Specialist in Indian Banking and Economic Research

Hemindra Hazari

This analyst’s <a href="https://hemindrahazari.com/2021/09/24/deafening-silence-from-media-and-sell-side-on-hdfc-banks-processing-fee-scandal/" target="_blank" rel="noopener">research</a> note on September 24, 2021 highlighted <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 disturbing practice of extracting ‘processing fees’ from prospective customers who applied for loans using false/fabricated documents. Following this, the media finally woke up (<a href="https://www.livemint.com/industry/banking/hdfc-bank-didn-t-flag-forgery-whistleblower-11632939515803.html?utm_source=share&amp;utm_medium=social&amp;utm_campaign=share_via_web" target="_blank" rel="noopener">here</a> and <a href="https://www.bloombergquint.com/business/the-curious-case-of-hdfc-banks-penalties-on-fraudulent-loan-applications" target="_blank" rel="noopener">here</a>) from their self-induced slumber. HDFC Bank was forced to issue a <a href="https://timesofindia.indiatimes.com/business/india-business/no-fee-refund-for-fraud-loan-applications-hdfc-bank/articleshow/86695841.cms" target="_blank" rel="noopener">media statement</a>  on October 1, 2021 wherein it justified levying processing fees, citing the additional due diligence required when loan applicants submitted “discrepant/suspected documents”. HDFC Bank also claimed that the bank filed police complaints in a “number of cases” where the processing cost was levied.  The bank also explicitly stated that the fees were not for closing the case. There are some issues with HDFC Bank’s clarification to the media:<ol style="list-style-type: lower-roman;">
<li>
The statement by HDFC Bank has not been published as a <a href="https://www.hdfcbank.com/personal/about-us/news-room/press-release" target="_blank" rel="noopener">press release</a>, nor has it been informed to the stock exchanges, which would have been the proper procedure. It has been given to select media agencies and to those analysts who have specifically requested it. This is unfortunate, as it is an important clarification, which required that it be publicly disclosed.
</li>
<li>Most Indian banks do not levy fees for rejecting a loan application where false documentation has been detected.  It is also unlikely that a person who was not a customer of the bank would voluntarily agree to pay a processing fee to a bank which has rejected his/her loan application.</li>
<li>There is no specific mention in HDFC Bank’s statement to the effect that Income Tax authorities had been informed in cases where fake Permanent Account cards (PAN) and dual PAN were submitted by prospective customers applying for a loan. The bank has specifically mentioned that internal and industry databases were updated and the police were informed.</li>
<li>HDFC Bank had earlier informed this analyst that it had recently stopped levying processing fees for false documentation. If the bank’s practice was legitimate and conformed to the law why did it discontinue the practice soon after the whistle blower raised these allegations?</li>
</ol>These questions can only be answered by a thorough investigation by the Reserve Bank of India (RBI) and by the Income Tax authorities to determine whether HDFC Bank was indulging in unfair practices, and whether loan applicants who were not HDFC Bank customers were voluntarily paying the “processing fees”.It is important for the regulator and for stakeholders to examine HDFC Bank’s significant fee income and the practices and policies that are driving it. HDFC Bank should not suffer the fate that befell <a href="https://www.smartkarma.com/entities/wells-fargo-co" target="_blank" data-smartkarma-citation="entities:232:1" rel="noopener">Wells Fargo &amp; Co (WFC US)</a>.

This analyst’s research note on September 24, 2021 highlighted HDFC Bank (HDFCB IN)’s disturbing practice of extracting ‘processing fees’ from prospective customers who applied for loans using false/fabricated documents. Following this, the media finally woke up (here and here) from their self-induced slumber. HDFC Bank was forced to issue a media statement  on October 1, 2021 wherein it justified levying processing fees, citing the additional due diligence required when loan applicants submitted “discrepant/suspected documents”. HDFC Bank also claimed that the bank filed police complaints in a “number of cases” where the processing cost was levied.  The bank also explicitly stated that the fees were not for closing the case. There are some issues with HDFC Bank’s clarification to the media:

The statement by HDFC Bank has not been published as a press release, nor has it been informed to the stock exchanges, which would have been the proper procedure. It has been given to select media agencies and to those analysts who have specifically requested it. This is unfortunate, as it is an important clarification, which required that it be publicly disclosed.

