Specialist in Indian Banking and Economic Research

Hemindra Hazari

Equity Bottom-Up

<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> ’s 1QFY2022 results on July 24, 2021 highlight the need for shareholders to re-examine the bank’s retail asset strategy. ICICI Bank’s strategy was to focus on retail assets to compensate for the bulky poor-quality corporate assets that it had earlier emphasised. However, the broad economic slowdown even prior to the Covid-19 pandemic impacted all segments of the economy, and the pandemic dealt small and medium enterprises, and indeed the whole informal sector, a severe blow. A section of organised sector employees too lost their jobs or experienced pay cuts. All these developments affected retail assets of banks. Unlike <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> , which started shifting from retail assets, ICICI Bank surged ahead in retail lending even when retail asset profits declined in FY2021, and this strategy continued in 1QFY2022 despite a drastic fall in retail profits.Apparently the board of directors has taken a view that the bank has to continue to grow the overall balance sheet despite the weak economic conditions, and that, since corporate credit remains weak, the only other avenue is to grow retail assets. It is precisely this strategy that shareholders need to review and debate with the management. The past two years’ data from both ICICI Bank and HDFC Bank reveal that, on account of deteriorating retail asset quality, the contribution of retail profits before tax (PBT) to overall PBT is declining, and in 1QFY2022 it has fallen steeply. From ICICI Bank’s surge in retail assets in FY2021 and 1QFY2022, it appears that the bank believes that the past two years’ data are an anomaly, and that retail asset quality will bounce back.According to ICICI Bank, additions to gross NPAs are expected to be lower in 2QFY2022, and further improve in 2HFY2022. Given the state of the Indian economy, it may be more prudent for ICICI Bank to curtail its asset growth, de-emphasise retail loans and focus on treasury and select corporate credit to boost profitability.

ICICI Bank Ltd (ICICIBC IN) ’s 1QFY2022 results on July 24, 2021 highlight the need for shareholders to re-examine the bank’s retail asset strategy. ICICI Bank’s strategy was to focus on retail assets to compensate for the bulky poor-quality corporate assets that it had earlier emphasised. However, the broad economic slowdown even prior to the Covid-19 pandemic impacted all segments of the economy, and the pandemic dealt small and medium enterprises, and indeed the whole informal sector, a severe blow. A section of organised sector employees too lost their jobs or experienced pay cuts. All these developments affected retail assets of banks. Unlike HDFC Bank (HDFCB IN) , which started shifting from retail assets, ICICI Bank surged ahead in retail lending even when retail asset profits declined in FY2021, and this strategy continued in 1QFY2022 despite a drastic fall in retail profits.Apparently the board of directors has taken a view that the bank has to continue to grow the overall balance sheet despite the weak economic conditions, and that, since corporate credit remains weak, the only other avenue is to grow retail assets. It is precisely this strategy that shareholders need to review and debate with the management. The past two years’ data from both ICICI Bank and HDFC Bank reveal that, on account of deteriorating retail asset quality, the contribution of retail profits before tax (PBT) to overall PBT is declining, and in 1QFY2022 it has fallen steeply. From ICICI Bank’s surge in retail assets in FY2021 and 1QFY2022, it appears that the bank believes that the past two years’ data are an anomaly, and that retail asset quality will bounce back.According to ICICI Bank, additions to gross NPAs are expected to be lower in 2QFY2022, and further improve in 2HFY2022. Given the state of the Indian economy, it may be more prudent for ICICI Bank to curtail its asset growth, de-emphasise retail loans and focus on treasury and select corporate credit to boost profitability.      

Cause for Alarm – ICICI Bank’s Burgeoning Retail Lending Vulnerable to the Economy

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

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

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

<div><a href="https://www.smartkarma.com/entities/paytm-mobile-solutions-pvt-ltd" target="_blank" data-smartkarma-citation="entities:26149:1" rel="noopener">Paytm (PAYTM IN)</a> plans to raise around US$2.2bn via selling a mix of primary and secondary shares in its India IPO. The company is backed by <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> (<a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>), <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and counts <a href="https://www.smartkarma.com/entities/berkshire-hathaway-inc-cl-a" target="_blank" data-smartkarma-citation="entities:1044:1" rel="noopener">Berkshire Hathaway Inc Cl A (BRK/A US)</a> among its investors.</div><div>
Paytm offers payment services, commerce and cloud services, and financial services to 333m consumers and over 21m merchants, as of Mar 21. It offers consumers a wide selection of payment options on the Paytm app. It also offers merchants solutions that allow them to accept payments, acquire and retain consumers, improve their business operations and access financial services.
We covered the company's background and positive aspects of the deal in our earlier note, <a href="https://www.smartkarma.com/insights/paytm-one-97-pre-ipo-the-positives-will-be-one-of-india-s-largest-ipos" target="_blank" rel="noopener">Paytm (One 97) Pre-IPO - The Positives - Will Be One of India’s Largest IPOs</a>.
In this note, we will talk about the not so flattering aspects of the deal.
</div>

Paytm (PAYTM IN) plans to raise around US$2.2bn via selling a mix of primary and secondary shares in its India IPO. The company is backed by Ant Financial Services Group (6688 HK) (Alibaba Group (BABA US)), Softbank Group (9984 JP) and counts Berkshire Hathaway Inc Cl A (BRK/A US) among its investors.
Paytm offers payment services, commerce and cloud services, and financial services to 333m consumers and over 21m merchants, as of Mar 21. It offers consumers a wide selection of payment options on the Paytm app. It also offers merchants solutions that allow them to accept payments, acquire and retain consumers, improve their business operations and access financial services.
We covered the company's background and positive aspects of the deal in our earlier note, Paytm (One 97) Pre-IPO - The Positives - Will Be One of India’s Largest IPOs.
In this note, we will talk about the not so flattering aspects of the deal.


