Bank of India and SBT and after the Adani and IDFC reports on Friday we close out earnings season with a fairly robust performance, near 20% profit growth still standard fare for the biggies.

Other Results

REC, M&M and Cox & Kings report on the 14th of Feb, ILFS Transpo, Page (and Lovable?) and Finolex Cable on 12th and Bombay Dyeing on the 13th. Lovable is doing well in the trade prioritiising for the New FMCG adds in 2010 IPOs

India Morning Report: IDFC on way to become a financial conglomerate

IDFC Project Equity
IDFC Project Equity (Photo credit: Wikipedia)

 

If its the currency dragging equity confidence down despite the healthy capacity in the market, wel land good. If the hit is however on the asset quality situation of the banks, it would be a quicker reversal tomorrow as ICICI Bank publicises its bigger Power plant accounts (Dabhol-II) Walmart leaving India, is probably most of the impact.

IDFC already is, one of the most far reaching shadow banking institutions especially since it caught one of those fund houses in 2005 and has been actively floating new funds and operating advances thru its infra NBFC as well as PE funds and others.

 

However, the treatment of NOFHC can be proprietary and thus the only risk to their getting a Banking License as it gets into an endless loop of what can be done without the regulator cutting off the air supply. Their objectives and disparate infra rules have to be kept independent and if the company is looking for flexibility there or some sort of understanding instead as Indian houses tend to treat discussions with the regulator, it may not turn out rosy for their ambitions of a license. Its an independent NOFHC subsidiary of the other non financial services business and Financial services business has to be outside the purview of the NOFHC so it will probably be under the independent NOFHC in the most pliable case but the funding requirements at 51% f the NOFHC equity as it owns probably more than the INR 200 crores of the bank is the deciding parameter of the bank.Tthe NOFHC allows promoters with public holdings to create a tightly controlled subsidiary with RBI denominated investors including 51% from such promoters, but the independent banking compliant structure has far other important functions than just that and may not be dispensed with.

 

There is more than enough of that, with the Dept of Post also turning out to be almost operationally untenable to do the deed and get a banking license within the parameters.

 

IDFC however is one of the best candidates already operating independent projects without mixing up and unnecessarily skewing up exposures. I would proffer LIC Housing too, esp if we actually want enterprises that have the understanding to withstand and grow in the faster growing non metropolitan India. As Foreign Banks have shown earlier, regulatory standoffs are costly for the banking model, and the sooner we get off that hobby horse the better.

 

The index is faltering again and the reason is really not easy to understand esp as the Put Call Ratio is just over 1 as of Friday closing, and really not that weak that everything be unwound. Markets are anyway unlikely to go below 5800 levels for more than a nary second, and the Rupee being weaker is a pretty range bound move. The MCX saga at the commodity exchange with its e series has still to unfold perhaps

 

Infra projects being cleared faster, its still happening as we speak and is unlikely to create any CAD resecting Dollars till the May ’14 General Elections

 

 

English: Kedarnath range behind the Kedarnath ...
English: Kedarnath range behind the Kedarnath temple early morning. (Photo credit: Wikipedia)

 

 

 

India Morning Report: It’s Monday and all’s upsy daisy in waiting

The Indian Rupee opened near 62.50 levels, a 2% jump from Friday levels well likely to follow last week’s 2.5% crawlback and the prospects of a bleary liquidity hit SuperFed becoming a scrawnyScrooge MadFed retraced as Larry Summers gave in to a Democratic caucus on the Banking Committee, incl Liz Warren and withdrew presumably in favor of Janet Yellen in the Fed changeover. The Fed will go ahead with Tapering as planned and that news is in by Wednesday. Indian Markets of course are then going to take the opportunity to break away from the global correlation and set a few ground rules for an Indian recovery. The WPI at near 6% again and the continuing pressures of the CAD and Bank reforms are likely to cause markets some sleepless nights too ahead on the turn. But before that a 6000-run as promised is nigh and mostly the mark would even be hit in today’s session itself in late afternoon trading given the Rupee level jumps are not adequately referenced in the 70-point Nifty jump in the pre open

Banks , even the lagging PSU Banks are finally in the limelight and the resulting breadth available to buyers is likely to be good tidings for the market. Reforms in the G-Sec market may well continue as caps on FIIs even without auctions are much easier today and probably reflective of the real appetite for Indian debt at $25Bln G secs and $45 Bln corporate debt now allowed to QFIs

LIC Housing is back in the news but if its that banking licence then one is not sure it is right for the market recovery esp with the 80-20 disbursal rule out of action. IDFC may be done with shorts and Power NBFCs may be ahead in the lead. As more debt reforms pick up steam and remaining restrictions on G–debt are removed, it is likely the NBFC sector’s institutions will also increase in priority for the markets. As of now effectively there is only one on the run (lquid, current) 10 year security available and it is issued by the RBI.

