Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has <a href="https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1101" target="_blank" rel="noopener">proposed</a>, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (<a href="https://hemindrahazari.com/2019/01/31/ilfs-collapse-what-happens-when-infrastructure-development-is-privatised-hemindra-hazari/" target="_blank" rel="noopener">here</a>) 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> (<a href="https://hemindrahazari.com/2019/01/29/panel-discussion-on-cobrapost-expose-of-dhfl/" target="_blank" rel="noopener">here</a>) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has proposed, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (here) and Dewan Housing Finance (DEWH IN) (here) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

<a href="https://www.smartkarma.com/entities/housing-development-finance-corporation" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener">HDFC Limited (HDFC IN)</a> recently announced that its board has approved a fund raising of US$1.9bn in one or multiple tranches of equity or equity linked instruments
The company will take shareholders approval via postal ballot and plans to raise equity in the first tranche. 
In this insight, I'll take an early look at the deal.

HDFC Limited (HDFC IN) recently announced that its board has approved a fund raising of US$1.9bn in one or multiple tranches of equity or equity linked instruments
The company will take shareholders approval via postal ballot and plans to raise equity in the first tranche. 
In this insight, I'll take an early look at the deal. 

HDFC Placement - Early Look - Looking to Raise US$1.9bn

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 Proposal Seeks Comment By Mid-July: The Reserve Bank of India (RBI), which took over the regulation of the housing finance companies (HFCs) in August 2019, put forth a roadmap to align the regulations of HFCs with those of the non-bank financial companies (NBFC) – seeking a response from stakeholders by July 15, 2020;  and*Negative Impact to HFCs: If this roadmap is implemented by the RBI, there is no doubt that profitability of the HFCs will be further negatively impacted, given the limit on non-housing businesses (LAP and CRE). Further, NBFCs are legacy players in this space with a greater than 50% of new originations by value.

* RBI Proposal Seeks Comment By Mid-July: The Reserve Bank of India (RBI), which took over the regulation of the housing finance companies (HFCs) in August 2019, put forth a roadmap to align the regulations of HFCs with those of the non-bank financial companies (NBFC) – seeking a response from stakeholders by July 15, 2020;  and*Negative Impact to HFCs: If this roadmap is implemented by the RBI, there is no doubt that profitability of the HFCs will be further negatively impacted, given the limit on non-housing businesses (LAP and CRE). Further, NBFCs are legacy players in this space with a greater than 50% of new originations by value.

Reserve Bank of India - Still Fiddling Around A Year On

Equity Bottom-Up

*Weak Results Will Continue For Some Time: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 4Q20 profits of INR 22.3 bn – missing consensus by 7% and falling INR 61.4 bn (73.3%) short of FY3Q20 results. On a stated result basis, the difference between the linked quarters was primarily attributed to the massive INR 90.7 bn gain on sale of securities. Despite the consensus miss and excluding gains, core operating results of INR 17.9 bn exceeded the FY 3Q20’s operating loss INR 6.9 bn; and * Loss Provisioning Must Be A Priority:NCOs were de minimis at HDFC which was surprising in this COVID-9 environment; however, when we account the level of net new stage 3 loans of INR 33 bn linked quarter we find that net new NPL growth implies an annualized increase of 194% - which is high by any standard. Reserve cover to Stage 3 loans leaves much to be desired at 47.5% - versus 49.0% in FY 3Q20. Assuming just a 10% growth rate in Stage 3 loans, a more proper loss provision for FY 4Q20 would have amounted to INR 85 bn  - implying a FY4Q20 loss of INR 13.7 bn.

