Banking & Finance – Page 515

HDFC Bank Q3: Continued growth momentum, provisioning buffer lend comfort

January 16, 2021 root Banking & Finance

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HDFC Bank’s business update that was released over a week ago, reporting 16 per cent YoY growth in loans—way above the industry growth of 6.7 per cent, and strong traction in low cost CASA deposits, had suggested continued growth momentum for the private lender in the December quarter. In line with market expectations, HDFC Bank has delivered a healthy financial performance, reporting 18 per cent YoY growth in profit in December quarter, aided by healthy traction in corporate loans and trading gains, even as excess liquidity continued to weigh on the bank’s core net interest margin (NIMs).

But there were other key trends and management commentary that were keenly awaited. Post the RBI temporarily halting the bank’s acquisition of new credit card customers and all launches under its Digital 2.0 initiative in December, there have been concerns over the directive’s impact on the bank’s growth outlook and market share. The management post the Q3 results, stated that it is in the process of taking necessary remedial measures to strengthen its digital infrastructure and will update on the progress going ahead. Given that the credit card business has been a key driver of retail loan growth for the bank in recent years, near term growth and valuations could come under pressure, until there is more clarity on this front.

Recent management churn also adds an element of uncertainty. The key to the bank’s premium valuations will lie in tiding over these near term challenges.

That said, HDFC Bank continues to score over other players on its digital and technological drive, overall business momentum, strong operational metrics and higher provisioning buffer.

Impact of credit card business

Over the past few years, HDFC Bank has been gaining market share, amid lacklustre industry growth and challenges, thanks to its diversified loan mix. Hence, even as retail loan growth slowed in FY19 and FY20, strong growth in corporate loans, held the bank’s overall growth momentum. In the first half of the current fiscal too, even as the pandemic impacted retail credit growth, HDFC Bank’s corporate segment continued to deliver strong growth, aiding earnings.

In the latest December quarter, the management stated that retail disbursements have surpassed pre-Covid levels, thanks to the festive season. Corporate loans continued to register strong growth of 25.5 per cent in the December quarter (26.5 per cent in the September quarter).

While retail loan growth picking up is a positive, headwinds in the bank’s credit card business can impact growth in the near term. Since FY18, HDFC Bank’s growth in credit cards has been outpacing that of industry. Even in the first nine months of the current fiscal, HDFC Bank’s credit card has grown at a higher pace than the overall industry growth within the segment.

That said, in the December quarter HDFC Bank delivered a resilient performance, with strong traction in deposits alongside healthy growth in corporate loans aiding earnings. Low cost CASA deposits grew by a strong 29.6 per cent, offering cushion to NIMs. Importantly, the bank’s structurally low cost-to-income ratio is a key positive. In the December quarter cost-to-income ratio stood at 36.1 per cent as against 37.9 per cent for the corresponding quarter last year.

Prudent provisioning

While the bank’s reported GNPA ratio stood at 0.81 per cent, on a proforma basis (if the bank had classified borrower accounts as NPA after August 31, 2020 had it not been for the Supreme Court asset classification standstill), GNPA ratio would have been 1.38 per cent.

However, HDFC Bank has made contingent provisions on such accounts alongside Covid-related provisions. This should provide cushion to earnings if asset quality deteriorates here on. The bank holds floating provisions of ₹ 1,451 crore and contingent provisions of ₹ 8,656 crore as on December.

The bank’s NBFC subsidiary, HDB Financial Services, remains a weak link, which has witnessed uptick in bad loans—GNPA ratio at 5.9 per cent (proforma basis) up from 2.9 per cent last year.

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Finmin looks at BIC model after RBI raises concern over zero coupon bonds for PSBs recap

January 16, 2021 root Banking & Finance

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With the RBI raising concern over the issuance of zero coupon bonds for recapitalisation of public sector banks (PSBs), the Finance Ministry is examining other avenues for affordable capital infusion including setting up of a Bank Investment Company (BIC), sources said.

