Tag: stock market

Bajaj Finance | HDFC Bank: Does it make sense to buy Bajaj Finance, HDFC Bank now? Sandip Sabharwal answers, BFSI News, ET BFSI

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A lot of the stocks which are moving up today are due to retail investment buying and speculative activity in the F&O market. We do not know how long it will go on. For Bajaj Finance to sustain these valuations, they need to grow at 40-50% continuously for the next four, five years in an economy where overall credit growth rate is 5-6%, says Sandip Sabharwal, analyst, asksandipsabharwal.com.

Bajaj Finance is becoming a platform company. It may become a front-ended platform company but the back-end would still be risk management, the NBFC business and the lending business. That is my view. Do you agree with it?
Yes. The overall technology edge is overestimated these days in my view because everyone has that technology now. Five years back, the technological edge was a story. Now it is more about innovation, how you sell your story and how you grow overall.

A lot of people talk about Bajaj Finance transformation. They are setting up all clients and all services together. But most of the banks are already doing that. I do not think that is a technological edge. I think the technological edge now is what you do and the stories will depend on how well you can execute those things.

Other than the big overhang of credit card issuances getting lifted from HDFC Bank, is there any reason to try and reallocate between ICICI Bank and HDFC Bank now?
Not so much. We need to remember that the last selloff which started in HDFC Bank was not related to the credit card, it was related to the spike in the NPAs which they saw in the last quarter and their asset quality is converging towards that of many of the other private sector banks. The credit card issue was an older one and that was as it is intact in the stock price for some time. That is the reason why this credit card ban being removed has not actually impacted the stock price so much. In anticipation of this itself, the stock has moved up by 5-6%. So I would think that the premium valuations which HDFC Bank used to enjoy because of the erstwhile CEO, the risk management and its consistent higher than market growth, no longer exists.

I would think that there will be a convergence of the valuations between HDFC Bank, ICICI Bank and other private banks which should continue unless and until we see HDFC Bank outperforming again in terms of asset quality. And we need to remember that HDFC and HDFC Bank are very heavily owned stocks and for them to outperform, they need to show something very distinct. Otherwise in most investor portfolios including FIIs, these stocks are very heavily over owned and for them to outperform becomes that much difficult.

Some would argue that this is a fair logic but this was a great logic at the beginning of the year when HDFC Bank was coming off years and years of outperformance and SBI’s years and years of underperformance. This year, the equation is different. SBI has given 50% return and HDFC Bank has been languishing. Is this relative valuation case true now also?
It does to some extent. If the HDFC Bank asset quality had not declined the way it declined over the last couple of quarters, then one would argue that what we are seeing is absolutely right but given the fact that they have seen a deterioration in asset quality, whereas other banks have actually ended up seeing some sort of recoveries and the asset quality has converged, then on a price to book valuation, the kind of premium HDFC Bank enjoys is tough to sustain.

In fact, Bajaj Finance now trades at some nine times price to book which is 180-190% premium to HDFC Bank, which is also very tough to sustain, given the kind of asset quality hit that NBFCs have seen over the last two quarters.

Why is anybody buying it? Price to book being expensive is not a restrictive factor for either foreigners or domestic investors to buy; retail cannot drive a stock like Bajaj Finance. why are markets ignoring that it is an expensive franchise, nine times book is like a crazy price to book which I have not seen even for illiquid names like Gruh Finance?
Yes, that is true but that always happens in significant huge up cycles or down cycles. For example, when Bajaj Finance took a beating at the same time last year, it was around Rs 2,000. We bought it near Rs 2,000 but exited it below Rs 4,000. The stock today is Rs 6,500. But at some point of time, valuations become restrictive. FIIs or domestic institutions’ flows have been quite muted in the last many days.

A lot of the stocks which are moving up today are due to retail investment buying and speculative activity in the F&O market. We do not know how long it will go on. For Bajaj Finance to sustain these valuations, they need to grow at 40-50% continuously for the next four, five years in an economy where overall credit growth rate is 5-6%. Also, Bajaj Finance is no longer a very small company, will they be able to do it? If they are able to do it, maybe the price will continue to trend up but I would find it tough to believe that they can do that.

We can say buy corporate banks because the capex cycle is there. But now big corporates are generating so much cash flow and the companies which need a lot of bank loans may not be going to banks to tap loans this time?
Many of the corporate banks which we used to talk about are now mixed bag. ICICI Bank is 57% retail now; HDFC Bank is looking towards corporate loans and in fact, in the last two, three quarters, a lot of their growth came from corporate loans. The entire space has got fuzzy ex of PSU banks where they do not have so much of a retail presence and to that extent they continue to be corporate banks. But as the economic activity picks up and working capital needs pick up, companies will find it tough to meet the entire capex out of internal accruals. So, some loans will be taken but the credit growth cycle might not be as it was in the past.