Most Indian banks do not levy fees for rejecting a loan application where false documentation has been detected.  It is also unlikely that a person who was not a customer of the bank would voluntarily agree to pay a processing fee to a bank which has rejected his/her loan application.
There is no specific mention in HDFC Bank’s statement to the effect that Income Tax authorities had been informed in cases where fake Permanent Account cards (PAN) and dual PAN were submitted by prospective customers applying for a loan. The bank has specifically mentioned that internal and industry databases were updated and the police were informed.
HDFC Bank had earlier informed this analyst that it had recently stopped levying processing fees for false documentation. If the bank’s practice was legitimate and conformed to the law why did it discontinue the practice soon after the whistle blower raised these allegations?
These questions can only be answered by a thorough investigation by the Reserve Bank of India (RBI) and by the Income Tax authorities to determine whether HDFC Bank was indulging in unfair practices, and whether loan applicants who were not HDFC Bank customers were voluntarily paying the “processing fees”.It is important for the regulator and for stakeholders to examine HDFC Bank’s significant fee income and the practices and policies that are driving it. HDFC Bank should not suffer the fate that befell Wells Fargo &amp; Co (WFC US).

The Mystery of Why Rejected Applicants Paid HDFC Bank ‘Processing Fees’

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Stocks Highlighted: WFC, COF, DFS, GS, JEF, RJF, LIN, ALB, AKZOY, OLN, CC, CDAY, RHI, MAN, TNET, ASGN, NSP, TBI, KELYA, BBSI, DHX, BGSF, AMN, and CCRN.Cyclical value areas are starting to play catch-up as interest rates show signs of bottoming -- all kickstarted by Friday's better-than-expected employment report. We see many actionable opportunities, particularly within the Financial and Materials Sectors, and also several retail stocks within Consumer Discretionary. As we noted last week, despite mixed signals from the market, there continues to be an absence of breakdowns at the index and Sector level which supports our overall constructive outlook.

Stocks Highlighted: WFC, COF, DFS, GS, JEF, RJF, LIN, ALB, AKZOY, OLN, CC, CDAY, RHI, MAN, TNET, ASGN, NSP, TBI, KELYA, BBSI, DHX, BGSF, AMN, and CCRN.Cyclical value areas are starting to play catch-up as interest rates show signs of bottoming -- all kickstarted by Friday's better-than-expected employment report. We see many actionable opportunities, particularly within the Financial and Materials Sectors, and also several retail stocks within Consumer Discretionary. As we noted last week, despite mixed signals from the market, there continues to be an absence of breakdowns at the index and Sector level which supports our overall constructive outlook.

Cyclical Value Areas Improving -- Add Exposure To Financials, Materials

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

There are stark differences in how loan loss provisioning levels have changed since late 2019 to early 2021. This can have implications for relative credit costs during FY21. STAN does not fare well, Mizuho looks best.

There are stark differences in how loan loss provisioning levels have changed since late 2019 to early 2021. This can have implications for relative credit costs during FY21. STAN does not fare well, Mizuho looks best. 

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

Equity Bottom-Up

*Tax Loss Carryforwards Drive Bottom Line: Bank of America (BAC.US) [BAC] reported 2Q21 bottom-line results of USD 9.0 bn, increasing USD 1.4 bn (18.6%) linked quarter. The USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 bottom-line exceeded that of 1Q21. If BAC were taxed at the 1Q21 rate, the bottom-line result would have been closer to USD 7.1 bn or USD 500 mn (6.6%) lower on a linked quarter basis; and*BAC’s Credit Quality Best Of Money Centers: We note that net new NPLs decelerated to USD 184 mn or 13.9% on an annualized basis – far better than the USD 957 mn or 74.8% posted in 1Q21. To put this result into perspective, JPM and Citigroup each reported large increases net new NPLs on a linked quarter basis of 177% and 48%, respectively. BAC would appear to have a very comfortable reserve cushion given the run rate in net new NPLs.

