Specialist in Indian Banking and Economic Research

Hemindra Hazari

In a major development, the Securities and the Exchange Board of India (SEBI) has finally instructed listed entities to <a href="https://www.sebi.gov.in/media/press-releases/mar-2021/sebi-board-meeting_49648.html" target="_blank" rel="noopener">disclose</a> the audio/video recording of the analyst/institutional investors’ meet and presentations made at such meetings before the next trading day or within 24 hours, whichever is earlier. Written transcripts of such meeting will have to be uploaded on the listed entities’ websites within 5 working days. This analyst had repeatedly argued (<a href="https://hemindrahazari.com/2020/04/03/did-kotak-mahindra-bank-release-price-sensitive-information-to-a-favoured-few-in-its-conference-call/" target="_blank" rel="noopener">here</a> and <a href="https://hemindrahazari.com/2020/04/11/hdfc-bank-makes-a-move-towards-greater-transparency-for-retail-investors/" target="_blank" rel="noopener">here</a>) for such an important disclosure and in a note dated April 11, 2020 had said, <blockquote>…SEBI must ensure that listed companies and sell-side firms which they regulate are mandated to upload the audio recordings/unedited transcript of such calls immediately after the call is completed, as it is unfair to shareholders, especially retail shareholders, to be denied such information. Such transparency to all shareholders would assist in price discovery for the entire market, and not just for the favoured few institutional investors/sell-side [brokers] analysts who typically get invited to such conference calls.</blockquote>The commendable but belated instruction by SEBI will disrupt the investor relations division of listed companies and put a thick spoke in the wheel of sell-side’s institutional business model.  Interactions between listed companies and with the buy (institutional investors)/sell side are for the latter to get an extra edge by acquiring a deeper insight into the company, with the possibility of some exclusive market sensitive information. In sell-side firms, corporate access is part of the Key Result Areas (KRA) for analysts whereby they have to regularly arrange meetings with the companies they cover for the buy-side. Companies are also eager to regularly interact with institutional analysts and asset managers in the hope that it will lead to additional share purchases boosting the share price, hence both sides benefit from this umbilical relationship.  As a consequence of the SEBI notification there will a sharp reduction in official interactions between companies with the buy- and sell-side, as both parties will not want their interactions to be in the public domain. Some buy-side firms, to maintain confidentiality, do not even permit sell-side analysts who had arranged meetings with the company to be present in their one-on-one interaction with the company. Henceforth companies will have to restrict their interactions to quarterly results calls. Till now, at sell-side conferences, not only would firms address gatherings of fund managers, but select high value clients were permitted one-on-one meetings. Now this too will reduce, as the recording of the meeting would have to be in the public domain.With the implementation of this notification, sell-side analysts can get back to their job of research, which, as corporate access gained prominence, had taken a back seat to arranging meetings with companies for institutional clients. Hopefully, in the stock market there will be a drastic drop in company visit notes, where sell-side analysts behaved like stenographers and dutifully regurgitated company management commentary to their clients. Sell-side analysts can focus on differentiated, thematic research and arranging value-added calls with industry experts instead of the commoditised company calls.A fallout may be that companies may increase their off-the-record one-on-one meetings, which are held outside the company/sell and buy side premises (coffee shops/conference rooms in hotels). Although this practice is widely prevalent, it is difficult to scale-up, and SEBI must ensure that off-the-record meetings by companies do not increase.SEBI’s decision is noteworthy in that it aims to reduce the asymmetry of information in the capital market. Hopefully, companies can focus their efforts on performance, and the sell and buy side can concentrate on analysis of public information for investment management.

In a major development, the Securities and the Exchange Board of India (SEBI) has finally instructed listed entities to disclose the audio/video recording of the analyst/institutional investors’ meet and presentations made at such meetings before the next trading day or within 24 hours, whichever is earlier. Written transcripts of such meeting will have to be uploaded on the listed entities’ websites within 5 working days. This analyst had repeatedly argued (here and here) for such an important disclosure and in a note dated April 11, 2020 had said, …SEBI must ensure that listed companies and sell-side firms which they regulate are mandated to upload the audio recordings/unedited transcript of such calls immediately after the call is completed, as it is unfair to shareholders, especially retail shareholders, to be denied such information. Such transparency to all shareholders would assist in price discovery for the entire market, and not just for the favoured few institutional investors/sell-side [brokers] analysts who typically get invited to such conference calls.The commendable but belated instruction by SEBI will disrupt the investor relations division of listed companies and put a thick spoke in the wheel of sell-side’s institutional business model.  Interactions between listed companies and with the buy (institutional investors)/sell side are for the latter to get an extra edge by acquiring a deeper insight into the company, with the possibility of some exclusive market sensitive information. In sell-side firms, corporate access is part of the Key Result Areas (KRA) for analysts whereby they have to regularly arrange meetings with the companies they cover for the buy-side. Companies are also eager to regularly interact with institutional analysts and asset managers in the hope that it will lead to additional share purchases boosting the share price, hence both sides benefit from this umbilical relationship.  As a consequence of the SEBI notification there will a sharp reduction in official interactions between companies with the buy- and sell-side, as both parties will not want their interactions to be in the public domain. Some buy-side firms, to maintain confidentiality, do not even permit sell-side analysts who had arranged meetings with the company to be present in their one-on-one interaction with the company. Henceforth companies will have to restrict their interactions to quarterly results calls. Till now, at sell-side conferences, not only would firms address gatherings of fund managers, but select high value clients were permitted one-on-one meetings. Now this too will reduce, as the recording of the meeting would have to be in the public domain.With the implementation of this notification, sell-side analysts can get back to their job of research, which, as corporate access gained prominence, had taken a back seat to arranging meetings with companies for institutional clients. Hopefully, in the stock market there will be a drastic drop in company visit notes, where sell-side analysts behaved like stenographers and dutifully regurgitated company management commentary to their clients. Sell-side analysts can focus on differentiated, thematic research and arranging value-added calls with industry experts instead of the commoditised company calls.A fallout may be that companies may increase their off-the-record one-on-one meetings, which are held outside the company/sell and buy side premises (coffee shops/conference rooms in hotels). Although this practice is widely prevalent, it is difficult to scale-up, and SEBI must ensure that off-the-record meetings by companies do not increase.SEBI’s decision is noteworthy in that it aims to reduce the asymmetry of information in the capital market. Hopefully, companies can focus their efforts on performance, and the sell and buy side can concentrate on analysis of public information for investment management. 