Now companies have the equity route, cash generation plus loans and so to that extent, the corporate loan growth cycle might not be as rapid as was seen earlier in the last capex cycle.

In the larger pool of financials, the same bifurcation or polarisation is happening within life insurance companies as well. What is SBI Life doing that other insurance players are not doing?
There are three or four plays and some stock outperforms. In the recent past, we have seen ICICI Prudential Life outperforming significantly, It had underperformed earlier when HDFC Life and SBI Life were doing better. There is cyclicality in their performances and also as the valuation differential becomes too high, those valuations correct.

I would think that longer term, many of these life insurance companies could actually perform very similarly.



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BoM tops PSU banks in terms of loan, saving deposit growth in Q1, BFSI News, ET BFSI

Banking & Finance

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New Delhi: State-owned Bank of Maharashtra (BoM) has emerged as the top performer among public sector lenders in terms of loan and savings deposit growth during the first quarter of the current financial year. The Pune-headquartered lender recorded 14.46 per cent increase in gross advances at Rs 1,10,592 lakh crore in April-June period of 2021-22, as per the published data of BoM.

It was followed by Punjab & Sind Bank which posted 10.13 per cent growth in advances with aggregate loans at Rs 67,933 crore at the end of June 2021.

When it came to deposit mobilisation, BoM with nearly 14 per cent growth was a notch behind Punjab and Sind Bank, while the country’s largest lender State Bank of India recorded 8.82 per cent rise.

However, in absolute terms SBI’s deposit base was 21 times higher at Rs 37.20 lakh crore as against Rs 1.74 lakh crore of BoM.

Current Account Savings Account (CASA) for BoM saw 22 per cent rise, the highest among the public sector lenders, during the quarter.

As a result, CASA was 53 per cent or Rs 92,491 crore of the total liability of the bank.

Total business of BoM increased 14.17 per cent to Rs 2.85 lakh crore at the end of June 2021.

For the first quarter, BoM’s standalone net profit more than doubled to Rs 208 crore as against Rs 101 crore in the same period a year ago.

The bank’s asset quality improved significantly as the gross bad loans or gross non-performing assets (NPAs) dipped to 6.35 per cent of gross advances by the end of June 2021 as against 10.93 per cent by the end of first quarter of the previous fiscal.

In absolute terms, gross bad loans stood at Rs 7,022 crore at the end of June 2021, lower than Rs 10,558.53 crore recorded in the same period a year ago.

Net NPAs nearly halved to 2.22 per cent (Rs 2,352.75 crore) from 4.10 per cent (Rs 3,677.39 crore).



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Samit Ghosh, BFSI News, ET BFSI

Personal Finance

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We would have to stabilise the organisation, reverse merge and then, we will take up the universal bank licence largely because it is more efficient to operate from a capital perspective because the capital adequacy requirement in small finance bank is 15% whereas an effective capital adequacy requirement in universal bank is about 8%, says Samit Ghosh, Founder, Ujjivan Financial Services.

Ujjivan Financial Services is the holding company of Ujjivan Small Finance Bank and we have seen the small finance bank reporting losses and higher NPAs which can be attributed to the second Covid wave. But what led to such losses and when can we expect to return to profitability?
As far as the business is concerned Nitin (Nitin Chugh, MD & CEO of Ujjivan SFB) is the right person to answer this question. From our perspective, obviously the impact was because of the second Covid wave, which took a toll on our portfolio and right now it is in recovery mode. But we do not know when the next wave is going to hit because not enough Indians have been vaccinated and with the festive season coming, there could be another knock down effect on us.

We have been very concerned about the portfolio quality and the management of the portfolio business. We are closely monitoring it and this is something we have been worried about not just now, but from last year itself. We are a very conservative organisation and we always believed that we should provide upfront and take appropriate action because that has been our philosophy in the past and that is what we would like to see again.

RBI has approved the merger of holding companies with small finance banks. When do you see that happening for your company?
We complete five years in the beginning of February and we can apply three months before that. So we would be applying three months before February, around November. Once RBI clears us for reverse merger, the whole process might take between 9 and 12 months. There are hurdles not only in the RBI but also from the Sebi perspective. There are a couple of issues for which they have to give us clearance. We are keenly watching what happens to Equitas because they are ahead of us in this process and we will follow suit. But our process will start in November and once our approval is there by February, it will take another 9 to 12 months.

