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Friday, July 28, 2017

Yes Bank turns tide on bad loans, powered by one account


The power of one is often underestimated but Yes Bank Ltd would know what one account can do to a lender’s performance. The fourth-largest private sector bank’s bad loan metrics showed an impressive turnaround in the June quarter, with both gross and net bad loan ratios improving significantly.

That the Yes Bank stock surged by more than 6% to a record high on bourses showed that investors have already forgotten the awful numbers of the previous quarter, taking comfort from the lender’s growth story.

Gross non-performing asset (NPA) ratio slipped to 0.97% from 1.52% in the previous quarter while its net NPA ratio fell to 0.39% from 0.81% the quarter before.

Moreover, the stock of bad loans too reduced sequentially by Rs654 crore. All this was possible because of one major account (Jaiprakash Associates Ltd) getting upgraded and the lender pocketing 60% of value, as recoveries.

The bank’s management has assured that further recoveries will be made in the ensuing quarters. The account was labelled as stressed in all lenders’ books, and Yes Bank’s exposure was around Rs900 crore.

Recall that in June, Aditya Birla Group arm UltraTech Cement Ltd acquired Jaiprakash Associates’ cement plants, the proceeds of which Jaiprakash Associates utilized to pay off its lenders.

Earlier this year, the Reserve Bank of India (RBI) had asked banks to disclose the divergence between the bad loans detailed by them as of March 2016 and what the central bank termed bad. The above account along with others had resulted in corporate lenders such as ICICI Bank Ltd, Axis Bank Ltd and Yes Bank reporting a surge in their provisions and bad loans. Yes Bank investors were stung badly by the 169% rise in its gross NPAs in the previous quarter and the fact that the disclosures came after the lender concluded its qualified institutional placement, hurt more.

Yes Bank seems to have done more than damage control in the June quarter. The bank has assured investors that it is retaining the provisions made for the cement account even though it has been upgraded to standard. Further, the lender also said that it has only Rs343.3 crore as exposure to two of the dozen accounts that RBI has asked banks to refer for insolvency proceedings under the Insolvency and Bankruptcy Code.

With asset quality normalizing, Yes Bank’s strong core growth will be the focus and here the lender has fired on all cylinders.

HDFC Q1 profit falls 17%, says exposure to Essar Steel at Rs910 crore


Mumbai: Mortgage lender Housing Development Finance Corp. Ltd (HDFC) on Wednesday reported a 16.84% decline in its June quarter net profit to Rs1,566 crore.

However, the 1,871 crore profit it recorded a year ago was boosted by a one-time gain of Rs697 crore.

Still, the June quarter profit failed to meet Street expectations. According to estimates of 11 Bloomberg analysts, HDFC was expected to post a net profit of Rs1,769.60 crore.

In a statement, HDFC said its results for the quarter are not comparable from a year ago as it sold shares of HDFC ERGO General Insurance Co. to ERGO International AG, an arm of Munich Re for Rs922 crore, and also created a one-time special provision of Rs275 crore as a charge to the statement of profit and loss in the June 2016 quarter.

The leading mortgage lender also clarified that it has an exposure of Rs 910 crore towards Essar Steel Ltd, one of the 12 accounts identified by the Reserve Bank of India for initiating bankruptcy proceedings.

“HDFC has made 25% provisioning against Essar Steel and this is likely to increase if the exposure is not settled,” said Keki Mistry, vice-chairman and chief executive officer, HDFC, on the sidelines of its annual general meeting. “RBI’s 50% additional provisioning norm for accounts referred to NCLT will not apply to us,” he added.

The company said for this quarter, the tax rate was higher at 34% compared to 30.7% in the corresponding quarter of the previous year because the stake sale of HDFC ERGO attracted long-term capital gains tax at a lower rate of 23.07% compared to the marginal tax rate.

“We expect the tax rate to significantly reduce in the subsequent quarter on account of dividend income and sale of investments,” the company said in a release to the stock exchanges.

Provisions for the quarter fell 75% to Rs85 crore against Rs340 crore a year ago. Total income declined 3% to Rs8,141.76 crore.

On a consolidated basis, HDFC reported a net profit of Rs2,733.87 crore, down 2.3% from Rs2,796.92 crore a year ago. Total income rose 6.9% to Rs14,463.01 crore. Provisions fell 67.53% to Rs113.77 crore.

HDFC said its board approved issue of non-convertible debentures worth Rs35,000 crore on a private placement basis.

HDFC shares closed at Rs 1633.25 on the BSE on Wednesday, up 0.95% from their previous close, while the benchmark Sensex index rose 0.48% to close at 32,382.46 points.