*Weak Results Will Continue For Some Time: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 4Q20 profits of INR 22.3 bn – missing consensus by 7% and falling INR 61.4 bn (73.3%) short of FY3Q20 results. On a stated result basis, the difference between the linked quarters was primarily attributed to the massive INR 90.7 bn gain on sale of securities. Despite the consensus miss and excluding gains, core operating results of INR 17.9 bn exceeded the FY 3Q20’s operating loss INR 6.9 bn; and * Loss Provisioning Must Be A Priority:NCOs were de minimis at HDFC which was surprising in this COVID-9 environment; however, when we account the level of net new stage 3 loans of INR 33 bn linked quarter we find that net new NPL growth implies an annualized increase of 194% - which is high by any standard. Reserve cover to Stage 3 loans leaves much to be desired at 47.5% - versus 49.0% in FY 3Q20. Assuming just a 10% growth rate in Stage 3 loans, a more proper loss provision for FY 4Q20 would have amounted to INR 85 bn  - implying a FY4Q20 loss of INR 13.7 bn.

Housing Development Finance Corp. - Provision Buffers Simply Do Not Exist

IDFC First Bank Limited / Equity Bottom-Up

*Poor Result, Despite Profit Anomaly: IDFC First Bank (IDFCBK.IN) [IDFC] reported FY 4Q20 results INR 7.2 bn – the first positive result after six consecutive quarterly losses. Improvement in linked quarter bottom-line performance was solely attributed a INR 189.3 mn (82.1%) decline in quarterly loan loss provisions. Excluding the capital gains of INR 3.2 bn  - likely associated with its Yes Bank (YESBNK.IN) stake, operating profits would have been lower by 44.4% or INR 4.0 bn;  and*Reserves Need Shoring As Tsunami of Weaker Credit Is Upon Us: IDFC posted a INR 189.2 bn (82.1%) loan loss provision decline versus FY 3Q20 – quite a surprise given the pace of deterioration in the portfolio and elevated loans now in moratorium. In our view, IDFC management has severely miscalculated is reserve needs – in fact, we would go as far to say that were it not for its capital raise over the near term provisions actually would have been INR 81 bn higher (nearly 2x higher). In other words, FY 4Q20 should have been the seventh consecutive quarterly loss at IDFC.

*Poor Result, Despite Profit Anomaly: IDFC First Bank (IDFCBK.IN) [IDFC] reported FY 4Q20 results INR 7.2 bn – the first positive result after six consecutive quarterly losses. Improvement in linked quarter bottom-line performance was solely attributed a INR 189.3 mn (82.1%) decline in quarterly loan loss provisions. Excluding the capital gains of INR 3.2 bn  - likely associated with its Yes Bank (YESBNK.IN) stake, operating profits would have been lower by 44.4% or INR 4.0 bn;  and*Reserves Need Shoring As Tsunami of Weaker Credit Is Upon Us: IDFC posted a INR 189.2 bn (82.1%) loan loss provision decline versus FY 3Q20 – quite a surprise given the pace of deterioration in the portfolio and elevated loans now in moratorium. In our view, IDFC management has severely miscalculated is reserve needs – in fact, we would go as far to say that were it not for its capital raise over the near term provisions actually would have been INR 81 bn higher (nearly 2x higher). In other words, FY 4Q20 should have been the seventh consecutive quarterly loss at IDFC. 

India

Dewan Housing Finance Corporation Ltd. provides housing finance services in India.  Dewan also leases commercial and residential premises to various companies.

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Dewan Housing Finance (DEWH IN)

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Instead of forcible conversion to banks the RBI should ensure that it improves the regulation of important NBFCs so as to ensure that these...

Hemindra Hazari

HDFC Placement - Early Look - Looking to Raise US$1.9bn

HDFC Limited (HDFC IN) recently announced that its board has approved a fund raising of US$1.9bn in one or multiple tranches of equity or equity...

Sumeet Singh

Reserve Bank of India - Still Fiddling Around A Year On

* RBI Proposal Seeks Comment By Mid-July: The Reserve Bank of India (RBI), which took over the regulation of the housing finance companies (HFCs)...

Thomas J. Monaco

Housing Development Finance Corp. - Provision Buffers Simply Do Not Exist

*Weak Results Will Continue For Some Time: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 4Q20 profits of INR 22.3 bn – missing...

Thomas J. Monaco

IDFC First Bank – False Dawn

*Poor Result, Despite Profit Anomaly: IDFC First Bank (IDFCBK.IN) [IDFC] reported FY 4Q20 results INR 7.2 bn – the first positive result after six...

Thomas J. Monaco

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