A lot of people are watching very closely whether or not you have the intention to become a universal bank. Is that something that you are still considering and what work is being done towards that end?
Firstly we have to reverse merge. That is the first step and it will stabilise us. We are going through a very difficult time right now, not only from a portfolio quality point of view but also from a people retention point of view. Lot of the people who actually built Ujjivan have left and that makes life more difficult for us. We would have to stabilise the organisation, reverse merge and then, we will take up the universal bank licence largely because it is more efficient to operate from a capital perspective because the capital adequacy requirement in small finance bank is 15% whereas an effective capital adequacy requirement in universal bank is about 8%. That we will take up after our own reverse merger process is over,



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5 small and midcaps that may give 50% upside in next 2 yrs, BFSI News, ET BFSI

Banking & Finance

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Stocks like JK Cement, Dalmia and Nuvoco Vistas may fall 10% in the near term but could give 50% upside over the next 2 year. Within the financial vertical, AU Bank and Federal Bank are the two names that we would be going with, says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.

What is your take on financials? Do you think that asset quality fears may come to haunt them a little later?
This space has gone through a lot of pain in the last one year. Initially, when we had the lockdown fears, the entire sector went down and within that sector, the smaller banks and NBFCs went through the maximum pain and after that we have seen a good amount of revival and by and large things are looking much better. What is important to note is that within the universe, there are a few pockets where the outperformance has been huge. Typically, HDFC, Kotak have underperformed and ICICI, Axis and SBI have done better.

My view is that some of the smaller banks like AU and a few other NBFCs seem to be doing well even in the most challenging environment where top notch banks are struggling to grow in terms of the NII and the overall franchise part. In a bull market, one typically tends to look out for some of the more exciting opportunities and within that, AU Bank or Federal Bank would definitely fit in. But a larger allocation of stocks should be in the likes of ICICI Bank, Axis Bank and State Bank of India.

Have you looked at Zomato’s numbers? There’s strong growth, strong revenue momentum and stronger contribution margins and all of this at the peak of the second Covid wave. Is that reason enough for the stock to push up even further?
The reason the Zomato IPO met with so much of success and excitement is definitely because there is a belief in the fact that there is a long runway of growth. The kind of app that they have created and the kind of business model that they are following would really deliver good performance over a period of time. When we look at the numbers, the fact remains that on the topline front, the average order value or the number of orders definitely has an element of momentum and traction and which also indicates that there is a good demand revival.

On the other hand, what really came as a big surprise was that the contribution margin has dropped by 170 bps and that is something that needs to be really checked as to what really is leading to this kind of a compression when there is a very strong growth on orders etc. What remains to be seen is that once offices open up and people go out more, are we going to see this momentum continuing or there is some sort of a cool off? That is something that we will have to watch. I do not think that we should form a view on Zomato by looking at the operating loss or the net loss. As long as the company is delivering on their top revenue and delivery transactions parameters with an eye on margin, the market may find this pretty exciting to get into it.

Give me the name of a small cap or two where you think a 10% downside for technical factors is possible but a 50% upside is also possible in the next two years?
I would be happy to share the midcap names or some of the smallcap names, but we have to be mindful of the fact that given the kind of runup that we have seen and the kind of valuation at which the broader market or midcap stocks are trading, they are almost at par with large caps. With this kind of runup, the volatility or the correction sometimes can surprise us. It may be 10%, it could be little more also and that is something that we will have to bear in mind when we are trying to dabble into the midcap and the small cap names.

So within the broader universe, we are comfortable in the cement sector. Given the kind of visibility that we have on the volume front, the companies on the north and east side of India are extremely well placed. One can look at names like JK Cement and to some extent Dalmia. Somewhere there is going to be a listing of Nuvoco Vistas and we will find that these existing companies are far better placed compared to the newly listed ones and that may create some sort of excitement.

Apart from that there are some of the smaller banks. Banks as a sector remained a bit muted for a long time and we are seeing an uptick and so AU Bank and Federal Bank are the two names within the financial vertical that we would be going with.

What about sugar stocks? After the runup in stock prices, do you believe they can be added afresh or added to the already existing holdings?
We have seen a very strong momentum in the global sugar prices maybe because of some crop failures in major continents like Brazil and some of the south-eastern regions. What remains to be seen when it comes to India is what are the inventory levels and the pricing that one can really expect from where we are right now.

Also we have to bear in mind that an important state like Uttar Pradesh is heading towards elections and the sugar policy and the stance that the government takes also plays an important role from election campaign perspective. It remains to be seen what happens in terms of fresh developments. Some of these commodities are in a strong up move and people may have some allocation for names like Balrampur Chini and some of the major north-based sugar companies. From a tactical point of view, it may make sense to participate in those names.



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Nischal Maheshwari, BFSI News, ET BFSI

Banking & Finance

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As we are going back to normalcy, the easy money has already been made in pharma and it is going to be very stock specific, says Nischal Maheshwari, CEO-Institutional Equities, Centrum Broking.