*Tax Loss Carryforwards Drive Bottom Line: Bank of America (BAC.US) [BAC] reported 2Q21 bottom-line results of USD 9.0 bn, increasing USD 1.4 bn (18.6%) linked quarter. The USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 bottom-line exceeded that of 1Q21. If BAC were taxed at the 1Q21 rate, the bottom-line result would have been closer to USD 7.1 bn or USD 500 mn (6.6%) lower on a linked quarter basis; and*BAC’s Credit Quality Best Of Money Centers: We note that net new NPLs decelerated to USD 184 mn or 13.9% on an annualized basis – far better than the USD 957 mn or 74.8% posted in 1Q21. To put this result into perspective, JPM and Citigroup each reported large increases net new NPLs on a linked quarter basis of 177% and 48%, respectively. BAC would appear to have a very comfortable reserve cushion given the run rate in net new NPLs.  

*Weaker Result Across Almost All Geographic Segments: Citigroup (C.US) [Citi] reported 2Q21 bottom-line results of USD 6.2 bn, decreasing USD 1.7 bn (22.0%) linked quarter. On operating basis, Citi posted results of USD 6.0 bn, USD 1.5 bn (93.3%) ahead of 1Q21 numbers. Negative operating jaws (revenues down 8.7% and costs up 1.1%) and weakness in both Global Consumer and Institutional businesses broke Citi this quarter; and*Credit Weaker But Coverage Strong:  In light of NCOs, net new NPLs amount to USD 616 mn or increasing at the same exact pace as 1Q21 at 48.0% on an annualized basis – although not nearly as bad as JPM’s 177% increase. While reserve cover remains strong in aggregate, credit degradation appears to still be on the rise going forward at Citi. That being said, despite the elevated increase, Citi still appears likely to continue down the road of reserve releases.

*Weaker Result Across Almost All Geographic Segments: Citigroup (C.US) [Citi] reported 2Q21 bottom-line results of USD 6.2 bn, decreasing USD 1.7 bn (22.0%) linked quarter. On operating basis, Citi posted results of USD 6.0 bn, USD 1.5 bn (93.3%) ahead of 1Q21 numbers. Negative operating jaws (revenues down 8.7% and costs up 1.1%) and weakness in both Global Consumer and Institutional businesses broke Citi this quarter; and*Credit Weaker But Coverage Strong:  In light of NCOs, net new NPLs amount to USD 616 mn or increasing at the same exact pace as 1Q21 at 48.0% on an annualized basis – although not nearly as bad as JPM’s 177% increase. While reserve cover remains strong in aggregate, credit degradation appears to still be on the rise going forward at Citi. That being said, despite the elevated increase, Citi still appears likely to continue down the road of reserve releases.

United States

Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage, leasing, credit cards, and consumer finance.  The Company operates through physical stores, the Internet and other distribution channels across North America and elsewhere internationally.

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Wells Fargo & Co (WFC US)

The Mystery of Why Rejected Applicants Paid HDFC Bank ‘Processing Fees’

If the bank’s practice was legitimate and conformed to the law why did it discontinue the practice soon after the whistle blower raised these...

Hemindra Hazari

Cyclical Value Areas Improving -- Add Exposure To Financials, Materials

Cyclical value areas are starting to play catch-up as interest rates show signs of bottoming. We see many actionable opportunities, particularly...

Vermilion Research

Banks – Provisioning

There are stark differences in how provisioning levels changed since 4Q29 to early 2021. This can have implications for relative credit costs...

Daniel Tabbush

Bank of America - Brian’s Song

Bank of America: USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 results exceeded 1Q21. Net new NPLs decelerated from...

Thomas J. Monaco

Citigroup – Janes’ Pain

Citigroup: Citi reported a 22.0% QOQ 2Q21 bottom-line decline from negative operating jaws and weakness in Global Consumer and Institutional. Net...

Thomas J. Monaco

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