Setting up a BIC as a holding company or a core investment company was suggested by the P J Nayak Committee in its report on ‘Governance of Boards of Banks in India’.

The report recommended transferring shares of the government in the banks to the BIC which would become the parent holding company of all these banks, as a result of this, all the PSBs would become ‘limited’ banks. BIC will be autonomous and it will have the power to appoint the board of directors and make other policy decisions about subsidiaries.

Capital infusion

The idea of BIC, which will serve as a super holding company, was also discussed at the first Gyan Sangam bankers’ retreat organised in 2014, sources said, adding it was proposed that the holding company would look into the capital needs of banks and arrange funds for them without government support.

It would also look at alternative ways of raising capital such as the sale of non-voting shares in a bid to garner affordable capital.

With this in place, the dependence of PSBs on government support would also come down and ease fiscal pressure.

To save interest burden and ease the fiscal pressure, the government decided to issue zero-coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of ₹ 5,500 crore into Punjab & Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the RBI expressed concerns over zero-coupon bonds for the recapitalisation of PSBs. The RBI has raised some issues with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par, the sources said.

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value, they added.

As these special bonds are non-interest bearing and issued at par to a bank, it would be an investment, which would not earn any return but rather depreciate with each passing year.

Parliament had in September 2020 approved ₹ 20,000 crore to be made available for the recapitalisation of PSBs. Of this, ₹ 5,500 crore was issued to Punjab & Sind Bank and the Finance Ministry will take a call on the remaining ₹ 14,500 crore during this quarter.

Recapitalisation bonds

With mounting capital requirement owing to rising NPAs, the government resorted to recapitalisation bonds with a coupon rate for capital infusion into PSBs during 2017-18 and interest payment to banks for holding such bonds started from the next financial year.

This mechanism helped the government from making capital infusion from its own resources rather utilised banks’ money for the financial assistance.

However, the mechanism had a cost of interest payment towards the recapitalisation bonds for PSBs. During 2018-19, the government paid ₹ 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in the capital so that they could meet the regulatory norms under the Basel-III guidelines.

In the subsequent year, according to the official document, the interest payment by the government surged three times to ₹ 16,285.99 crore to PSBs as they have been holding these papers.

Under this mechanism, the government issues recapitalisation bonds to a public sector bank which needs capital. The said bank subscribes to the paper against which the government receives the money. Now, the money received goes as equity capital of the bank.

So the government doesn’t have to pay anything from its pocket. However, the money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest.

In all, the government has issued about ₹ 2.5 lakh crore recapitalisation in the last three financial years. In the first year, the government issued ₹ 80,000 crore recapitalisation bonds, followed by ₹ 1.06 lakh crore in 2018-19. During the last financial year, the capital infusion through bonds was ₹ 65,443 crore.

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HDFC Bank reports 18% rise in Q3 net profit

January 16, 2021 root Banking & Finance

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Private sector lender HDFC Bank reported an 18.1 per cent increase in its net profit for the third quarter this fiscal at Rs 8,758.29 crore.

The bank had a standalone net profit of Rs 7,416.48 crore in the same period last fiscal.

For the quarter ended December 31, 2020, HDFC Bank’s net revenues (net interest income plus other income) grew to ₹ 23,760.8 crore from ₹ 20,842.2 crore a year ago.

Net interest income (interest earned less interest expended) for the quarter ended December 31, 2020 grew by 15.1per cent to ₹ 16,317.6 crore from ₹ 14,172.9 crore for the same period last fiscal.

In a statement on Saturday, the bank said this was “driven by advances growth of 15.6 per cent, and a core net interest margin for the quarter of 4.2 per cent”.

Provisions and contingencies for the third quarter this fiscal rose to ₹ 3,414.1 crore as against ₹ 3,043.6 crore for the quarter ended December 31, 2019. “Total provisions for the current quarter include contingent provisions of approximately ₹ 2,400 crore for proforma NPA as described in the asset quality section below,”it said.