What will be the impact on Vodafone after Mr Birla’s resignation? Also, how exactly would Bharti and Reliance Jio gain and how should one approach the telecom sector now?
I continue to maintain my view that there is trouble for this sector. Even after the number of players came down from 7-8 to 3, we were still not able to increase ARPU. Now, one of the companies is just throwing up its hands saying that they are not able to manage. In the short term, there is more pain. Maybe the government will come out with a package or something delaying the payments. But long term, it could be good. But in the short term, it would be pain.

Why would you say that? As Vodafone is losing market share, the subscribers are not going to stop using mobile phones. They will switch to Bharti or Jio and both will gain market share as a three-player market becomes a two-player market.
That was true earlier also. Vodafone has been hanging by a thread. In the last 12 months, every month Vodafone has lost customers. There has been a question of its survival. But still ARPUs have not increased. Both the top players continue to come with very aggressive numbers though their bottom packs have been raised from Rs 49 to Rs 79. But there are enough discounts out there. At the end of the day, I would look only at the ARPUs and ARPUs do not seem to be increasing and none of the two players are actually going out and saying that they are going to be giving away or taking a backseat as far as competition is concerned.

The world over, it has been a two- three player market. There has never been seven or eight players anywhere else. In India, they were surviving. Now, they have been cut down too and the existing players will continue to compete with each other.

SBI seems to be recovering faster than anticipated and the hit on account of Covid second wave is not as much as the Street was pencilling in or even the industry average. What’s next for SBI?
The results have been good but I would be a little bit worried given that most of the other banks have shown higher slippages as far as the second wave is concerned, especially, on the retail side. I would wait for another quarter because my issue remains that the coverage ratio is very low for SBI. It is only 40 bps which they have provided for unlike most other banks especially on the private side, who have provided for anything between 1% and 1.5%. Otherwise, the bank is doing pretty well. The recoveries have been good and it seems to be on a very solid wicket. So wait for another quarter but definitely it is a buy on dips.

Everyone is bullish on real estate and housing demand but somehow the HFC stocks have done nothing. Why is that?
After the first wave, most of the HFC stocks doubled from the bottom like Can Fin, LIC. HDFC has been a bit of an underperformer but that has also done well. During the second wave, basically everybody seems to have suffered — and the slippages are much higher in companies like LIC Housing Finance. HDFC Limited came up with very good numbers, Can Fin also faced some amount of pressure. So during the second wave, market was worried as far as retail is concerned/

The market is worried what is really going to happen if another wave comes in because the retail seems to be getting much more hit than the corporate book in the banks because the corporates are able to get their people vaccinated and and it so they continue to work but the collections suffer as far as the retail is concerned. That is why the market is a bit worried and wants to wait out for another quarter to see what really happens on the health side.

If everything goes fine, then we will start seeing some action in housing finance companies. But having said that, I believe it is a good time because these stocks have not performed and if real estate rightly is doing well, it is only a matter of time that the housing finance stocks will also start doing well. So we have a buy across the whole sector.

Where within banks are you finding comfort to buy afresh?
The top two banks SBI and ICICI are the ones I would put my money on. As the recovery in the economy happens, most of these banks are showing stronger recovery in their old NPAs. ICICI, Axis and SBI historically have had much higher NPAs in their portfolio. So when the recovery happens, they would be the beneficiaries and that is why one is seeing a strong recovery there. HDFC and Kotak are the better ones of the lot. They never had much problem and that is why they have quoting at 3.5-4 times. During this phase, they may underperform the market.

The Covid bump off for pharma companies is over. Today Cipla will come out with numbers for the quarter gone by. Is market pricing in the normalisation of pharma earnings?
I think so. Last year when Covid hit, the pharma sector came out of five years of underperformance with most of the stocks doubling in a very short period of time. But if you look at a longer time horizon, I think they would have just returned whatever 30-40% kind of a return on a five year time basis. So yes, for a short term, outperformance happened. The API companies started showing 20% plus kind of margins and as the Covid receded or things became normal, most of them have hit below 20% margin and are not even able to hold 17-18% margin.

So as we are going back to normalcy, the easy money has already been made in pharma and it is going to be very stock specific. We may see something like Divi’s outperforming. A new stock which got listed, Gland Pharma, is outperforming. Now it is going to depend on earnings growth and valuations.

Sun has been an underperformer for a long period of time and for two quarters, they have started showing good performance on the specialty portfolio which the market was waiting for. The stock is outperforming now. It is very, very stock specific now. The big move is over in pharma



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Chakri Lokapriya, BFSI News, ET BFSI

Banking & Finance

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SBI’s credit costs have come down and it looks like SBI has executed well, given the tough macro environment. The Covid related provisioning are largely within expectation and gives comfort that numbers for other banks will also hopefully be in line or better, says Chakri Lokapriya, CIO & MD, TCG AMC.

