Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Two charts and two trade ideas:<ol>
<li>
<a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank's (CBK IN)</a> 3 7/8% coupon 2024 bond is a clear outlier relative to peer banks. The bank’s US$-debt curve may be too steep. If investors were truly concerned regarding the viability of the firm, then its credit curve would be inverted. This may represent an investment opportunity.</li>
<li>
<a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank's (ICICIBC IN)</a> 2027 bond is tight to Export Import Bank of India’s theoretical 2027 note. Our preference is the 2026 maturity ICICI note.</li>
</ol>

Executive Summary: Two charts and two trade ideas:

Canara Bank's (CBK IN) 3 7/8% coupon 2024 bond is a clear outlier relative to peer banks. The bank’s US$-debt curve may be too steep. If investors were truly concerned regarding the viability of the firm, then its credit curve would be inverted. This may represent an investment opportunity.

ICICI Bank's (ICICIBC IN) 2027 bond is tight to Export Import Bank of India’s theoretical 2027 note. Our preference is the 2026 maturity ICICI note.


India-Headquartered Bank Relative Value in 2 Charts

Executive Summary:  A slightly declining US interest rate yield curve aided in driving credit spreads tighter during the month of May while Asia’s bank credit market conditions remained largely positive, despite the recent flare-up in Covid-19 cases across the region. Global market liquidity metrics continued to push investors into risk assets and Asia’s bank debt benefitted from concerns in other parts of the market.Asia’s Tier 2 bonds slightly outperformed Additional Tier 1 (AT1) bonds during May. Both bank debt capital components generated positive total returns during the month. Given five-year effective durations, Asia's AT1 bonds have generated slightly positive total returns year-to-date while Tier 2 notes lag. As with April, Asia’s (x-Japan) US$-denominated bank bond performance diverged by duration during the month of May. Shorter-duration bonds outperformed and, for the most part, longer duration notes underperformed in Option Adjusted Spread terms.Longer duration, high BB rated bonds led spread widening over the month. These bonds were also predominantly Basel III debt capital securities. Unlike in April, there was a mixture of low and high spread bonds amongst underperformers. This suggests greater investor differentiation, via credit fundamentals, in longer duration notes.

Executive Summary:  A slightly declining US interest rate yield curve aided in driving credit spreads tighter during the month of May while Asia’s bank credit market conditions remained largely positive, despite the recent flare-up in Covid-19 cases across the region. Global market liquidity metrics continued to push investors into risk assets and Asia’s bank debt benefitted from concerns in other parts of the market.Asia’s Tier 2 bonds slightly outperformed Additional Tier 1 (AT1) bonds during May. Both bank debt capital components generated positive total returns during the month. Given five-year effective durations, Asia's AT1 bonds have generated slightly positive total returns year-to-date while Tier 2 notes lag. As with April, Asia’s (x-Japan) US$-denominated bank bond performance diverged by duration during the month of May. Shorter-duration bonds outperformed and, for the most part, longer duration notes underperformed in Option Adjusted Spread terms.Longer duration, high BB rated bonds led spread widening over the month. These bonds were also predominantly Basel III debt capital securities. Unlike in April, there was a mixture of low and high spread bonds amongst underperformers. This suggests greater investor differentiation, via credit fundamentals, in longer duration notes.

Bank Credit Compass: Asia Tier 2 and Short Duration Notes Sit in the Sweet Spot

India Financials

Saumya Agarwal

Thematic (Sector/Industry)

A year into the pandemic, Indian Banks have emerged with better-than- expected Gross NPA levels and huge Covid buffers at end  FY21.  With India's vaccination coverage at ~200 million or ~15% of total population and a sustained decline in daily count of fresh infections, many of the uncertainties are  receding. A downward bias on credit costs is now increasingly likely, and should augur well for Banks.

A year into the pandemic, Indian Banks have emerged with better-than- expected Gross NPA levels and huge Covid buffers at end  FY21.  With India's vaccination coverage at ~200 million or ~15% of total population and a sustained decline in daily count of fresh infections, many of the uncertainties are  receding. A downward bias on credit costs is now increasingly likely, and should augur well for Banks.