Really, though markets are up the traders’ picks on networks could point to the list of mid-caps just likely to gain from the liquidity rush and may not reflect any real fundamentals and is probably sign that these low mid caps list in the traders favorites needs to be changed more frequently. Notably, Voltas, Jindal Steel, UCO and Union Bank, Future Ventres and NHPC are probably candidates for non performance and “no results” in their respective sectors and will be trgeted wins as market favorites because today nothing can go wrong for the pro traders. But many other pro traders now would pick the over NBFCs and other good picks not at variancce with what Foreign desks have also short listed in the last four – five years

 

India Morning Report: A late last minute judgement call but that pair trade was ill advised

6th century
6th century (Photo credit: Wikipedia)

ET finally let the cat out of the bag but a bit late as the Bank nifty short was paired to the indices in a copycat move of a trade that worked in the 4700-5300 down India jamboree of 2010 then 2011 and then 2012 as well. Anyway it is afternoon as most of my readers realise my busy ness in th emorning with struggles for food and hearth taking over the life and times of accomplished investing advice and career counseling for the world of investment banking. Ph. D seats in India are few as well and a preeminent shortage of goods could well price that education much higher than it is today, the doctors 9 though i m yet to get in) still on the periphery of business and academia preferring stolid credentials to maintain ranks and bag enough fees to supplemennt honored careers in banking and finance (most of them)

Anyway here’s wishing them better luck for the pair trade next time and here’s wishing you use the contact form below to discuss and disect India, Finance, and anything else you think makes sense

No break from trading this week as another broking NBFC tops $400 mln in quarterly revenues following IIFL efforts yesterday and with broking revenues not dipping in one of the most inactive lulls of equity trading in recent times.

Dr Reddy’s results look nippier solely on last year’s poor Q4 but revenues rose nearly 30% at INR 33.4 Bln , annual results topping 20% on Sales and still 18% on profits across at least 2 bad quarters out of 4 reported. Generics accounted for INR 82 Bln out of 111bln in Sales. GVK power results this afternoon were wierdly out of whack with some tussle forming with APTRANSCO while GMR seems to be progressing along expected lines on cutting debt.

Nothing of note from Novartis or Pfizer yesterday Given the wierd secrecy arround mnc accounts one cannot immediately comment on 90% of their profits (Novartis) being from other income and being (un)affected by transfer pricing

Anyway the wind out of shorts jumped Wednesday indices to 6150 and markets are trading a t their highest level since 2011 while the rupee from trades on Monday continues to stay around 54.80 and expiry is going to be easy for long traders in options , shorting options now key to an ever changing vocabulary for our middle tof the tail at BPOs earning seven figure salaries or hoping to make some disposable spreads through trading, hear hear..( Three fat tail events discussed in here, find them and write to me for a mid week mania contest entry, your favorite candy ata favorite coffee place for prizes)

India Morning Report: Markets regain 5900 levels, short trade not on

English: Implied Vol. Surface
English: Implied Vol. Surface (Photo credit: Wikipedia)

 

Aftera small skirmish/face off in the morning trades as was likely on expiry day, the volatility smile of the May series was intact with high ranges for out of the money calls and puts and shorts bowed out of remaining scrips before noon possibly. Markets are stable at around 5900 and are celebrating the Jet deal, Tata Global beverages also getting neww found attention as it consolidates thee first year of results of Starbucks and probablyocased the kind of innovation and looks for global scale forced by its jv partners and global coffee markets. P&G global results yesterday showed the importance of innovation and BRIC growth in consumption stocks and India remains an important global destination for consumption industries FDI not just in travel and financial services.

 

FDI, Media and infrastructure expansion and perhaps a stable polity make guessing capital market priorities an almost daily habit for the multitudes but investing funds and managers fail to expand the footprint of the profession while retail investors get knocked out for scale, leaving pronooters speculating on margin an important riceboll weevil infestation in the Indian wealth crop, clearing of which is still dependent on monsoon dusting of crops, That is where similes end up when coffee conversations about the market try to replace in depth research. M&M Financial however seems to have cottoned on to the diversified growth tenets of a NBFC and bajaj finance firms too are pretty surefooted led by their last insurance investments.

 

Jet is likely to cross a near 100% retunr at these levels to four figures but that time frame could be six months or even six years whence it will cycle thru another multiquarter negative round of profits based on the cost of oil. Rupee trade is stong ont he upside and the banks being pilloried for having reached levels at which further investment is foolhardy are still purveyors of both value and more than 30% growth and as long as exit targets are available in IT and defensive sector stocks should continue to be staple of portfolios

 

Rollovers are likely to be subdued and if that happens there could be an entry opportunity in this market around 5800 levels after the new series trades in earnest next week. (ofcourse if these ‘scheme’ is indeed adopted along with the 24% stake approval for Jet, Friday trading could still have already set base levels for the May series before markets start the new trend direction next week but as of now, Friday would be dull and rollovers sparse

 

 

India Morning Report: Sorry Bears and Cartels, Bulls are still hiding in the Indian woodwork

Yes Bank
Yes Bank (Photo credit: Wikipedia)

 