Just looking at SBI’s performance, the big takeaway from the numbers is the asset quality outcome, the fact that they have managed to brave the Covid-19 second wave impact. Slippages have come in at 2.47%, of which, a significant amount has already been pulled back in July. Do you think that is something that is going down well with the street?
It is absolutely right because going into the quarter, the economic backdrop had the services economy still in a contraction while the manufacturing sector was moving by stops and starts. There was a fear that slippages would increase from industries that take loans from SBI.

Now those slippages are under control. The 15,600 odd crore mark is a good number. Secondly, we know that credit growth is unlikely to pick up any time soon. The number reflects that 5% to 6% range whereas the deposit growth continues to remain strong. SBI’s credit costs have come down and it looks like SBI has executed well, given the tough macro environment. The Covid related provisionings are largely within expectation and gives comfort that numbers for other banks will also hopefully be in line or better.

Would a long-term investor be willing to buy the stock at the current levels?
Absolutely. The stock at the current levels still trades only at about close to its book value around one time for the medium to longer term investor. For a franchise as strong and big as SBI, one in four or five loans in this country is made by SBI.

Today whether it is corporate banking, retail banking or the government borrowings from banks, SBI has executed well. So even without multiple re-rating, the stock can go much higher. At this current rate it will probably hit north of Rs 600 in less than about a year’s time from now.

What are your views on HDFC Ltd?
After long underperformance due to slowing loan growth etc, hopefully things will improve for HDFC if there is no third wave. Also coming out of the current lockdowns, home loan growth rates are picking up while other forms of borrowing or lending has still not picked up. That is reflected both in the volumes of real estate companies as well as by the housing finance companies. I think given its underperformance, HDFC being the market leader along with LIC Housing and Repco, could do well in the next couple of quarters



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CS Ghosh, BFSI News, ET BFSI

Banking & Finance

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We are provisioning for net NPA in this quarter also. It has come down and so a very small amount has come. This is a conscious call because we have not written off NPAs in this quarter, says CS Ghosh, MD & CEO, Bandhan Bank.

It has been a kind of mixed performance for Bandhan Bank. While the bank has reported the highest ever quarterly operating profits, NPA stress has also risen. Can you tell us about the quarter?
This quarter was more severe than any other quarter in the pandemic situation. The second wave affected lots of lives and people were more scared about it. That prevented a good number of business owners from properly running their business. It started in the first month of the quarter from central India, Delhi and Madhya Pradesh and Chhattisgarh and it has gradually gone to the north east. Till now, it is happening in the north east.

Secondly, micro credit is nearly 60% of Bandhan Bank’s advanced book. The staff go to customers’ doorsteps to collect instalments. It was not easy to do because of the lockdowns and also because of risk to staff health. The number of cases affected came down in July and lockdowns were also lifted and a couple of rating organisations and the government also declared their GDP growth rate will come to 9-10%. I hope the future turns very good.

The total collection efficiency stood at 86% in Q1. Talk to us about collection efficiency for the overall book and collection efficiency in states like West Bengal and Assam. Are you seeing any improvement versus the last quarter?
There has been improvement in collection efficiency. In March, micro credit collection efficiency was 95%. In April, May, June it was hit in a big way by the Second Covid Wave. For that region, it has come down a little bit.

In case of the micro credit portfolio, in the first quarter our demand was Rs 13,000 crore and we collected nearly Rs 13,000 crore including arrears. That means our customers are paying the instalment. The total collection efficiency including arrear is 98% in micro credit and in case of total bank, it is 101% which shows that after the bad situation in the first quarter, it recovered a lot in this month. I hope next quarter onwards it will improve further.

Has micro finance loan book slowed versus last quarter? Is that a conscious call to slow down the growth as collections and demand may be impacted?
No. There are three factors here; one factor is that in the first quarter of any financial year, demand for credit always comes down. Secondly, there was the impact of Covid 2.0 in first quarter and that also impacted demand. Thirdly, we are disbursing credit conservatively and on a very selected basis.

Credit cost has come down versus the last quarter but it is still pretty high at 4.9. Will operating profits be enough to take care of the provisioning or the credit cost needs?
The provisioning is in two parts. One, it has helped me to increase PCR. The other side, it has helped us to strengthen our balance sheet. We can continue this provision continuously and accordingly the business growth will absorb it.