The Gross and Net non-performing assets were at 0.81 per cent of gross advances and 0.09 per cent of net advances as on December 31, 2020 respectively. The restructuring under RBI resolution framework for Covid-19 was approximately 0.5 per cent of advances.

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HDFC Bank reports 18% jump in net profit to Rs 8,758 crore; gross NPA ratio at 0.81%

January 16, 2021 root Banking & Finance

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In terms of asset quality, HDFC Bank noted that gross and net non-performing assets were at 0.81% of gross advances and 0.09% of net advances.

India’s largest private sector lender HDFC Bank, today reported an 18.1% on-year rise in net profit during the fiscal third quarter. HDFC Bank’s standalone net profit stood at Rs 8,758 crore in the October-December quarter against Rs 7,416 crore in the same period last year. The bank’s net revenue was recorded at Rs 23,760 crore against Rs 20,842 crore from the year-ago period. On a consolidated basis, HDFC Bank’s net profit for the period under review was Rs 8,769 crore, against Rs 7,659 crore in the previous year.

HDFC Bank’s net interest income for the previous quarter grew 15.1% to Rs 16,317 crore helped by growth in advances, which was at 15.6%. The liquidity coverage ration of HDFC Bank was reported to be at 146%, well above the regulatory limit. Other income in the said period was at Rs 7,443 crore, 31.3% of the net revenue.

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RBI open to examining bad bank proposal, says Shaktikanta Das; wants lenders to identify risks early

January 16, 2021 root Banking & Finance

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The RBI Governor said that the idea of a bad bank has been under discussion for a long time.

Reserve Bank of India Governor Shaktikanta Das today said that the central bank is open to looking at a proposal around setting up a bad bank. “Bad bank under discussion for a long time. We at RBI have regulatory guidelines for Asset reconstruction companies and are open to looking at any proposal to set up a bad bank,” Shaktikanta Das said while delivering the 39th Nani Palkhivala Memorial Lecture on Saturday. Das touched up on a range of issue during the event as he lauded the role played by the RBI during a pandemic.

Bad Bank for India?

The RBI Governor said that the idea of a bad bank has been under discussion for a long time now but added that the RBI tries to keep its regulatory framework in sync with the requirement of the times. “We are open (to look at bad bank proposal) in the sense, if any proposal comes we will examining it and issuing the regulatory guidelines. But, then it is for the government and the private players to plan for it,” Das said. He added that RBI will only take a view on any proposal only after examining it.

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The Idea of setting up a bad bank to help the banking system of the country has picked up after Economic Affairs Secretary, Tarun Bajaj earlier last month, said that the government is exploring all options, including a bad bad, to help the health of the lenders in the country. However, earlier in June last year, Chief Economic Advisor Krishnamurthy Subramanian had opined that setting up a bad bank may not be a potent option to address the NPA woes in the banking sector.

Discussion the idea of bad banks, domestic brokerage and research firm Kotak Securities this week said that it may be an idea whose time has passed. “Today, the banking system is relatively more solid with slippages declining in the corporate segment for the past two years and high NPL coverage ratios, which enable faster resolution. Establishing a bad bank today would aggregate but not serve the purpose that we have observed in other markets,” a recent report by Kotak Securities said.

Banks, NBFCs need to identify risks early

Looking ahead, Shaktikanta Das said that integrity and quality of governance are key to good health and robustness of banks and NBFCs. “Some of the integral elements of the risk management framework of banks would include effective early warning systems and a forward-looking stress testing framework. Banks and NBFCs need to identify risks early, monitor them closely and manage them effectively,” he added.

Talking about recapitalising banks, the RBI governor said that financial institutions in India have to walk on a tight rope. The RBI has advised all lenders, to assess the impact of the pandemic on their balance sheets and work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others. “Preliminary estimates suggest that potential recapitalisation requirements for meeting regulatory norms as well as for supporting growth capital may be to the extent of 150 bps of Common Equity Tier-I 10 capital ratio for the banking system,” Shaktikanta Das said.