Network analysts sitting on lower support levels and betting short on most new blue chips having seen the infracos slide, are in for another shocker as the march series looks to inch closer to 5600 on expiry day before closing out comfortably ahead of August 2012 levels. Both Sukhani continue on the second month of watchful short betting SS targetting YES Bank further from today while Bharti and some others responded in kind to the lack of interest to back the market interest to significant lower levels but the buls seem to have won on real strength of fund inflows for the time being. Markets will correct but not by much in April and while the upside was capped to 5850 levels by the weakness that just means the lowside is still as high as 5550 even for safe investors and 5500 puts should be real rich making sells for bullish investors. (We personally are not conflicted by any position here)

 

Five Rupee Coin
Five Rupee Coin (Photo credit: Dinesh Cyanam)

 

BRICS Development Bank aside, which we look to fund the Indian Infrastructure gap in due course, India inc starts off results season in a week and its profitability scores that already improved on identified sectoral leaders in Q3, are the ones that will be identified with the successful India story and not the politicking as enough stability and forward looking governance is guaranteed by incumbent ministers if not the party flags.

 

The Rupee keeps most of its strength in the new series and the may series may give pointers on the new range for the currency as Fixed income yields cross back into the 8+ range having lost the rate cut and pushed the bank to the reverse repo rate on the corrridor

 

Given the strength of equities and currency going in, profitability concerns of consumption and auto plays should be watched closely for bear victories even as IT forecasts and IT results will remain damp and not affect sentiment. Healthcare could lead stocks nose down but not up even if it maintains good profitability and revenue growth and any weakness in bank performance including Q1 FY14 forecasts will be a deal breaker.

 

Infra debt funds have indeed taken off and execution perofrmance of projects still hanging will come intpo play on the bourses also in Q3 FY14, QIP fund raising shifting out from infra and bank fund raising to NBFC or Capital expansion plays across manufacturing and services businesses with CDS holding sub 200 levels , a great performance for an isolated Asian performer.

 

 

Morning Trading Strategies (addendum to India Morning Report) : Shortson IDFC and LIC Housing seem…

English: Logo of Etihad Airways
English: Logo of Etihad Airways (Photo credit: Wikipedia)

Yesterday’s move up was a defining one and is likely to be bet dowwn in today’s reaction. Also, infra is likely to be rated down as Election year approaches and India inc battles with inflation. However shorts on larger movers like LIC Housing and IDFC are unlikely to give more than the required minimum in the reaction and remain larger movers on the upside. Also Jp associates as expected followed last week’s DLF into the quagmire of being shortlisted wwithout a salary for the bulls on offer and are unlikely to be further good for more than a 5-10% move down or up. Similarily Bharti , another favorite on the downtrade, has already reached barely 300+ levels and may not move.

However, the loss of control in the Aviation investments being sidled in are a serious issue the market swill discount as Air Asia gets sleepy Tata and Bhatia (mittal in laws) investments and Etihad goes out demanding CEO and COO positions for its investment

Maybe a leg in Pharma before an upmove and that highlights Lupin and Cipla, while OMCs also offer an uptrade and private banks below ING and Indus ind in the pecking order get picked up further on deal buzz (warranted or otherwise) including Karur Vysya Bank, Federal and South Indian Bank all with almost no

South Indian Bank
South Indian Bank (Photo credit: Wikipedia)

available float for takeovers or buying of a NBFC to expand footprint.
Maruti is still not a blue chip for the Indian Market and Hero and Maruti infact make for a big short i would try as they can be kep t open well into next week a day before budget moves take over

Bank Results Season: India Earnings (The Old and Weak) Will India jettison its Public sector behemoths as instruments of policy [SBI Q2 FY2013]

The deterioration in asset quality though well within control at SBI to 5.15% or INR 491 B does not meet management statements of no more deterioration in asset quality. The written off loans of INR 14.92 B and reducing provisions of INR 18.5 B from INR 22.73 B a quarter ago raise questions of capacity and capaability even as the Central bank has obliged with CRR cuts and the bank continues to manage the loest deposit base in the country ith the status as largest bank int he country borne in measure by share of loan assets and the size of asset book  as well as the market share computations for the sector in both retail and SME/corporate banking

However a future for India Financial Services may need to have a larger NBFC role designed aas per the latest policy documents or otherwise continue privatising bank franchises and allowing new banks with rural and priority mandates make the competition tougher whence sucha weak showing by SBI with only 5% growth in NII below INR 110 B for the quarter makes ita tough pill for the market to swallow. However, the current macroeconomic revival may let other banks pick up the slack and allow investors to ignore this quarter’s SBI records while the markets again take a fact check on how good the India story is.