Gross NPAs stood at 8.2% and the net at 3.3%. At a net-net level, will gross and net NPA for FY22 be higher?
No. We have not written off this quarter. We have a Rs 700 crore account for NPA. If we write off this NPA, it will not be in place. Again, when one calculates the gross NPA percentage, because my advance book size has come down, percentage wise also, it has come down. Otherwise, percentage wise gross NPA has increased by 0.5% from last quarter to this quarter. We are tracking that. We are provisioning for net NPA in this quarter also. It has come down and so a very small amount has come. This is a conscious call because we have not written off NPAs in this quarter.

Overall the loan book has declined by about 8% quarter-on-quarter. What kind of loan growth do you expect this year?
In this type of a situation, the bank will be cautious and very selective. The credit growth will come from the last month of the second quarter before the Puja and Dussehra to the fourth quarter. That has been the case in normal times and even last year. So it depends on whether the Third Covid Wave comes in the Puja season or not.

Over the next one-two years, which segments do you think will lead to growth — microfinance, mortgage or commercial banking?
Microfinance is a very standard model and India is a big country. There is no growth driver needed for that. But we are likely to drive the growth of the housing loan vertical. It accounts for 24% now and in future we would like this segment to account for 30% of the total book.
The second vertical we are focussing on is MSME which caters to less than Rs 5 crore type of MSME. There is a huge market which is secure and we would like to grow it in future. Gold loan is another we would like to grow because like housing loans, it is also secured. These are the three sectors we would like to focus on in future and which we expect to account for 30:30:30 by 2025.

What led to margin improvement during the quarter, at what level do you see margins stabilising going ahead?
I have always predicted that around 8 or 8 plus will be NIM but this quarter, it is a little bit higher compared to the last quarter. That is because of last quarter we have reversed the interest of Rs 500 crore. Otherwise, 8 to 8.4 is what we would like to maintain.

You seem to have sufficient capital, how long will the current capital last considering your growth?
The growth of the bank was a little bit on conservative side last year and this year we expect normal growth. Upto 2025, we do not need the extra capital.

Is the structure of the financial industry changing with competition from fintech players?
The banks are focussing on digital transaction mode for the customers. At Bandhan Bank, in the last quarter, 87% of the transactions happened digitally. 11% of the bank accounts were opened digitally. We are also invested in digital transformation of the bank. We are also focussing on how we can give digital service to the customer.

Won’t you need additional capital to expand in digital space?
We have enough funds and we are already working on that from last year. Whatever is needed, will be invested from our own funds.



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AU Small Finance Bank surges 9% after Q1 update, BFSI News, ET BFSI

Banking & Finance

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New Delhi: Shares of AU Small Finance Bank soared 9 per cent in early trade on Tuesday following the June 2021 quarter update by the lender.

The numbers gave a relief to the investors who were expecting a worse impact of the Second Covid Wave on the small finance lenders. The restrictions on mobility and business during the second wave were less stringent than those during the nationwide lockdown.

The gross advances showed a growth of 31 per cent on year-on-year basis (YoY) to Rs 34,688 crore in the quarter ended on June 30, 2021 from Rs 26,534 crore in the June 2020 quarter. The loans in the March 2021 quarter were Rs 35,356 crore.

Shares of AU Small Finance Bank soared 9 per cent to Rs 1,126 on Tuesday at the time of writing this report. BSE Sensex was trading at 52,960.83, up by 83.83 points or 0.15 per cent higher at the same time.

Disbursements in Q1FY22 were at Rs1,896 crore (including Rs 302 crore of ECLGS disbursements) compared to disbursement of Rs 1,181 crore (including Rs 23 crore of ECLGS disbursements) in Q1FY21.

Total Deposits in the bank were Rs 37,014 crore, as of June 30, 2021, 38 per cent higher than the deposits at Rs 26,734 crore on June 30, previous year. The deposits inched up 3 per cent on quarter-on-quarter basis (QoQ).

The small finance bank has delivered over 32 per cent in the year 2021 so far. The counter has soared over 90 per cent in the last one year.

The CASA Ratio stood at 26 per cent in the June 2021 quarter, compared to Rs 14 per cent in the quarter a year ago. Average cost of funds decreased to 6.3 per cent to 7.2 per cent during the period under review.

The global brokerage firm Morgan Stanley is bullish on AU Small Finance Bank. It has maintained an ‘overweight’ stance on the lender with a target price of Rs 1,150. “The AUM growth for the lender is stable on a YoY basis and down 3 per cent QoQ.” it added.



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Rashesh Shah, BFSI News, ET BFSI

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“We expect to have about Rs 500-600 crore of excess capital available that we can invest for future growth to acquire companies. Our board decided that we need to be very focussed and reallocate capital in a very smart way,” says Rashesh Shah, Chairman, Edelweiss Group.