Indian Banks- Downward Bias on Credit Costs, as Uncertainties Recede

Specialist in Indian Banking and Economic Research

Hemindra Hazari

While <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a>  has recovered from its corporate non-performing asset (NPA) crisis, it seems to be in the midst of a management attrition problem, partly explained by significant <a href="https://thewire.in/banking/will-axis-bank-right-the-ship-with-its-mid-level-management-shake-up" target="_blank" rel="noopener">sackings</a> in FY2020. Staff turnover levels have been steadily rising in FY2018 – FY2020 (data for FY2021 not yet released). What is worrying is the attrition is across management strata, and covering all age groups. In our sample of banks ( <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a> , Axis Bank, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> and <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> ) which disclose this data, only Yes Bank has worse attrition than Axis Bank, which is understandable given Yes Bank’s precarious situation till FY2020.It is commendable of both Axis Bank and Yes Bank to have voluntarily provided detailed disclosure of attrition (unlike <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank Ltd (ICICIBC IN)</a> 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> , which provided no disclosures in this regard), enabling a meaningful analysis. The consistent rise in attrition in Axis Bank is a serious human resource (HR) problem reflecting on the bank’s <a href="https://www.axisbank.com/media-centre/board-of-directors" target="_blank" rel="noopener">board of directors</a>. Responding to a query posed by this analyst on this subject, the bank has stated that it “does not comment on internal administrative matters”. This analyst believes the high attrition can be attributed to (i) sackings, (ii) poor selection practices by the Human Resources division (responsibility of <a href="https://www.linkedin.com/in/rajesh-dahiya-4911961/?originalSubdomain=in" target="_blank" rel="noopener">Rajesh Dahiya</a>  since June 2010) in identifying appropriate candidates (especially at the entry level of sales where attrition was a shocking 69% in FY2020), (iii) excessive pressure to meet over ambitious targets, (iv) difficult working conditions, (v) poor training and (vi) inadequate resources for its staff.Axis Bank’s FY2020 annual report maintains that “its employees remain the most critical drivers for growth and success” and are the “catalyst which builds talent”. However, inexplicably, the board of directors have presided over large-scale staff attrition and allowed the attrition to keep rising. Amitabh Chaudhry took over as Chief Executive Officer (CEO), Axis Bank on January 1, 2019, and in the first week of April, 2019  <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/axis-bank-asks-more-than-50-mid-level-managers-to-leave/articleshow/68731729.cms?utm_source=whatsapp_app&amp;utm_medium=social&amp;utm_campaign=socialsharebuttons" target="_blank" rel="noopener">media reports</a> indicated significant forced removals. It is surprising that lower levels of management bore the brunt while senior executives closely associated with the previous CEO’s strategy got away. Banking is all about trust, and customers become uncomfortable when there is a constant churn of staff who service them. Nor is it healthy for any institution to have a high and consistently increasing attrition, which is a symptom of an underlying problem and signifies waste of expenditures incurred in hiring and training staff. It is also surprising that credit rating analysts have not red flagged this development. These issues can no longer be tucked away in some obscure corner in a company’s website, but will have to be mandatorily included in company’s annual reports from FY2023 as per SEBI’s <a href="https://www.sebi.gov.in/media/press-releases/may-2021/sebi-issues-circular-on-business-responsibility-and-sustainability-reporting-by-listed-entities-_50097.html" target="_blank" rel="noopener">recent</a>  business responsibility social reporting (BRSR).  By then one hopes the board of directors at Axis Bank would have woken up and addressed this critical issue.