Paytm (One 97) Pre-IPO - The Negatives - Asking Valuations a Long Shot

<a href="https://www.smartkarma.com/entities/paytm-mobile-solutions-pvt-ltd" target="_blank" data-smartkarma-citation="entities:26149:1" rel="noopener">Paytm (PAYTM IN)</a> plans to raise around US$2.2bn via a mix of selling primary and secondary shares in its India IPO. The company is backed by <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> (<a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>), <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and counts <a href="https://www.smartkarma.com/entities/berkshire-hathaway-inc-cl-a" target="_blank" data-smartkarma-citation="entities:1044:1" rel="noopener">Berkshire Hathaway Inc Cl A (BRK/A US)</a> among its investors.Paytm offers payment services, commerce and cloud services, and financial services to 333m consumers and over 21m merchants, as of Mar 21. It offers consumers a wide selection of payment options on the Paytm app. It also offers merchants solutions that allow them to accept payments, acquire and retain consumers, improve their business operations and access financial services.The company clocked payment gross merchant value (GMV) of INR4tn (US$50bn) in FY21 for 114m transacting users during the year. Its users undertook a total of 7.4bn transactions in 2020. Along with its payment infrastructure, PayTM also runs a payment bank, in which it owns a 49% stake. The payment bank had a deposit base of INR52bn across 64m payment bank accounts.In this note we will talk about the positive aspects of the deal.

Paytm (PAYTM IN) plans to raise around US$2.2bn via a mix of selling primary and secondary shares in its India IPO. The company is backed by Ant Financial Services Group (6688 HK) (Alibaba Group (BABA US)), Softbank Group (9984 JP) and counts Berkshire Hathaway Inc Cl A (BRK/A US) among its investors.Paytm offers payment services, commerce and cloud services, and financial services to 333m consumers and over 21m merchants, as of Mar 21. It offers consumers a wide selection of payment options on the Paytm app. It also offers merchants solutions that allow them to accept payments, acquire and retain consumers, improve their business operations and access financial services.The company clocked payment gross merchant value (GMV) of INR4tn (US$50bn) in FY21 for 114m transacting users during the year. Its users undertook a total of 7.4bn transactions in 2020. Along with its payment infrastructure, PayTM also runs a payment bank, in which it owns a 49% stake. The payment bank had a deposit base of INR52bn across 64m payment bank accounts.In this note we will talk about the positive aspects of the deal.

Paytm (One 97) Pre-IPO - The Positives - Will Be One of India’s Largest IPOs

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released another disappointing set of results, as its FY 1Q22 bottom-line result declined another INR 4.6 bn (5.6%) to INR 77.3 bn on a linked quarter basis. The earnings disappointment came from a net interest income decline, a loss provision increase, and fee revenue weakness; and*Credit Challenged Still: We calculate that net new NPLs actually increased a whopping INR 57.6 bn or 152.8% on an annualized basis – accelerating from the INR 49.2 bn or 130.4% increase posted in FY 4Q20. By our calculation, reserves are massively short by nearly INR 316 bn or nearly an entire year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released another disappointing set of results, as its FY 1Q22 bottom-line result declined another INR 4.6 bn (5.6%) to INR 77.3 bn on a linked quarter basis. The earnings disappointment came from a net interest income decline, a loss provision increase, and fee revenue weakness; and*Credit Challenged Still: We calculate that net new NPLs actually increased a whopping INR 57.6 bn or 152.8% on an annualized basis – accelerating from the INR 49.2 bn or 130.4% increase posted in FY 4Q20. By our calculation, reserves are massively short by nearly INR 316 bn or nearly an entire year of core operating results. 

HDFC Bank – Is This Really India’s Best Bank?

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)

Cause for Alarm – ICICI Bank’s Burgeoning Retail Lending Vulnerable to the Economy

It may be more prudent for ICICI Bank to curtail its asset growth, de-emphasise retail loans and focus on treasury and select corporate credit to...

Hemindra Hazari

Bajaj Finance – Just BAFfling

BAJAJ FINANCE: Bajaj posted a QOQ FY 1Q22 results decline 25.6% driven by credit weakness in Consumer. Net new NPLs increased at 281% annualized...

Thomas J. Monaco

Paytm (One 97) Pre-IPO - The Negatives - Asking Valuations a Long Shot

Paytm (PAYTM IN) plans to raise around US$2.2bn via its India IPO. The company is backed by Ant (6688 HK) (Baba (BABA US)), Softbank (9984 JP) and...

Sumeet Singh

Paytm (One 97) Pre-IPO - The Positives - Will Be One of India’s Largest IPOs

Paytm plans to raise around US$2.2bn in its India IPO. The company is backed by Ant Fin, Softbank (9984 JP) and counts Berkshire Hathaway among its...

Sumeet Singh

HDFC Bank – Is This Really India’s Best Bank?

HDFC Bank: HDFCB QOQ results declined 5.6% due to a net interest income and fee revenue along with a loss provision increase. Reserves appear...

Thomas J. Monaco

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