Edelweiss Group is going to exit insurance broking business. US insurance broking firm Arthur J Gallagher & Co is likely to acquire JV partner Edelweiss Financial Services‘ 70% stake in Edelweiss Insurance Brokers at a valuation of $100 million (around Rs 750 crore). Insurance is a great place to be right now and you are exiting and divesting the stake here. What is the strategy?
Edelweiss is a diversified group with almost 10 different businesses and this insurance broking business is very similar to investment banking and very similar to broking business. It was earlier part of the wealth management business which we have spun off and we are getting it listed as a standalone business. Here we had a partnership with Gallagher. They were keen to keep it as a standalone and increasingly this is becoming a global business. They wanted to increase their stake and we got a good price. So, we are reallocating capital.

I must remind you we have two other insurance businesses. We have a life insurance business and a general insurance business where collectively we have invested more than Rs 2,500 crore up till now and we continue to invest in that. We are reallocating capital from insurance broking which was a small, very high quality, very niche business. Since it was part of wealth management after we spun off wealth management, this became a standalone business and so our board decided that if there was a good partner and the business future is very bright, we can re-plough this capital into other growth areas.

After this sale, we still have eight businesses; we have a housing finance business, NBFC, asset management, mutual fund, ARC, life insurance, general insurance and wealth management. All are very good businesses. Our customer assets had grown by 35% in the last one year. We have restructured and from one company with many divisions, we have now become many standalone separate companies and each one has a very bright future and can take off on its own.

You have also done a transaction in the wealth business a couple of months back. PAG, one of the most reputed companies, has come in. How much capital have you raised together and how would you be utilising that?
The total capital we have raised in these two transactions will be close to Rs 2,500 crore. About half of that — Rs 1,400 crore — goes into repaying debt. We had some holding company level debt and which we have now decided to reduce. So about Rs 1,400 crore goes into reducing debt and the balance goes as investments in our asset management business. We have an alternative business and a mutual fund business, the collective assets are now close to Rs 85,000 crore. As they are growing fast, we need to make some very tactical investments in that. We are making small investments in our NBFC and housing finance business and the retail part of the credit business which are growing very well plus, our insurance business.

Even after this, we expect to have about Rs 500-600 crore of excess capital available that we can invest for future growth to acquire companies. Our board decided that we need to be very focussed and reallocate capital in a very smart way.

Did you say acquire companies? Which direction would you take?
There are a couple of areas where we are seeing a lot of opportunities to make very smart tactical acquisitions; one is in the fintech space. We think the entire credit space is getting disrupted in a very fast way given the NBFC crisis, credit issues in SME and housing finance. There are some good analytics firms. There are some good firms which underwrite risk management on retail credit portfolios. That is a good place for some tactical investments. One can spend Rs 100-200 crore to buy some smart capability.

We want to grow the retail credit business which is SME and home loans as well as our asset management business. We also want to grow the insurance businesses. Even in general insurance, we are seeing some very good tactical opportunities coming up. It is a very fintech driven business. One of the biggest things would be to buy stakes which either gives us distribution or stakes which gives us technological capabilities.

Edelweiss wants to focus on getting distribution. We can get that by buying a small stake in a small finance bank and that will allow distribution of insurance and asset management products by the small finance bank. We also want to invest in technology. As we have become more retail in the last two years, our retail customers have gone from half a million to 2.5 million. Now we are adding between 1.2 and 1.5 million retail customers every year. So distribution and technology are very important for us.

Have you identified any of those banks where you may be keen to pick up small stakes or some of the credit organisations or SME related fintech kind of companies?
There is no development to announce anything. We are evaluating and the year FY22 is a very important year because we have restructured our businesses and simplified our organisation structure. We have capitalised all our businesses adequately. All businesses have enough capital for growth plus we have some excess capital at the holding company level. We will make sure there is enough capital. Now we have to think about growth. The last two years have been about managing liquidity, simplifying the structure and strong balance sheet.

Let us come back to value unlocking. There would soon be another listed company from your house. How far is Edelweiss Wealth from being a listed company and how is business growing over there?
Edelweiss Wealth had a very good year last year. Retail broking and individual investors coming back to the market has been a big thing as interest rates have come down and investors are looking for advice on how to get some extra yield and how to manage risk very well, given all the disruption in the mutual fund industry.

Our customer assets in Edel Wealth Management last year grew by 25%. The business made a profit of approximately Rs 240 crore last year. With a PAG deal, Rs 400 crore of fresh capital has been infused in the business and we we are going through a demerger process because that will allow us to give Edelweiss shareholders direct equity in the wealth management business and we think that demerger process is about 12 to 18 months away depending on NCLT process.

We should have Edelweiss Wealth Management listed. The business is growing well. It is very well capitalised. By the end of this year, it should have an equity base of close to Rs 1,800 crore plus. Having that level of equity base and growth, it seems to be in a very good place and listing will be good for that business.

