Specialist in Indian Banking and Economic Research

Hemindra Hazari

The Reserve Bank of India’s (RBI) decision to temporarily put a halt to all digital launches of <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>’s financial products and also cease all new issuances of credit cards by the bank brings to the fore the huge reputational risk on account of the bank ignoring its technology issues. But further, it impacts its future revenue, especially from its highly lucrative credit cards business. The bank is the market leader in credit cards, with a 31.4% share by card spend, and its 3 month average (July-September) addition was 136,044 cards per month, which is the likely loss to the bank as rivals compete for these additional cards in the following months. In FY2020, <a href="https://www.hdfcbank.com/content/bbp/repositories/723fb80a-2dde-42a3-9793-7ae1be57c87f/?path=/Footer/About%20Us/Investor%20Relation/Detail%20PAges/inverstor%20relation/PDF%27s/Q3FY20%20Rev.pdf" target="_blank" rel="noopener">95%</a> of customers initiated transactions via its digital (internet and mobile) channel and as on September 30, the bank had consolidated assets of US$ 225 bn. In <a href="https://hemindrahazari.com/2019/12/09/hdfc-banks-digital-disaster-no-recovery-plan/" target="_blank" rel="noopener">December 2019</a>, this analyst was one of the few to highlight the obvious deficiencies in HDFC Bank’s digital operations, the lack of clear and relevant communication to the public and to customers by the bank, and, most worryingly, the absence of a disaster recovery plan, which should have been taken up on a war footing by the bank’s board of directors.The RBI’s order specifies that the “Bank’s board examines the lapses and fixes accountability”, which indicates that in the past year the HDFC Bank’s high profile <a href="https://www.hdfcbank.com/personal/about-us/corporate-governance/composition-of-the-board" target="_blank" rel="noopener">board of directors</a> has not given this issue the importance it deserves by examining the cause for the failure of its digital operations, and the remedial actions to be adopted to prevent its recurrence; nor has it fixed accountability. A professional board would have given such a basic task high priority soon after the lengthy digital outages of last December. That it takes a humiliating public directive from the banking regulator to remind the HDFC Bank’s Board to do its job is indicative of the corporate governance practiced in India’s most valuable bank.

The Reserve Bank of India’s (RBI) decision to temporarily put a halt to all digital launches of HDFC Bank (HDFCB IN)’s financial products and also cease all new issuances of credit cards by the bank brings to the fore the huge reputational risk on account of the bank ignoring its technology issues. But further, it impacts its future revenue, especially from its highly lucrative credit cards business. The bank is the market leader in credit cards, with a 31.4% share by card spend, and its 3 month average (July-September) addition was 136,044 cards per month, which is the likely loss to the bank as rivals compete for these additional cards in the following months. In FY2020, 95% of customers initiated transactions via its digital (internet and mobile) channel and as on September 30, the bank had consolidated assets of US$ 225 bn. In December 2019, this analyst was one of the few to highlight the obvious deficiencies in HDFC Bank’s digital operations, the lack of clear and relevant communication to the public and to customers by the bank, and, most worryingly, the absence of a disaster recovery plan, which should have been taken up on a war footing by the bank’s board of directors.The RBI’s order specifies that the “Bank’s board examines the lapses and fixes accountability”, which indicates that in the past year the HDFC Bank’s high profile board of directors has not given this issue the importance it deserves by examining the cause for the failure of its digital operations, and the remedial actions to be adopted to prevent its recurrence; nor has it fixed accountability. A professional board would have given such a basic task high priority soon after the lengthy digital outages of last December. That it takes a humiliating public directive from the banking regulator to remind the HDFC Bank’s Board to do its job is indicative of the corporate governance practiced in India’s most valuable bank.