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Open to look at proposal for setting up bad bank: RBI

January 16, 2021 root Banking & Finance

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The Reserve Bank of India (RBI) is open to looking at any proposal for setting up a bad bank, according to Reserve Bank of India (RBI) Governor Shaktikanta Das.

“A bad bank has been under discussion for a very long time. We have regulatory guidelines for Asset Reconstruction Companies (ARCs). If any proposal (for setting up a bad bank) comes, we are open to examining it and issuing required regulatory guidelines,” Das said in an interaction with participants after delivering the Nani Palkhivala Memorial Lecture.

The Governor emphasised that it is for the government and other private sector players to really plan for the bad bank.

“As far as RBI is concerned, we try to keep our regulatory framework in sync with the requirement of the times. If there is a proposal for setting up a bad bank, RBI will examine and take a view on that,” Das said.

Also read: Bad bank should have been set up 3-4 years back, not now: Kotak Securities report

The Economic Survey 2016-17 had suggested setting up of a centralised Public Sector Asset Rehabilitation Agency (PARA) to take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt. But no steps have been initiated so far to set up PARA.

Later, in 2018, the Sunil Mehta committee had recommended an Asset Management Company-led resolution approach for loans over ₹500 crore. This proposal too, has remained only on paper.

The need to set up a bad bank assumes importance in the context of macro stress tests for credit risks conducted by RBI showing that the gross non-performing asset (GNPA) ratio of Scheduled Commercial Banks (SCBs) may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario.

If the macro economic environment deteriorates, the ratio may escalate to 14.8 per cent under the severe stress scenario. These projections are indicative of the possible economic impairment latent in banks’ portfolios, according to RBI’s latest Financial Stability Report (FSR).

In his lecture, the Governor noted that the current Covid-19 pandemic-related shock will place greater pressure on the balance sheets of banks in terms of non-performing assets, leading to erosion of capital.

“Building buffers and raising capital by banks – both in the public and private sectors – will be crucial not only to ensure credit flow but also to build resilience in the financial system. We have advised all banks, large non-deposit taking NBFCs (non-banking finance companies) and all deposit-taking NBFCs to assess the impact of Covid-19 on their balance sheets, asset quality, liquidity, profitability and capital adequacy, and work out possible mitigation measures, including capital planning, capital raising, and contingency liquidity planning, among others,” he said.

Prudently, a few large public sector banks (PSBs) and major private sector banks (PVBs) have already raised capital, and some have plans to raise further resources taking advantage of benign financial conditions. He emphasised that this process needs to be put on the fast track.

Also read: RBI FSR: Bad loans can rise to 13.5% by Septemberas regulatory reliefs are rolled back

Das observed that the integrity and quality of governance are key to good health and robustness of banks and NBFCs.

“Recent events in our rapidly evolving financial landscape have led to increasing scrutiny of the role of promoters, major shareholders and senior management vis-à-vis the role of the Board. The RBI is constantly focussed on strengthening the related regulations and deepening its supervision of financial entities…Some more measures on improving governance in banks and NBFCs are in the pipeline,” he said.

Capital inflows

While abundant capital inflows have been largely driven by accommodative global liquidity conditions and India’s optimistic medium-term growth outlook, domestic financial markets must remain prepared for sudden stops and reversals, should the global risk aversion factors take hold, said Das.

Under uncertain global economic environment, emerging market economies (EMEs) typically remain at the receiving end, he added.

“In order to mitigate global spillovers, they have no recourse but to build their own forex reserve buffers, even though at the cost of being included in the list of currency manipulators or monitoring list of the US Treasury. I feel that this aspect needs greater understanding on both sides, so that EMEs can actively use policy tools to overcome the capital flow-related challenges,” Das said.

The Reserve Bank is closely monitoring both global headwinds and tailwinds while assessing the domestic macro economic situation and its resilience.