You have seen cycles from the market point of view, from credit point of view and economy as a whole as well. What stage of the market cycle are we looking at? In terms of rebound, are we euphoric or are we fairly priced?
It is always a challenge to make any predictions on the market. Market even after 30 years keeps us surprised, especially in the short term. In the short term, anything can happen, some global announcement by US Fed, some Indian government announcement, some accident happening anywhere in the world could derail the market. In the short run, it is very hard to say where the market is headed.

On a long term basis, India has seen degrowth in corporate profit for the last eight years from 2013 till 2021. The long term trend has turned around and I think corporate profit will be on an uptick for the next four-five years at least. So on a five-year basis, one feels very optimistic about corporate profit growth.



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Bond yields and equities – it takes two to tango

Personal Finance

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In recent months inflation expectations have been on the rise both in India and the developed markets and its impact has been felt on bond yields globally, central bank QE (quantitative easing) notwithstanding. Since then a new narrative has been taking hold amongst some market bulls. This new narrative is that the long-term correlation between bond yields and equities is positive, and hence is not a cause for alarm among equity investors. If expectations of better growth is driving inflation upwards and results in a rise in yields, then it reflects optimism on the economy and equities are likely to do well in such a scenario, is their argument. Is there data to support these claims? Is increase in bond yield actually good or bad for equities?

Inconsistent narratives

When movement of bond yields in any direction is used as a justification for equities to go up, then you must become circumspect. Since the launch of monetary stimulus last year globally by central banks and the crash in bond yields and deposit rates, the narrative that was used to justify a bull case for equities (which played out since the lows of March 2020) was that there is no alternative to equities. Hence, when bond yields actually start moving up as they have since early part of this year, an alternative for equities is actually emerging. So, market bulls have now shifted the narrative to why increase in bond yields this time is positive for equities as in their view bond yields are rising in anticipation of better economic growth. Well actually by this logic, last year bond yields fell in anticipation of a recession, so ideally it should have been negative for equities, right? Logic is the casualty when goal posts are changed.

Economic theory vs reality

Theoretically, increase in bond yields is negative for equities. This is for four reasons.

One, increase in yields will make borrowing costs more expensive and will negatively impact the profits of corporates and the savings of individuals who have taken debt.

Two, increase in bond yields is on expectations of inflation and inflation erodes the value of savings. Lower value of savings, implies lower purchasing power, which will affect demand for companies.

Three, increase in bond yields makes them relatively more attractive as an investment option; and four, higher yields reduce the value of the net present value of future expected earnings of companies. The NPV is used to discount estimates of future corporate profits to determine the fundamental value of a stock. The discounting rate increases when bond yields increase, and this lowers the NPV and the fundamental value of the stock.

What does reality and data indicate to us? Well, it depends on the period to which you restrict or expand the analysis (see table). For example if you restrict the analysis to the time when India had its best bull market and rising bond yields (2004-07), the correlation between the 10-year G-Sec yield and Nifty 50 (based on quarterly data from Bloomberg) was 0.78. However if you extend your horizon and compare for the 20 year period from beginning of 2001 till now, the correlation is negative 0.15. The correlation for the last 10 years is also negative 0.75.

In the table, we have taken 4 year periods since 2000 and analysed the correlation, on the assumption that investors have a 3-5 year horizon. The correlation is not strong across any time period except 2004-07 . It appears unlikely we will see the kind of economic boom of that period right now. That was one of the best periods in global economy since World War 2, driven by Chinese spending and US housing boom as compared to current growth driven by monetary and fiscal stimulus, the sustainability of which is in doubt in the absence of stimuli. This apart, Nifty 50 was trading at the lower end of its historical valuation range then versus at around its highest levels ever now. Inflationary pressures too are higher now. In this backdrop, the case for a strong positive correlation between equities and bond yields is weak.

What it means to you

What this implies is that the data is not conclusive and claims that bond yields and equities are positively correlated cannot be used as basis for investment decisions. At best, one can analyse sectors and stocks and invest in those that may have a clear path to better profitability when interest rates increase for specific reasons. For example, a company having a stronger balance sheet can gain market share versus debt-laden competitors; market leaders with good pricing power can gain even when inflation is on the rise.

A final point to ponder upon is whether a market rally that has been built on the premise that there is no alternative to equities in ultra-low interest rate environment, can make a transition without tantrums to a new paradigm of higher interest rates even if that is driven by optimism around growth. An increase in Fed expectations for the first interest rate increase a full two years from now, caused temporary sell-offs across equites, bonds and emerging market currencies, till comments from Fed Governor calmed the markets. These may be indications of how fragile markets are to US interest rates and yields.

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