India Financials

Saumya Agarwal

Thematic (Sector/Industry)

The coronavirus contagion has intensified the divergence in the credit and deposit growth of Indian Banks. Should this trend persist, it will amplify another key concern for Banks – the Asset-Liability mismatch. Most Indian banks have a negative asset-liability mismatch in the short term i.e. in the less than one year time horizon.  With retail inflation breaching the RBI's prescribed limit, upside risks to inflation and bond yields remain a worry.  Should interest rates start rising,  Indian banks with a negative asset-liability gap will be the most susceptible. However, there are a few outliers too.

The coronavirus contagion has intensified the divergence in the credit and deposit growth of Indian Banks. Should this trend persist, it will amplify another key concern for Banks – the Asset-Liability mismatch. Most Indian banks have a negative asset-liability mismatch in the short term i.e. in the less than one year time horizon.  With retail inflation breaching the RBI's prescribed limit, upside risks to inflation and bond yields remain a worry.  Should interest rates start rising,  Indian banks with a negative asset-liability gap will be the most susceptible. However, there are a few outliers too.

Indian Banks: Be Mindful of the Negative Asset-Liability Gap in the Short-Term

Silver Point

Thomas J. Monaco

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 Lands Them In Court. 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) and ruled on an interim basis that loans not declared NPL on August 31, 2020 will not be declared NPL until further notice; and*Clarification Expected September 10th. The Supreme Court noted that the RBI will have to give clarification on the interest being charged to bank customers, as the moratorium and penal interest cannot together. We await the RBI response, and would expect the RBI to clarify that interest on interest in the case of moratorium loans is not penal interest at the next next Supreme Court hearing, which will be held on September 10th.

* RBI Failure To Think Through Moratorium Lands Them In Court. 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) and ruled on an interim basis that loans not declared NPL on August 31, 2020 will not be declared NPL until further notice; and*Clarification Expected September 10th. The Supreme Court noted that the RBI will have to give clarification on the interest being charged to bank customers, as the moratorium and penal interest cannot together. We await the RBI response, and would expect the RBI to clarify that interest on interest in the case of moratorium loans is not penal interest at the next next Supreme Court hearing, which will be held on September 10th. 

Reserve Bank of India – Ooops We Did It Again

Specialist in Indian Banking and Economic Research

Hemindra Hazari

The near-absence of a government stimulus to revive the Indian economy from the Covid-19 meltdown portends a severe and prolonged economic slowdown. This will squarely hit the banking industry with huge credit costs and low growth. In such a dismal scenario, the only lever available to the banks is cost management: to reduce costs and to leverage the existing cost structure to generate more business. In both respects, banks would have to adopt a revised business model: successfully implementing digitisation, which would entail re-engineering processes, developing new businesses and  taking market share from other banks must take precedence to reduction in headcount; salary cuts (starting from the bloated remuneration given to senior management); and a re-examination of overheads. As compared with government banks, private sector banks have a higher component of non-staff costs to staff costs, on account of the incentives they pay to direct sales agents (DSAs) and for business processing outsourcing (BPO); for government banks such work is done by their own staff. In the 1QFY2021 it would appear that banks have commenced cost cutting measures, as they reported a decline in non-staff operating expenses. However, management commentary claimed that this was on account of the loss in business, which resulted in lower expenses related to the business, such as sourcing fees and commissions to direct sales agents (DSA). But nevertheless the banks in our sample, with the exception of <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a>, reported improvements in the cost-to-income (excluding domestic treasury profits) ratio.While the 1QFY2021 results reveal that the banks are aware of the importance of cost management, a lot more has to be done as credit costs in the coming days rise sharply. The only lever available to management to prop up profits in the face of the inevitable economic slowdown is to hasten the process of digitisation, thereby reducing headcount, develop new business verticals and slash salaries. Shareholders therefore need to closely monitor cost-to-income ratios stripped of treasury profits to determine which banks are successfully implementing cost management and digitalisation.

The near-absence of a government stimulus to revive the Indian economy from the Covid-19 meltdown portends a severe and prolonged economic slowdown. This will squarely hit the banking industry with huge credit costs and low growth. In such a dismal scenario, the only lever available to the banks is cost management: to reduce costs and to leverage the existing cost structure to generate more business. In both respects, banks would have to adopt a revised business model: successfully implementing digitisation, which would entail re-engineering processes, developing new businesses and  taking market share from other banks must take precedence to reduction in headcount; salary cuts (starting from the bloated remuneration given to senior management); and a re-examination of overheads. As compared with government banks, private sector banks have a higher component of non-staff costs to staff costs, on account of the incentives they pay to direct sales agents (DSAs) and for business processing outsourcing (BPO); for government banks such work is done by their own staff. In the 1QFY2021 it would appear that banks have commenced cost cutting measures, as they reported a decline in non-staff operating expenses. However, management commentary claimed that this was on account of the loss in business, which resulted in lower expenses related to the business, such as sourcing fees and commissions to direct sales agents (DSA). But nevertheless the banks in our sample, with the exception of Indusind Bank (IIB IN), reported improvements in the cost-to-income (excluding domestic treasury profits) ratio.While the 1QFY2021 results reveal that the banks are aware of the importance of cost management, a lot more has to be done as credit costs in the coming days rise sharply. The only lever available to management to prop up profits in the face of the inevitable economic slowdown is to hasten the process of digitisation, thereby reducing headcount, develop new business verticals and slash salaries. Shareholders therefore need to closely monitor cost-to-income ratios stripped of treasury profits to determine which banks are successfully implementing cost management and digitalisation.

