In this briefing:
- RBI Confidential Reports Reveal a Gulf Between Axis Bank Annual Reports and Reality
- IndusInd Bank – Excessive Loan Growth, Especially To Property Developers
- Are Risky Assets Overvalued?
- Taking Off: Vietnamese Exports Are Rocking and Rolling
- The CPSE ETF Arb Is Back, but Tighter!
Under the threat of being pulled up for contempt of court by the Supreme Court of India, the Reserve Bank of India (RBI) finally disclosed the confidential inspection reports, called Risk Assessment Reports, of some banks requested under the Right to Information Act (RTI), 2005. The reports, though dated (from FY2013 till FY2015), provide a valuable insight into the actual working of banks, at times in contrast to the management’s commentary to shareholders at that time. In the case of Axis Bank, the divergence of views of the management and the banking supervisor is evident. Many in the sell-side and business media tend to regard management’s commentary with reverence, and these supposed sentinels regurgitate the same to their clients and the public without the rigour of critical evaluation. The now public disclosures of the RARs of banks is a rude wake-up call to these watchpersons to thoroughly scrutinize and challenge audited accounts and management commentary. Media reports cite that Axis Bank may be considering a US$ 1.3 bn equity issue, and although a new CEO has taken charge, investors may well want to exercise caution regarding management commentary in light of the RARs that have been made public.
Of India’s listed banks, there is only one that has seen credit growth higher than Indusind Bank (IIB IN) over the past three years: Yes Bank Ltd (YES IN). This is not particularly good company. Adding enormous amounts of credit risk amidst a frail economic environment can lead to high NPL growth. IndusInd Bank expanded its loans 111% over the past three years, where Yes Bank is the only listed bank higher, at 146%. Perhaps it is no wonder that IndusInd bank saw its NPLs up 132% last year, higher than all listed banks, other than Yes Bank at 200%. There are also concerns with what appears to be excessive substandard loans and over zealous growth in real estate developer loans.
US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.
In the credit space, corporate bonds are expensive, and leveraged loans unattractive.
As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.
Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.
The Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) is a passive fund that was created to help the Government of India divest some of its stake in selected CPSEs through the ETF route. The ETF is based on the Nifty CPSE index and currently includes 11 listed Central Public Sector Enterprises. The number of names in the ETF reduces to 10 once Rural Electrification (RECL IN) is kicked out this Friday, July 12.
The sixth tranche of the ETF is expected to open on July 18 to anchor investors and on July 19 to non-anchor investors. The new units are expected to start trading on July 29. The discount on the ETF will be 3%, opening up arbitrage opportunities to investors.
We also see an additional trade in Indian Oil Corp (IOCL IN) based on the ETF offering.