While Axis Bank Ltd (AXSB IN)  has recovered from its corporate non-performing asset (NPA) crisis, it seems to be in the midst of a management attrition problem, partly explained by significant sackings in FY2020. Staff turnover levels have been steadily rising in FY2018 – FY2020 (data for FY2021 not yet released). What is worrying is the attrition is across management strata, and covering all age groups. In our sample of banks ( HDFC Bank (HDFCB IN) , Axis Bank, Indusind Bank (IIB IN) and Yes Bank (YES IN) ) which disclose this data, only Yes Bank has worse attrition than Axis Bank, which is understandable given Yes Bank’s precarious situation till FY2020.It is commendable of both Axis Bank and Yes Bank to have voluntarily provided detailed disclosure of attrition (unlike ICICI Bank Ltd (ICICIBC IN) and Kotak Mahindra Bank (KMB IN) , which provided no disclosures in this regard), enabling a meaningful analysis. The consistent rise in attrition in Axis Bank is a serious human resource (HR) problem reflecting on the bank’s board of directors. Responding to a query posed by this analyst on this subject, the bank has stated that it “does not comment on internal administrative matters”. This analyst believes the high attrition can be attributed to (i) sackings, (ii) poor selection practices by the Human Resources division (responsibility of Rajesh Dahiya  since June 2010) in identifying appropriate candidates (especially at the entry level of sales where attrition was a shocking 69% in FY2020), (iii) excessive pressure to meet over ambitious targets, (iv) difficult working conditions, (v) poor training and (vi) inadequate resources for its staff.Axis Bank’s FY2020 annual report maintains that “its employees remain the most critical drivers for growth and success” and are the “catalyst which builds talent”. However, inexplicably, the board of directors have presided over large-scale staff attrition and allowed the attrition to keep rising. Amitabh Chaudhry took over as Chief Executive Officer (CEO), Axis Bank on January 1, 2019, and in the first week of April, 2019  media reports indicated significant forced removals. It is surprising that lower levels of management bore the brunt while senior executives closely associated with the previous CEO’s strategy got away. Banking is all about trust, and customers become uncomfortable when there is a constant churn of staff who service them. Nor is it healthy for any institution to have a high and consistently increasing attrition, which is a symptom of an underlying problem and signifies waste of expenditures incurred in hiring and training staff. It is also surprising that credit rating analysts have not red flagged this development. These issues can no longer be tucked away in some obscure corner in a company’s website, but will have to be mandatorily included in company’s annual reports from FY2023 as per SEBI’s recent  business responsibility social reporting (BRSR).  By then one hopes the board of directors at Axis Bank would have woken up and addressed this critical issue.

Why Are Axis Bank’s Directors Mum About the Extraordinary Staff Churn?

In a little-publicised step, the Securities and Exchange Board of India (SEBI) has directed the first 1,000 companies by market capitalisation on the Indian bourses to disclose voluminous information in their <a href="https://www.sebi.gov.in/media/press-releases/may-2021/sebi-issues-circular-on-business-responsibility-and-sustainability-reporting-by-listed-entities-_50097.html" target="_blank" rel="noopener">business responsibility and sustainability</a> reporting. For FY2022 this is voluntary, but from FY2023 it is to be mandatory. This largely non-financial data may provide significant insights into large cap companies’ impact on the welfare of stakeholders (communities, employees, customers and channel partners) and the environment.Since 2012 the SEBI had mandated the disclosure of a Business Responsibility Report containing Environment, Social and Governance (ESG) parameters; however, the data was not standardised. The recent SEBI directive will standardise the data, facilitating its aggregation and its comparison across companies and industries. Even though they may not appear to be directly relevant to shareholders, these disclosures will shed light on how other stakeholders’ concerns are being addressed; and that can be relevant to the shareholders as well over the medium term. For the private sector banking and financial intermediaries, this data will reveal the near absence of trade unionism amongst their employees, and the high turnover of staff, especially at the lower levels. This turnover at the branches engaged in retail banking appears to be on account of ambitious sales targets set by the management. Such issues have typically been ignored by institutional investors, and indeed they often applaud such a policy, as it restrict wages and delivers higher profits.The disclosures stipulated by SEBI will also cover how the communities, customers, channel partners and employees view the company. Will this mean that companies will not be able to focus solely on shareholder interest, but will also have to pay attention to stakeholders’ concerns? In some cases, anti-corporate campaigners (representing workers, project-affected communities, or consumers) may find in such reports revelations that are embarrassing to the firm.The media and sell-side research have not reacted to these new requirements, as the disclosures are mainly non-financial. However, analysing and aggregating the data will provide valuable insights into companies and industries. In future, the cost of compliance for companies will increase. They will have to create separate departments, or outsource the function, in order to manage the voluminous data. It yet has to be seen how far the corporate sector cooperates, and the quality of the data provided. Nevertheless the step is likely to be helpful for understanding some aspects of the dynamics of corporate businesses in India.