Net profits for the quarter are INR 36 B ahead of estimates by more than 5% but the stock will drag the Banknifty in the current run with management guidance not being welcome. The year on year groth in profits does meet the benchmark of 30% at a 25% score bu tthat  is on a low base from underperformance after the bad loan cliff ensnared the bank

REstructurd loans are INR 46.94 B or 5% of the loan book roughly Additional slippages are INR 85 B compared to INR 103B last quarter (linked/seq)  but recoveries are also up by nearly 17% at INR 14.3B The loan book has grown to INR 9.56 T

 

India Morning Report October 08, 2012: India Inc Waits For Real Reforms

 

Update: Some brokerages have already updated sharp shorts in Mid Cap IT but Hexaware could follow Geometric into positive

A downgrade from Morgan Stanley (RIL), an India on call report from Credit Suisse asking for reform implementation and eGOM’s easy billing answer to the fiscal deficit ( from Telecom spectrum) alongwith the age old Cauvery issue complicating mining ban and drought hit Karnataka’s problems contributed to the background against wich the inevitable happened yesterday. The Emkay event is not yet forgotten and DLF has paid for an ‘unraveling’ of a very public Vadra connection but the indices are still above 5670 and going back north today from the looks of it as the welcome corrections piques the watchers of the Indian markets from foreign shores.

A 2013 story train from us 

A title “Contemporary Banking in India” edited by Naina Kidwai of HSBC forms the bedrock of my missing gaps in the knowledge of all things local and as the author of “100 small steps..” takes the inevitable podium on thought waves, the growth of Tier 2 towns and NBFC based financial inclusion alongwith ECB avenues for NBFCs are likely to be ‘revived’ as and growth truly coems back to India after the bottoming in Q2 or Q3. However, the important thing remains to be that results in our deficit numbers CAD and Fisc show up as soon as possible and we move on to not just a buoyant Services PMI but take the Consumption story forward from the undeniable stamp of nondescript plateauing at $1 B for alomost every consumer brand in every sector int his country

The rest of them and reform

The final nails in the coffin for Kingfisher have arrived and the key issue likely to make the media strongly in the next few days is their wage bill which pays 13 managers 67% of their INR6.7B compensation costs. Foreign banks have made a comeback in assets from Citi and DBS while HSBC still has the strongest branch network and SCB inexplicably stuc k in telecom assets syndications despite having won with extensive outgoing FDI support cases including Bharti.

The reform, what exactly does one expect int he next few months to come back from implementation. Perhaps the real FDI reforms only and no GST , Direct Tax code or Companies Bill yet as it might need to be introduced in Parl again.

 

India 3.0 – A question of balance (A Calendar of Economic Events)

Trading strategies are more the norm at this time of the day but the markets have finally regressed the entire cycle of events from the mid 90s to retrieve a year or at least a month of flat no move left stock markets and the rupee after a valiant afternoon early last week, follows into submission.

By our calendar, India Inc and indian polity have more twiddling of thumbs despite the Parliament out of the way till New Year festivities start in earnest and the Opposition crosses probably into a near win zone against the losing Indian government, a sinking ship, ripe for deserters and hence the time for foreign media to make a tattle tale red a**ed monkey impact on things.

One still thinks ofcourse that India Inc will survive the remaining year as the financial markets have, propped by liquidity though consumption is likely to be a dampenedr in the coming festive season with means stripped of all respect in the Ways and Means advances of a government, 33% of plan spending and 52% of non plan spending exhausted in one quarter and personal consumption enjoying the hit from inflation every week.

Ofcourse the Indian polity has been early pioneer and we the commentators have been as usual late in adapting to India 3.0 which like 1.0 and 2.0 before simply refuses to budge from positions, movements and growth rates established last after a severe drought in the early 20th century and a westernised relief program by the then British sponsored Congress governments in the principalities of Indian maharajahs.

The Anna movement has fizzled out without a viable political color, NaMo and Nimo apparently not good for a national calling and Rahul Gandhi not coming out to take charge, the old generation moving on has also provided pause for those of us born in the 70s as more entry line recrutiting takes salaries , if any , to 20 somethings and no growth industry replaces againg telecom infrastructure stories banks amnaging to gro credit to NBFC, Real estate (Affordable Housing) and other services industries.

FDI collars for old sectors, new banks and growth calls for the pack waiting for work yet still snagging salaries at IPL linked marketing companies, erstwhile growing BPO and IT companies or NPA hit PSU banks are yet a year or more away. Not much is expected from IIP data and Manufacturing Output growth data on Wednesday while Friday’s WPI data and that of FX reserves is unlikely to move decisively either, yet not be in the rut, WPI having improved for the last three-four months. European inflation data is likely to be worse today when most nations report than tomorrow when Italy and Sweden are scheduled to report while key South Korean, Russian and Aussie data speeden the recovery by the currencies against the dollar.

RELIANCE AMC gets follow on investment from Nippon Life

Even as Rel Com suffers from a $ 6.5 bln debt overhang , even witht he rupee holding, the condition of the group is precarious esp on Reliance Capital as a NBFC funding the group also. Rel Capital got a reprieve yet with Nippon Life agreeing to another high valuation, this time the mutual fund at 6.4%AUM and investing INR13.5 bln for a share of the business

At a valuation of slightly over $1 bln, the investment pays premium for Reliance’s dominant 12.5% share of Indian AUMs at the said 6.4%

JM Financials: NBFC is, NBFC will be (HSBC cards portfolio)

Commitment to a non banking model does give one clarity to operate in the high risk high margin segments that are exclusively revenues accretive to a NBFC. Apart from the big bang in MFIs in the unregulated market earlier, NBFCs may also proceed to have fun in the millions of card accounts attrited in the 2008 restructuring at banks

JM Financials for example , has bought HSBC’s credit card portfolio for its bad assets..and if you are one of the unfortunate ones without income, you may yet get new calling agents to break the rules as the bad assets business is very cash driven and thus highly accretive for exactly the wrong kind if not understood carefully.