Axis Bank set to buy Freecharge from Snapdeal for up to Rs400 crore


Bengaluru: Axis Bank Ltd is nearing a deal to buy digital payments platform Freecharge for Rs350-400 crore in cash, giving much-needed breathing space to the latter’s parent Snapdeal, which is separately in talks to sell itself to larger rival Flipkart.

By buying Freecharge, Axis Bank will get a popular digital payments brand as well as access to high-quality technology that traditional companies typically struggle to build compared with internet start-ups.

Axis Bank and Freecharge are likely to announce the deal this week, two people familiar with the matter said on condition of anonymity.

Freecharge had also held lengthy talks with Paytm (One97 Communications Ltd) but chose to go with Axis Bank as the private sector bank offered a higher price, the people said.

Axis Bank and Snapdeal (Jasper Infotech Pvt. Ltd) didn’t immediately respond to emails seeking comment.

Axis Bank was represented by the law firm Cyril Amarchand Mangaldas and Freecharge was represented by J. Sagar Associates. Neither used an investment bank for the deal.

The sale of Freecharge will mark the most stunning collapse in India’s start-up world, even more so than that of its parent company, which has seen its fortunes dip since the start of 2016. Snapdeal bought Freecharge for $400 million in April 2015 in what was then the largest start-up deal in India.

Last year, Freecharge hit the market to raise funds separately. Until late January, Snapdeal was confident Freecharge would raise fresh capital at a valuation of $700-900 million. But because of differences between board members, Freecharge passed up at least two funding offers.

Since late last year, Snapdeal’s founders and venture capital firms Nexus Venture Partners and Kalaari Capital have been locked in a boardroom battle that has resulted in Snapdeal and Freecharge passing up funding deals, cutting jobs and being forced to seek buyers. SoftBank Group Corp., the biggest investor in Snapdeal, disagreed with the others over the firm’s valuation in a potential sale or funding round.

“The big takeaway from the Snapdeal-Freecharge situation is the fact that the consumer internet market is growing very slowly. This is not China. Just because everyone has internet access does not mean the internet economy is growing,” said Rutvik Doshi, director at the India arm of Inventus Capital Partners. “And that’s not going to change in the next few years—the GDP (gross domestic product) is not suddenly going to grow at 10-12%. What we have seen so far is too much exuberance and optimism from investors and that’s not going to help. When that happens, you end up with a situation like (Snapdeal and Freecharge).”

Axis Bank on Tuesday had reported a 16.07% fall in net profit for the quarter ended 30 June because of higher bad loans and provisions. On Wednesday, its shares fell 2.9% to Rs528.85 on the BSE, while the benchmark Sensex ended up 0.48% at 32,382.46 points.

Time running out for RBI rate cuts


We expect the Reserve Bank of India (RBI) monetary policy committee (MPC) to cut policy rates by a quarter of a percentage point on 2 August. In our view, time is running out. An RBI rate cut now would signal a lending rate cut to banks before the start of the “busy” industrial season in October. As 2015 showed, “busy” season RBI rate cuts do not transmit to lending rate cuts.

Delays would push the next lending rate cut to the “slack” season beginning April. We reiterate that lending rate cuts hold the key to recovery. It is only when the cost of credit comes off that demand revives to exhaust capacity and spark investment. This would also buttress RBI’s efforts to improve banks’ asset quality as the bulk of non-performing assets are cyclical, fuelled by high rates in a long global recession.

We flag six reasons why the RBI Monetary Policy Committee’s (MPC) inflation concerns are likely to continue to dissolve:

First, inflation risks are muted. Despite a tomato price spike, food inflation is falling on a good summer rabi harvest. We track July inflation at about 2% atop June’s 1.5%. We expect consumer price index (CPI) inflation to average a weak 3% in 1HFY18 and 3.7% in FY18, well within RBI’s 2-6% inflation target. RBI has itself cut its inflation forecast to 2.5-3.5% from 4.5% in 1HFY18 in the last policy meeting. Core CPI inflation (when adjusting petrol and diesel prices) has slipped to 3.7% from 4.8% in October rather than being sticky. RBI now finds that “the industrial outlook… indicates that pricing power remains weak”.

Secondly, we do not expect the output gap to close anytime soon, with high lending rates delaying recovery. This obviously curbs pricing power. Old series GDP growth, at about 5.5%, remains well within our estimated 7% potential. RBI also acknowledges “…deceleration of activity… since Q2…”

Third, rising hopes of a normal monsoon should dampen agflation. Autumn kharif sowing is also higher than last year, although the drop in oilseed cropping is a concern.


Fifth, the second round effects of the hike in housing rent allowance (HRA) by the 7th Pay Commission can hardly be considered material as the first round is largely statistical. As a large number of government employees reside in government quarters, they would not be financial beneficiaries.