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FD holders vote against DHFL resolution plan proposals

January 16, 2021 root Banking & Finance

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Continuing their demand for full repayment of their investments, fixed deposit holders of Dewan Housing Finance Corporation Ltd (DHFL) voted against all the proposals as part of the resolution process.

Voting on the proposals by the Committee of Creditors ended on January 15.

Public depositors, who have a 6.18 per cent share in the voting mechanism, voted against all the proposals.

“We will continue to fight the case in the National Company Law Tribunal. We believe that voting against the proposals will strengthen our case,” said Vinay Kumar Mittal, a lead petitioner in the court on behalf of FD holders of DHFL.

The NCLT is hearing a petition of FD holders on DHFL dues and the next hearing is scheduled on January 20.

FD holders have been opposing the resolution plan as many of them would get negligible amount of their investments back.

Under the proposal for payout to FD holders and non-convertible debenture holders for DHFL, they will be divided into four categories based on the value of their admitted claims.

The first category of up to ₹2 lakh will get 100 per cent repayment of the principal under the resolution mechanism.

“The aggregate additional amounts to be distributed to the FD holders in Category 1 and secured NCD holders in Category 1 shall be paid in full to the extent of principal from upfront cash up to two per cent of the resolution plan payment with the intention of providing the maximum principal recovery to them basis amounts available,” said the proposal.

The second category is between ₹2 lakh and ₹5 lakh, followed by the third category of ₹5 lakh to ₹10 lakh and the fourth category would be of over ₹10 lakh.

The proposal has however, been approved by the CoC with about 87 per cent of votes in favour of it.

Piramal Capital and Housing Finance, which has emerged as the winning bidder for DHFL, is understood to have set aside funds for FD holders in its resolution plan.

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JPMorgan’s profits jump as economy, investment bank recovers, BFSI News, ET BFSI

January 16, 2021 root Banking & Finance

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JPMorgan Chase & Co, the nation’s largest bank by assets, said its fourth quarter profits jumped by 42 per cent from a year earlier, as the firm’s investment banking division had a stellar quarter and its balance sheet improved despite the pandemic.

The New York-based bank said it earned a profit of USD 12.14 billion, or USD 3.79 per share, up from a profit of USD 8.52 billion, or USD 2.57 per share, in the same period a year ago. Excluding one-time items, the bank earned USD 3.07 a share, which is well above the USD 2.62 per share forecast analysts had for the bank.

The one-time item was JPMorgan “releasing” some of the funds it had set aside last year to cover potential loan losses caused by the coronavirus pandemic and subsequent recession. Banks had set aside tens of billions of dollars to cover potentially bad loans, and JPMorgan had been particularly aggressive in setting aside funds early in the pandemic.

Releasing those funds goes straight to a bank’s bottom line when it reports its results, but it’s not money that the bank generated from loans, customers or borrowers. It’s just funds that were effectively put into escrow and are no longer in escrow.

The USD 1.9 billion release is only a fraction of what JPMorgan set aside last year, and with the pandemic raging across the globe and particularly here in the U.S., it’s uncertain how much more the bank will release in the upcoming quarter.

“While positive vaccine and stimulus developments contributed to these reserve releases this quarter, our credit reserves of over USD 30 billion continue to reflect significant near-term economic uncertainty,” said JPMorgan CEO Jamie Dimon in a statement.

The driver of JPMorgan’s profits this quarter was the investment banking business. The corporate and investment bank posted a profit of USD 5.35 billion compared with USD 2.94 billion in the same period a year earlier. JPMorgan said it saw higher investment banking fees – money banks collect to advise companies on going public or buying other companies – as well as higher fees from its trading desks.

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Non-food credit growth at eight-month high of 6.53%

January 15, 2021 root Banking & Finance

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Most large banks have been saying that they are seeing a pick-up in economic activity and expect that to translate into higher loan growth, largely on the back of housing loans.

The growth in non-food credit rose to an eight-month high of 6.53% year-on-year (y-o-y) during the fortnight ended January 1, from 6.03% in the previous fortnight. The last time non-food credit grew faster was during the fortnight ended April 24, 2020.