You could have bought these assets from the bank for 20-30% of their value and the bank could have recovered most of its debt by continuing posting 50% interest charges in defaulted accounts, the low revenue to the bank from the sale being more than profitable to recover the lost retail banking win. HSBC already broke even last year in 2011 March in retail operations and has restarted unsecured lending

Banking growth: More policy blowback – Subsidiaries refused

ICICI Bank Headquarters
Image via Wikipedia

Where banks throughout the world are now deleveraging having hoped for an extra bit of govt sponsored handholding to survive that was refused in the Inidan and Chinese environment faceoffs between regulators and bankers are more regular as banks alternate between traditional models on one end to unverified arbitrage and sustainable global opportunities on the other. The RBI diktat of merging all subsidiary businesses and banking business to a single Financial Operating Holding Company ( FOHC) some time six months aago is one of those. Banks that have already set up elaborate structures incl. ICICI may be able to do that without much fuss, but unlikely find it critical to their operations to do so and expect the regulator to understand.

Similarly, public sector banks have tried for long that they be alllowed to circumvent uniform compensation

South Indian Bank
Image via Wikipedia

guidelines that apply to them so that specialized talent may be held accountable to existing / new profitable lines of business at middle and senior levels. Bank of India’s proposal to hire such staff at different compensation thru a new people subsidiary was rejected by the RBI according to Business Standard(BS)

South Indian Bank was also asked to conduct business in gold loans directly thru branches instead of setting up a NBFC (presumably) subsidiary and Axis Bank and ICICI Bank were earlier stopped from setting up separate Infracos after differential funding norms were offered to NBFCs in the sector allowing a distinct 15:1 leverage

RBI diktats suggest it approves subsidiaries only for businesses that cannot be conducted thru branches and current licenses such as insurance and securities broking which is now expected to moved to an Operating company rathwr than current conditions where these are subsidiaries of the banks ror have stakes from the banks.

LVB was refused choice to set up a distinct housing subsidiary, probably in which more banks would have used the strategy to ‘follow the herd’ and unnecessarily crowded the space without effective business growth

A separate report highlights how Indian companies have banking business in branches abroad with PSEs SBI and BOB leading with 50 branches each and ICICI Bank having come up int he Private Sector with 19 such offices outside the country. All these offices end up without transaction banking mandates or even an effective market share of NRI deposits and are being asked by select governments to concentrate on local lending in that jurisdiction without any apparent results

NBFCs: Barclays completes process of closing out, buyers welcome

Barclays apparently thought it a good idea to enter India as a NBFC less than 5 years ago as NBFCs can open branches at will. However, as much noted, the model did not quite work for Barclays with a lack of probity and inability to grow in Credit cards forced the bank to sell out and close its operations in India.

It’s credit cards portfolio without its 20% NPSs as sold to SCB and of the 30 odd branches for the bank, hat have all stopped lending further, at least 20 ar ebeing closed down across the country leaving it with branches in ‘ single digits’ to manage the existing unsecured loan book

The loan assets are worth another INR 30 bln or $500 mln on top of the sale of INR1.75 bln in Credit card assets ( from 160,000 cardholders )

Eiko and her credit card
Image by eikootje via Flickr

NBFC lending steams Economy, RBI gets tough

Even as banks have been looking for increasing theiur exposure to unsecured loans, the Auto loans sector and even loans to businesses in real estate sector have grown healthily in 2011 on the back of NBFCs alone. CV financing by Shriram Auto and commercial Finance by L&T Finance alongwith players like Mahindra Financial for in house auto loans have been growing through 2011 even as price hikes creep up on buyers.

In the mean time, the success of Discounts and promotions has encouraged vehicle manufacturers ( see December Auto Sales report) to continue suhc offers till February 2012

While Auto loans may well reach rates of 12-13% to the consumer or flat rates of nearly 10% per month,

Loans
Image by jferzoco via Flickr

interest rates are unlikely to come down for the NBFC lenders even when the central bank does cut interest rates for the banks. Also, most NBFC lenders survive on a higher margin as a higher tolerance is inbuilt into their models for repayment schedules of borrowers unlike bank finance. However as of now, RBI applies the same three month norms to recognise NPAs for these players and this might skew their loan book performanc eint he coming one or two quarters, in some cases leading to increasing borrowing costs from banks too.

While NBFC lending has crossed 2.0 Tln in the current credit reporting to RBI, making it 5% of credit assets the same has been pulled up by the Central Bank esp targeting those rejected by the Central Bank from taking public deposits into the ND-NBFCs or Non Deposit taking NBFCs.