HDFC Bank’s Digital Irresponsibility: RBI’s Novel Penalty Hits Where It Hurts

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 Bottom-Up

SBI Cards & Payment Services / Equity Bottom-Up

<div><a href="https://www.smartkarma.com/entities/sbi-cards-payment-services-limited" target="_blank" data-smartkarma-citation="entities:28662:1" rel="noopener">SBI Cards (SBICARD IN)</a> is India's second largest credit card issuer with a market share of 18.7% in terms of number of cards outstanding. SBI Cards is a subsidiary of <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank Of India (SBIN IN)</a>, India’s largest commercial bank, and has Carlyle as its second largest share holder.</div><div>The stock made a tepid debut in the market in Mar 2020, owing to the timing being closely aligned with the COVID-19 onslaught. Its now trading above its listing price, and its operations are normalising. Furthermore, its largest competitor and the market leader in credit cards, <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> was recently barred by the banking regulator from issuing credit cards.</div>

SBI Cards (SBICARD IN) is India's second largest credit card issuer with a market share of 18.7% in terms of number of cards outstanding. SBI Cards is a subsidiary of State Bank Of India (SBIN IN), India’s largest commercial bank, and has Carlyle as its second largest share holder.The stock made a tepid debut in the market in Mar 2020, owing to the timing being closely aligned with the COVID-19 onslaught. Its now trading above its listing price, and its operations are normalising. Furthermore, its largest competitor and the market leader in credit cards, HDFC Bank (HDFCB IN) was recently barred by the banking regulator from issuing credit cards.

2021 High Conviction - SBI Cards & Payments - Multiple Tailwinds, Including Biggest Peers Recent Ban

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a>. One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a>. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-yes-stressed-deposit-flight-simulation" target="_blank" data-smartkarma-citation="insights:44213" rel="noopener">Yes-Stressed Deposit Flight Simulation</a>.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-missing-deposit-miasma-1-year-after-yes-bank-s-silent-run" target="_blank" data-smartkarma-citation="insights:45438" rel="noopener">Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run</a>.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

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

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

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

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion; LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well.

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion; LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well. 

Thematic (Sector/Industry)

*Adding To The Confusion Again: Just when we thought Indian banking couldn’t get any muddier, the Reserve Bank of India (RBI) released its Report of the Internal Working Group (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks which convened on June 12, 2020; and*Proposed Changes: The IWG has proposed: a) a higher promoter stake cap of 26% (from 15% currently); b) harmonization of corporate structures to non-operative financial holding companies (NOFHC); c) large corporates can be given a banking license subject to conditions and checks; and d) large non-bank financial companies (NBFCs) with assets greater than INR 500 bn can be considered for a banking license.

*Adding To The Confusion Again: Just when we thought Indian banking couldn’t get any muddier, the Reserve Bank of India (RBI) released its Report of the Internal Working Group (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks which convened on June 12, 2020; and*Proposed Changes: The IWG has proposed: a) a higher promoter stake cap of 26% (from 15% currently); b) harmonization of corporate structures to non-operative financial holding companies (NOFHC); c) large corporates can be given a banking license subject to conditions and checks; and d) large non-bank financial companies (NBFCs) with assets greater than INR 500 bn can be considered for a banking license.

Reserve Bank of India – How Simple Becomes Really Complicated

India

HDFC Bank Ltd. offers a wide range of services to the global corporate sector. The Bank provides corporate banking and custodial services and is active in the treasury and capital markets. HDFC also markets project advisory services and capital market products such as Global Deposit Receipts, Euro currency loans, and Euro currency bonds.

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HDFC Bank (HDFCB IN)

HDFC Bank’s Digital Irresponsibility: RBI’s Novel Penalty Hits Where It Hurts

That it takes a humiliating public directive from the banking regulator to remind the HDFC Bank’s Board to do its job is indicative of the...

Hemindra Hazari

2021 High Conviction - SBI Cards & Payments - Multiple Tailwinds, Including Biggest Peers Recent Ban

SBI Cards is India's second largest credit card issuer with a market share of 18.7%. SBI Cards is a subsidiary of State Bank Of India (SBIN IN)...

Sumeet Singh

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

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

Hank Calenti, CFA

DBS Group Holdings – The LVB Cram Down

DBS GROUP HOLDINGS: The LVB Cram-down Raises Significant Questions Over Potential Cost For DBS, Raises Significant Concerns Over Audited Financial...

Thomas J. Monaco

Reserve Bank of India – How Simple Becomes Really Complicated

RESERVE BANK OF INDIA: New Just when we thought Indian banking couldn’t get any muddier, the Reserve Bank of India (RBI) released its Report of the...

Thomas J. Monaco

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