SEBI Disclosure Circular, a Blow Against the Exclusive Information Club

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

Thematic (Sector/Industry)

*Can Kicked Less Far: On March 23, 2021, the Supreme Court in a final ruling  rejected pleas for a complete waiver of interest on loans under moratorium; ; and*Good News For Banks Is Still Bad News: Despite the favorable RBI Supreme Court ruling, Indian financial sector credit quality remains amongst the worst in Asia and globally. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those to the woodpile of Indian NPLs. Massive capital raises need to occur within the sector.

*Can Kicked Less Far: On March 23, 2021, the Supreme Court in a final ruling  rejected pleas for a complete waiver of interest on loans under moratorium; ; and*Good News For Banks Is Still Bad News: Despite the favorable RBI Supreme Court ruling, Indian financial sector credit quality remains amongst the worst in Asia and globally. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those to the woodpile of Indian NPLs. Massive capital raises need to occur within the sector.  

Reserve Bank of India – Heads You Win, Tails I Lose

Equity Bottom-Up

*KMB’s Lack Of Credit Discussion Raises Eyebrows:On a competitor call, Kotak Mahindra Bank (KMB.IN) [KMB] management only spoke about the potential macro recovery with the ongoing COVID-19 vaccinations, and how well-prepared that the Indian financial sector is to address the current pandemic. It cited broadly stable NIMs with continued improvement in loan-to-deposit ratio, and held a discussion on loan growth;  and  *Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarters of stated PBT…for now.

*KMB’s Lack Of Credit Discussion Raises Eyebrows:On a competitor call, Kotak Mahindra Bank (KMB.IN) [KMB] management only spoke about the potential macro recovery with the ongoing COVID-19 vaccinations, and how well-prepared that the Indian financial sector is to address the current pandemic. It cited broadly stable NIMs with continued improvement in loan-to-deposit ratio, and held a discussion on loan growth;  and  *Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarters of stated PBT…for now. 

Kotak Mahindra Bank – Failing To Answer The Hard Questions

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.   

HDFC Bank – Story Appears Different From Reality

*Banks’ Insurance Investment Restrictions On The Way: Although not confirmed, the Reserve Bank of India (RBI) is contemplating limiting bank ownership in insurance companies to a maximum 20% stake. The RBI is apparently growing uncomfortable with the higher ownership in insurers due to their higher capital requirements.  Instead, the RBI would prefer that its constituent banks focus on their core business; and*RBI Has More Important Things To Concern Itself With: Given where we are in the credit cycle – with annualized net new NPL growth in many instances exceeding 100% and banks already insolvent, it would appear that the RBI has better things to concern itself over rather than a bank’s low absolute investment in insurance companies – investments which are posting positive results unlike most core businesses of the Indian commercial banks.

*Banks’ Insurance Investment Restrictions On The Way: Although not confirmed, the Reserve Bank of India (RBI) is contemplating limiting bank ownership in insurance companies to a maximum 20% stake. The RBI is apparently growing uncomfortable with the higher ownership in insurers due to their higher capital requirements.  Instead, the RBI would prefer that its constituent banks focus on their core business; and*RBI Has More Important Things To Concern Itself With: Given where we are in the credit cycle – with annualized net new NPL growth in many instances exceeding 100% and banks already insolvent, it would appear that the RBI has better things to concern itself over rather than a bank’s low absolute investment in insurance companies – investments which are posting positive results unlike most core businesses of the Indian commercial banks.  

Reserve Bank of India – Idle Hands Are The Devil’s Workshop

India

iShares MSCI India Index ETF is an exchange-traded fund registered in Singapore. The Fund seeks to provide investment results that, before expenses, closely correspond to the performance of the MSCI India Index. The Fund invests all or substantially all of its assets in shares comprising the MSCI India Index in substantially the same weightings as constituted in the underlying index.

iShares MSCI India Index ETF (INDIA SP)

SEBI Disclosure Circular, a Blow Against the Exclusive Information Club

The commendable but belated instruction by SEBI will disrupt the investor relations division of listed companies and put a thick spoke in the wheel...

Hemindra Hazari

Reserve Bank of India – Heads You Win, Tails I Lose

RESERVE BANK OF INDIA: The Supreme Court rejected pleas for a complete waiver of interest on loans under moratorium. Nevertheless, the Indian...

Thomas J. Monaco

Kotak Mahindra Bank – Failing To Answer The Hard Questions

KOTAK MAHINDRA BANK: On a recent call, KMB spoke of macro recovery. KMB’s is not exhibiting any sign of recovery as net new NPLs increased 122.8%.

Thomas J. Monaco

HDFC Bank – Story Appears Different From Reality

HDFC BANK: HDFCB recently put a positive spin on nearly every aspect of its business. However, credit quality and provision realities are far...

Thomas J. Monaco

Reserve Bank of India – Idle Hands Are The Devil’s Workshop

RESERVE BANK OF INDIA: The RBI is contemplating limiting bank ownership in insurance companies to a maximum 20%. Given where we are in the credit...

Thomas J. Monaco