RBI is mulling a limit ont he anmount of bank funding available to these NBFCs the MFIs are separately classified, as are Infra Financing Companies. MFIs have recently been allowed to access ECBs internationally to compensate for the dqueeze on lending practices and regulation of margin and amount of loans they can make in their captive rural/urban areas MFIs can be registered as a Society or Trust or with the RBI as NBFC-MFI

RBI Bank Credit Review shows small pockets of growth

Diwali celebrations in Coventry, United Kingdo...
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For some strange reasn we are dealing with September Data by Segment after getting (flash) data for the fortnight ended Oct 07, 2011 instead of the Diwali week, but do not get confused by that. Out of the INR 16 Tln non food credit, growing by the predicated 18.7%, Credit to NBFCs has grown year on year from INR 1.16 tln and INR 1.56 tln sometime in June to INR 1.83 tln or $36.5 bln Total creit had grown to 42 tln to the last week of September as already covered.

ET carries a detail table based on the RBI release not carried online The misguided analysis by the young ET analyst still shows an ability to review the data though home loan growth has actually pretty much slowed things for banks everywhere and it holds right now for India oo and any patriotic assertions not backed by data do not do good to India’s investment inflows

The gold mine of data is apparently located at http:/dbie.rbi.org.in. The segmental breakdown (thanks to the villains of all financial confusion at moneycontrol.com)

As margins in retail industry contracted, food supplies incl Tea and Sugar companies took credit off the table in 2011, while credit to industry grew at 22.7% and Personal loans at 15%. From looking at the Auto sales data, it is apparent that the trend in personal and NBFC loans will continue to grow in October as well but at the expense of mandatory big ticket spends of the festival season: House and Car.

Infrastructure credit to Power is up 11% over the year to INR 4.8 tln New Infrastructure credit requirements at NIMZ under the New Manufacturing Policy could include INR 3.6 tln for the DFC and another INR 3.6 Tln for the DMIC builds However work on the greenfield projects is unlikely to take off any time soon as even in Power, 5 out 15 UMPPs are ‘indefinitely’ delayed ( nice B-TV analysis)

Growth in Credit is lower than the overall 18.7% growth in all industries except Mining and Gems and Jewelry and sub segments like growth in NBFCs credit by 46% stand out. This growth will be mostly to real restate projects already sanctioned and retail unsecured credit, not encouraged at banks like ICICI Bank but fueling a lot of NBFC and even banking credit growth

Personal Loans are a 18% of the Gross RBI credit at INR 7.02 Tln or $140 bln outstanding as of September 23, 2011. Over the year Vehicle and Home loans have also grown at 15.7% and 19% but to INR 3.06 tln and INR0.86 tln out of the Personal basket

Credit card spend has started ticking upward after three years since February 2008 from this month now at $4.62 bln outstanding credit and a monthly spend that is about the same..

Living with high interest rates: How Banks will follow the script for India’s new growth – Part II

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The RBI proposal for making a 100% WOS structure mandatory for existing foreign licensees is likely to get the tax man’s blessings if the diktat comes through form the MoF letting Banks bring in unlimited Capital for the new banking company without any tax implications. It still leaves to the foreign banks to set up such WOS structures that bind them to 25% branches in rural unbanked centers. In the draft for new banks for example I do not believe rural unbanked is the term used and they may be just llooking at setting up next to the HDFC Bank or PSB in the village/town when they do get down to implementation. Also with Foreign banks have partnered themselves in Insurance the FOHC/NOHC structure will be invoked with nary permutations to let HSBC and Citi operate for the projected bancassurance incomes in reputed cross sell revenue burst yet to be seen here.

However Banks will have a significantly larger play than just habituating Indian customers to high rates (mostly on loans), to mobile USSD messaging, UID enrolling for deposit accounts and mobile payments interfaces With RBi close to the curve on inflation there is much more rate hike in India’s future till we can outrun that inflation or pull it back(not happening till midway in 2012) Social programs in the rural hinterland may become more common and apparently more sophisticated than the public sector loan melas of the 80s

Swabhimaan inititive or rural unbanked villages claims 70,000 villages covered in 2011 till now, while NBFCsoperating int he country are being re regulated to level the playing field in terms of prudential and provisioning norms while deposit taking remains the purview of banks and those already having such a license in the NBFC space while allowing NBFC s access to SARFAESI Acto to allow recovery

It is the urban market increase in consumption which is a fertile grounded seeded by the Private and Foreign banks with renewed vigour. With underwriting norms slikely to be ofllowed diligently at least for some more months to come, the higher rates may not make much of an impact on consumer disposition with Cars and Homes hoping to come back to the top of the shopping list sooner than FY12 end in six months

Contraction in bank branches in the US however and in fact everywhere in the developed world where branch interaction has been a much lower component since more than a decade back, the growth in superstructure may be discouraged by the higher rate structures for the banks themselves. This is exemplified by the transaction charge difference of upto 5 times in a bank branch (40p) as compared to an internet only transaction(8p)  An Asian Banking report recently suggested that Internet transactions in Asia are more than 1 in every 5 transactions including large monolithic markets like China

Investments in risk process and Trading systems and platforms will likely take uo larger investments on the banks’ part yet. However, globally some larger operations in FICC and Equities may be looking for less regulated centers than the freshly reregulated markets in US, India, and China and global expasion to SE Asia’s frontier markets and Africa may well shift  the invesment locus from India and China too and thus Indian regulators would have to sweeten the regulatory pie they have to eat at India’s party for some time to come.