In a little-publicised step, the Securities and Exchange Board of India (SEBI) has directed the first 1,000 companies by market capitalisation on the Indian bourses to disclose voluminous information in their business responsibility and sustainability reporting. For FY2022 this is voluntary, but from FY2023 it is to be mandatory. This largely non-financial data may provide significant insights into large cap companies’ impact on the welfare of stakeholders (communities, employees, customers and channel partners) and the environment.Since 2012 the SEBI had mandated the disclosure of a Business Responsibility Report containing Environment, Social and Governance (ESG) parameters; however, the data was not standardised. The recent SEBI directive will standardise the data, facilitating its aggregation and its comparison across companies and industries. Even though they may not appear to be directly relevant to shareholders, these disclosures will shed light on how other stakeholders’ concerns are being addressed; and that can be relevant to the shareholders as well over the medium term. For the private sector banking and financial intermediaries, this data will reveal the near absence of trade unionism amongst their employees, and the high turnover of staff, especially at the lower levels. This turnover at the branches engaged in retail banking appears to be on account of ambitious sales targets set by the management. Such issues have typically been ignored by institutional investors, and indeed they often applaud such a policy, as it restrict wages and delivers higher profits.The disclosures stipulated by SEBI will also cover how the communities, customers, channel partners and employees view the company. Will this mean that companies will not be able to focus solely on shareholder interest, but will also have to pay attention to stakeholders’ concerns? In some cases, anti-corporate campaigners (representing workers, project-affected communities, or consumers) may find in such reports revelations that are embarrassing to the firm.The media and sell-side research have not reacted to these new requirements, as the disclosures are mainly non-financial. However, analysing and aggregating the data will provide valuable insights into companies and industries. In future, the cost of compliance for companies will increase. They will have to create separate departments, or outsource the function, in order to manage the voluminous data. It yet has to be seen how far the corporate sector cooperates, and the quality of the data provided. Nevertheless the step is likely to be helpful for understanding some aspects of the dynamics of corporate businesses in India.

Newly Mandated Disclosures for India’s Top Corporates May Yield a Gold Mine of Information

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.

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ICICI Bank Ltd (ICICIBC IN)

India-Headquartered Bank Relative Value in 2 Charts

Two charts and two relative value trade ideas. Canara Bank’s 2024 bond looks oversold while ICICI’s 2027 note looks overbought

Hank Calenti, CFA

Bank Credit Compass: Asia Tier 2 and Short Duration Notes Sit in the Sweet Spot

Asia’s Tier 2 notes slightly outperformed AT1 in May. Shorter-duration bonds outperformed although there was greater differentiation in longer...

Hank Calenti, CFA

Indian Banks- Downward Bias on Credit Costs, as Uncertainties Recede

Indian Banks have braved the first wave well and built huge Covid related provisions. With many of the uncertainties receding, there is a downward...

Saumya Agarwal

Why Are Axis Bank’s Directors Mum About the Extraordinary Staff Churn?

Stakeholders, including credit rating agencies, need to be concerned with such high attrition rates in Axis Bank, as banking is staff intensive,...

Hemindra Hazari

Newly Mandated Disclosures for India’s Top Corporates May Yield a Gold Mine of Information

It is true that the explosion of ESG funds worldwide has not so far resulted in an improvement in ESG itself, but at least SEBI’s move may provide...

Hemindra Hazari

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