For Banks, Cost Management Is the Only Way of Surviving the Long Slump

Equity Bottom-Up

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked quarter. Driving the results, we note positive operating jaws. Also aiding LIC’s results, we note an INR 85 mn (14.9%) decline in loss provisioning tracking the improvement in overall credit quality; and substantial tax rate decline from 54.8% to 19.7% linked quarter; and*Credit Risk Flat, But Reserves Light: Stage 3 loans at LIC declined INR 216 mn (0.4%) linked quarter to INR 59.4 bn, and remained flat relative to total loans at 2.83%.There is no doubt under our calculation that LIC’s provisions remain woefully inadequate. We believe reserves need to be buttressed in the neighborhood of INR 33 bn or an entire year on bottom-line performance.

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked quarter. Driving the results, we note positive operating jaws. Also aiding LIC’s results, we note an INR 85 mn (14.9%) decline in loss provisioning tracking the improvement in overall credit quality; and substantial tax rate decline from 54.8% to 19.7% linked quarter; and*Credit Risk Flat, But Reserves Light: Stage 3 loans at LIC declined INR 216 mn (0.4%) linked quarter to INR 59.4 bn, and remained flat relative to total loans at 2.83%.There is no doubt under our calculation that LIC’s provisions remain woefully inadequate. We believe reserves need to be buttressed in the neighborhood of INR 33 bn or an entire year on bottom-line performance. 

LIC Housing Finance - Positive Operating Deltas

SBI (State Bank of India) / Equity Bottom-Up

*CRISIL Upgrade Of YES: CRISIL (formerly Credit Rating Information Services of India Limited) [SPGI. US] recently upgraded the rating on Yes Bank’s (YES.IN) [YES] INR 200 bn in certificates of deposit (CDs) by one notch to A2+ from A2.  According to CRISIL, the upgrade reflects an improvement in the funding and liquidity profile of YES, with a gradual increase in its deposit base as well as the resent sizeable capital raise;*SBI’s Outlook Improves: Subsequent to the YES capital raise, State Bank of India’s (SBIN.IN) [SBI] stake in YES has now been reduced to from 48% to 30%. In addition, YES’stress loans have essentially been cut on half from 64% to 38%. The likelihood that SBI will have to increase its involvement in YES has significantly diminished – and the CRISIL upgrade confirms this view; and *Sector Proxy: SBI is an excellent proxy for the improvement in the Indian financial sector. SBI is managing its balance sheet well by proactively making provisions, and has one of the highest provisions on total stressed loans.

*CRISIL Upgrade Of YES: CRISIL (formerly Credit Rating Information Services of India Limited) [SPGI. US] recently upgraded the rating on Yes Bank’s (YES.IN) [YES] INR 200 bn in certificates of deposit (CDs) by one notch to A2+ from A2.  According to CRISIL, the upgrade reflects an improvement in the funding and liquidity profile of YES, with a gradual increase in its deposit base as well as the resent sizeable capital raise;*SBI’s Outlook Improves: Subsequent to the YES capital raise, State Bank of India’s (SBIN.IN) [SBI] stake in YES has now been reduced to from 48% to 30%. In addition, YES’stress loans have essentially been cut on half from 64% to 38%. The likelihood that SBI will have to increase its involvement in YES has significantly diminished – and the CRISIL upgrade confirms this view; and *Sector Proxy: SBI is an excellent proxy for the improvement in the Indian financial sector. SBI is managing its balance sheet well by proactively making provisions, and has one of the highest provisions on total stressed loans. 

India

ICICI Bank Limited operates as a bank. The Bank offers saving accounts, loans, debit, credit cards, insurance, investments, mortgages, and online banking services. ICICI Bank serves customers worldwide.

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

ICICI Bank Ltd (ICICIBC IN)

Indian Banks: Be Mindful of the Negative Asset-Liability Gap in the Short-Term

The coronavirus contagion has put forth multiple challenges for the Indian Banking sector. One of them is the marked divergence in the credit and...

Saumya Agarwal

Reserve Bank of India – Ooops We Did It Again

* RBI Failure To Think Through Moratorium Lands Them In Court. On September 3, 2020, the Supreme Court of India held a hearing on interest rate...

Thomas J. Monaco

For Banks, Cost Management Is the Only Way of Surviving the Long Slump

Banks need to develop new businesses, take market share from other banks, reduce overheads which must take precedence to reduction in headcount.

Hemindra Hazari

LIC Housing Finance - Positive Operating Deltas

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked...

Thomas J. Monaco

State Bank of India – YES We Can

*CRISIL Upgrade Of YES: CRISIL (formerly Credit Rating Information Services of India Limited) [SPGI. US] recently upgraded the rating on Yes Bank’s...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)