The ideal for banks right now is the renewed strength of income from the Wealth segments in Fee and Advisory income, investment income as well as financing the luxury goods consumption channel that seems to have been fairly robust during 2008 and now. Even if retial was to reach an average of 33% to 40% of the banks’ income statements it could mean large jums for the banks’ balance sheets and for India’s consumption pie. Corporate Banking and the likely revitalised IPO market remains the banks’ most dependable source  of income even with a more conservative range of products for the dle funds that have been the banks’ focus for faster profits to the clients and themselves

An HDFC Bank Branch in Hyderabad
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Setting up the NBFC Banking Corporation Part II – The Infracos will find it tough but so will everyone else

Setting up the NBFC Banking Corporation Part II – The Infracos will find it tough but so will everyone else

The infracos, REC, PFC and even IRFC if you believe the Financial Express have been tempted to start a Banking crporation and the current RBI chief Duvvoori Subbarao has been very clearly discouraging them. making their ask tougher is the new norms for recognising NPAs in a 90 day timeframe though power companies with no exposure to SEBs may not face challenges on that count as much as all of them will be preoccupied with analysts reporting a 5-7% downgrade in earnings according to the new NPA norms. There is also my own limitations of understanding as SCB research mentions that current NBFC ops are a big no no for banking wannabes.

Nothing in the current regulations precludes new banks from maintaining their NBFCs , in fact as the CXOs of these new banks holding companies are likely to canvas with RBI to allow their existing branch networks to become banking branches and that may very much necessitate a couple of public clarifications by the regulator as these are extensive networks in retail and will be the main utilisation of bank funds from low cost deposits of these banks in the first instant necessitating a relook at single party and group exposure norms and making it infeasible for the new NBFC banking corporations to set up new branches rather than refashion existing distribution networks of their NBFCs

The new NPA norms may hit the three Auto finance cos too as NPAs in the NBFC sector will now exceed twice the 2-3% Gross rate in the establshed banks. Also the NPAs are only a tough start as maintaining a 12% adequacy is already causing the new candidate banks a notional loss of nearly a potential INR 80bln or $2 bln in RWA and thus more than $200mln in annual profits compared to existing banks.

Also RBI’s interest in keeping PSUs and infracos away may be due to their existing development charter based on which they can issue tax free infraco paper to retail investors and also raise low cost monies to a higher leverage as discussed last year in IFC norms at this repository

The Risk weighting of Power industry assets is also specially marked down for the registered infracos ahead of the new banking regulations

The task of taking the bank public in two years most nessarily will be an unfinished agenda item unless the bankers want to sell equity while still aloss making concern, esp if they set up new branch infrastructure in which case For 10 new branches only 2-3 need to be in the hinterland and can function with skeletal staffing and a working mobile payments platform. this is much like at their much maligned broker cousins and with investment next to existing HDFC Bank and other players likely to make more sense immediately and in the long run making more ATMs available to the road weary urban traveller across India’s well connected and telecom upgraded highways and rail lines. HDFC Bank manages very well with rural branches next to agri markets from its acquisition of failed banks of 1994 vintage and thru fresh investments it made in rich agri catchment areas in Punjab

That is not necessarily extra burden on existing NBFCs as ong as they understand the importance of safe capital investments than leveraging too fast too soon as the guidelines have indicated for the way forward

Setting up the NBFC Banking Corporation – Comprehending India’s new Banks policy

Reserve Bank of India Lucknow
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india’s new Banks are likely to have 25% branches in the rural regions, 40% promoter holding, a listing within 2 years and a FII cap of 49% for the first five years before being granted the freedom to sell the excess promoter stake that will no doubt hinder capitalisation for the first few years, and tak eon the interested FIIs to the extent of 74% as for other banks. Not a roster of choices the NBFCs wanting to be banks would have chosen.

So why is it that LIC Housing, L&T finance and M&M and Shriram Transport are interested in seriously becoming a bank holding company as per the new regulations. Apart from sacrificing their interests in broking and real estate that are more than 10% of revenues ruling out Religare and Indiabulls, the new banks will hold higher capital at 12% and hold all their interests tied together in Financial Services in a single holding cvompany, apparently from the point of view of preserving Capital. Of course, Real estate exposure will finally be allowed indirectly as and when LIC Housing and Infra Cos are permitted to egt abanking license but then even L&T Finance is hoping forr a nod for inorganic growth to kickstart its banking foray and that in itself may turn out to be a pipe dream despite its stakes in City Union Bank and Federal Bank.