As on January 1, outstanding non-food credit stood at Rs 106.12 lakh crore, showed data released by the Reserve Bank of India (RBI). Deposits with banks stood at Rs 147.27 lakh crore, up 11.48% y-o-y. The credit-deposit ratio was 72.06%.

Most large banks have been saying that they are seeing a pick-up in economic activity and expect that to translate into higher loan growth, largely on the back of housing loans. Some private banks have also reported a strong growth in advances during Q3 ahead of their financial results.

After State Bank of India’s (SBI) Q2FY21 results, chairman Dinesh Kumar Khara had said that the bank was expecting an 8-9% credit growth in FY21 because economic activity had gathered pace. “We have already seen the growth as far as our book is concerned. We have seen growth of about 6% till September 30. Hopefully, with the unlocking happening, we should be in a position to reach better than 8%,” he observed.

For both public-sector banks (PSBs) and private banks, much of the fresh lending in the last few quarters has been in the government segment as also in gold loans. The emergency credit line guarantee scheme (ECLGS) has also helped step up loan sanctions to small enterprises. The RBI’s trend and progress report said that credit expansion was at a higher pace among PSBs during March, June and September, 2020 quarters, after three consecutive quarters of deceleration. Lending in rural areas has been a bright spot for banks in FY21. “Although the share of rural credit in the total has been hovering between 8 and 9%, its growth surpassed that of other categories in 2019-20, after a gap of four years,” the central bank said.

Analysts also expect loan growth in Q3 to have been robust on the back of festive demand and the government’s credit guarantee scheme for small businesses.

In a results preview, analysts at Axis Securities said, “Overall, we estimate business growth to recover, aided by pent up demand, a good festive season, and expect systemic loan growth for FY21 to pick-up from its lows.” At the same time, whether the recovery in credit demand sustains through Q4FY21 remains to be seen.

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Piramal wins race to acquire DHFL

January 15, 2021 root Banking & Finance

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After multiple rounds of bidding and counter bids, Piramal Capital and Housing Finance Ltd has won the race to acquire Dewan Housing Finance Corporation Ltd. The voting by the Committee of Creditors ended today.

The debt resolution proposal submitted by Piramal received 94 per cent of the lenders’ votes, according to banking industry sources. The proposal submitted by Oaktree Capital is understood to have secured around 45 per cent of the votes. The official numbers will be disclosed by the DHFL administrator over the weekend.

“Total recovery comes to about 42 per cent (of the total creditors claim of about ₹81,000 crore). This recovery is very good under IBC process compared to many other accounts. The winning bidder is giving ₹12,700 crore upfront cash. Balance recovery is in the form of non-convertible debentures (NCDs), with a moratorium in the first two years and payable from the third year,” said a banker.

Twists & turns

The resolution process has gone through multiple twists and turns over the last few months. In the first round of bidding, Oaktree had emerged the highest bidder in terms of value, but the Adani group submitted an out-of-turn offer that was higher. This forced the bidders to call for another round of bidding.

As reported by BusinessLine earlier, Piramal had scored higher on the evaluation parameters of the CoC though both Oaktree and Piramal had submitted bids in the range of a little over ₹38,000 crore. However, Piramal’s overall score was 94 while Oaktree’s bid was given 85 points in the evaluation metrics scored by DHFL administrator. Oaktree had then questioned the evaluation metrics and had threatened to take legal recourse if the lenders did not give adequate consideration to its bid. On Friday, Oaktree did not comment on its future course of action as the official results of the voting are yet to be made public.

If Oaktree challenges the outcome, the actual recovery will take time. The bid resolution by Piramal will have to be ratified by the Reserve Bank of India and the National Company Law Tribunal.

This process could take 90 days under normal circumstances. However, there could be further delays if Oaktree challenges the lenders’ decision.

The case may then go to the Supreme Court. This will be another test case under IBC as DHFL is the first finance company to be referred to the NCLT by the Reserve Bank of India.

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