However, the cases for Auto finance companies of Shriram and M&M may seem t be the most germaine and with substantial global bank interest in India, there may yet be a JV of interest with the 49% holding model allowing FIIs to explore the Indian territory rather than jump in with 100% WOS models with unlimited branch licences and retail expansion for banks holding more than 0.25% of banking assets of the country.

Then again, that is an exploration the right dealmaker in the right place can just about broach to a prospect. more likely would be a staid NOHC set up by these corprations and by LIC HSG to tie up their current Auto/Home finance companies and then set up aberand new bank limited to a NW of Rs 5 bn or more translating to a RWA of Rs 200 bln or $5bln in its first 5 years for every multple of 500 crores it brings in along with its FII partners ( at a debt equity of 5:1, and presumably with a higher tier I weightage in the first 5 years)

This will then serve a s a base for expansion and transfer of existing profitability from the NBFC portfolios may again have to be navigated with the regulator handholding them every step of the way. The ROE targets of global banks are just 12-13% now and these banks being an emerging market proponent with M&M having even an international presence int he more interesting EMs and planning for more would be under pressure to deliver much more

Building expectations for a rate hike top-off

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With the noise for credit growth gladdening the hearts of the stock markets and that of offices in the RBI, Bankers have already announced that further rate hikes in India would likely be counter productive as they suggest for and on behalf of the RBI that the inflation cycle itself has already peaked. Though my economist brain refuses to accept the same(and my daughter is one too!), one can see that the knock to commodities from the IEA ‘s interjection worth 60 mln tonnes and the down tick in China’s manufacturing output has really dealt a death knell to the commodities inflation cycle.

However a retail inflation uptick is more than likely and the rates are not coming down for a long time, increasing the probability that this is merely a delay in further rate hikes of even a 100 bps further down the road. Also the Credit growth thru the NBFC and directly has been increasing RWA assets in Construction and Real Estate. While someone like ICICI Bank with 19.4% CAR may well go oall out for such RWA to soup up margins, the others may not be that lucky esp with SBI continuing 2-3 quarters of delayed provisioning from 2010 For May Real Estate has grown 24% directly and thru NBFCs may have added another half a trillion in credit and 20% more for RWA

Managing credit growth in Asia

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Global banks are planning cut-downs slashing salaries and staff to gain back lost ground as revenue take a dive in 2011(advantages.us).

Interest rates rise in India on the other hand is creating another bag of worries for banks like HSBC whose demand is very much dependent on prevailing rates vs a vis their offering. Public demand for credit in India however has been shored up by NBFC loan demand(up 56%) and that is personal loans(unsecured, 17%) as public sector banks hold on to larger market shares in the domestic market. 

As of June 17,  when outstanding balances rose to 42 lakh crores ( a dip from an even higher 44 lakh crores in May) and deposits grew to 54 lakhs crores ( 56 lakh crores as of May) the incremental credit deposit ratio had come down to 44% from 88% in March, implying that banks would now be more conservative in the CD ratios even as higher rate deposits interest payous do not mean any significant dent in Net Interest Margins.

With Credit growth at 21% and closer to 22% for the quarter, Banks are set for a surprise showing in the quarter. However HSBC and Stanchart would continue a slower, tougher and less profitable showing along with other MNC banks for their urban 10% market share as swapped credit ratios were higher than 25-26 in relation to their Net worth in March

NBFCs are being used as intermediaries as 30% of NBFC loans get securitiesed by banks and realtors make a bee line for NBFC loans that come at a similar cost in the higher interest rate regime when compared to any bank offers if were still available to real estate. 

India Earnings Season: Institutionalising housing infrastructure (HDFC results)

HDFC again underlines India’s NBFC structure / Institutional structures for finance & Credit companies across Infrastructure and Housing.

Additionally it emphasises that India’s disappointment riddled 2011 still means a more than 20% in sales year on year and 12 % profit QOQ. HDFC manages a 30% increase in Sales and 23% increase in profits for the quarter. Sales are up to $947 million for the quarter and Profits are an important 25% margin at $285.5mln (Net Profits after tax) with Net NPAs at NIL

Provisions have been maintained as mandated by NHB

Defaults are more likely if interest rate hikes continue into 2012 howwever fresh lending maybe under pressure immediately after the 50 bps hike

HDFC maintained spreads at 2.3% and including tail income from securitised/sold assets it upped NIMs to 4.57%

Construction companies had a great FY11, Sobha Developers for example intends to build an inventory of 11 million sft up ahead and is currently carrying only 130k inventory in fully built units and of the 2.7 mln sft under construction, less than 30% inventory is unsold.

Sobha was one of the unleveraged players having reduced debt to $350 mln at March 2010 Profits were more even than last time going to $11 mln for the Quarter at an ave realisation of INR4500 psft or $112.0 while for the year profits rose to $45mln at an average realisation of $100 psft (INR4000)

Meanwhile, Healthcare – Pharma major Ranbaxy PAT dropped from 20% or $240 mln last March to less than 15% to $75 million this quarter while sales were also lower at an expected $535mln clip

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