Sixth, “imported” oil inflation risks are coming off on lower oil prices and a softer US dollar.

This naturally begs the question, can RBI really cut 50 basis points as Ravindra Dholakia, an MPC member, has called for? We see a second cut only if good monsoons water a sufficiently bumper crop to sustain low agflation. We believe the long global recession justifies one 25 basis points (bps) cut that takes the negative real repo rate to 50 bps, assuming 6.5% long-term CPI inflation as a proxy for inflation expectations. One basis point is one-hundredth of a percentage point. Then RBI governor Bimal Jalan had similarly cut the policy rate to 4.5% in August 2003, below the then 5% wholesale price index (WPI) inflation target. This scripted the India growth story without fanning inflation. Second, RBI’s 50 bps cut in early 2015 went for nought as tight liquidity impeded transmission to bank lending rate cuts. Finally, the rate differential with the US Fed remains a comfortable 500bps even after a December Fed hike.

We continue to expect RBI to recoup foreign exchange reserves as governor Urjit Patel is already doing. Foreign portfolio investments jumped to 120% of FX reserves from 80% in 2007-08. Just as importantly, the FPI debt portfolio has risen to about 20% of FX reserves after the hike in investment limits. Second, it is true that the import cover looks comfortable at 11 months on a 1-year forward basis, above the eight months we deem needed for rupee stability. We are still concerned that this remains well below the import cover of 14+ months during the previous upcycle.

In our view, the improvement in import cover largely reflects lower oil prices and weak import demand rather than any fundamental accretion to FX reserves. Import demand can turn up very quickly with recovery: imports doubled to $111bn in FY05 from $50.5bn in FY02. Finally, Bharatiya Janata Party (BJP) governments typically conservatively build up FX reserves. Governor Jalan (and governor Y.V. Reddy) laid the foundations of our balance of payments security by amassing FX reserves in the Vajpayee regime, and similarly governor Raghuram Rajan after the BJP’s 2014 victory.

Finally, we also continue to expect RBI to switch to open market operation purchases from the current sales auctions. We estimate that it would need to inject $35 billion of reserve money in FY18, double the current year-on-year $15 billion (adjusted for demonetization). Although demonetization has shifted money to bank accounts from the public’s pocket, M3 growth, the measure for overall liquidity, is running at 7.4%, below half its 15.5% average. Not surprisingly, this has constricted loan growth to 6.1%, again well below its 18% average

HDFC’s gilt-edged loan book dims as bad loans tick up


Mortgage king Housing Development Finance Corp. Ltd (HDFC) rarely disappoints its investors and the June quarter results weren’t off the script. Optically, the 16% year-on-year fall in net profit to Rs1,556 crore was higher than what the Street expected.

The company’s stake sale in its subsidiary HDFC Ergo last year attracted a higher effective tax rate and a one-off extraordinary charge of Rs275 crore to the profit and loss account—the reasons behind the steep fall in profits.

Beyond the profit, the metrics were encouraging. HDFC’s loan book grew at a faster pace of 18%, giving a glimpse of the mortgage lender’s impressive historical average growth rate. The fact that its loan growth has bounced back after being hit by demonetization for two quarters should give enough reasons for investors to shrug off the net profit disappointment.

The strong loan growth backed the 16% net interest income growth. Add an improvement in the spread that the company earns from lending to 2.29% from 2.26% a year ago and the stock’s 3% rise in the last three months seems justified.

However, one needs to look at how the loan growth and the spreads have improved for the lender. HDFC’s strength is its individual loan book, the quality of which is stellar as non-performing loans have always been less than 1% of the total loan portfolio. For the June quarter, individual loan book expanded by 16%, while the non-individual loans or loans to developers grew by 22%. The growth in developer loans has been faster than that of individual loans for many quarters now.

Incrementally too, the share of developer loans has been rising. Essentially, the company has been comfortable lending more and more to developers although loans to homebuyers still dominate at more than 70% of the book.

HDFC has been consciously increasing the share of developer loans in its loan book simply because spreads on individual loans are lower. For it to maintain net interest margins, a gradual shift to developer loans is the answer.

The flipside to this is that lending to developers is inherently riskier than lending to individuals. This risk is getting more visible every quarter as the mortgage lender’s bad loan ratios are inching up. The gross non-performing asset (NPA) ratio as of 30 June was 1.12%, up from 0.75% a year ago and 0.79% at the end of the previous quarter.

The rise in gross NPA ratio was also due to the fact that HDFC had a lumpy exposure to one of the dozen bad loan accounts the Reserve Bank of India had asked banks to refer to the National Company Law Tribunal under the Insolvency and Bankruptcy Code.

For now, HDFC seems to be comfortable with the increasing risk on its loan book through developer loans. With the stock trading at nearly four times the estimated price-to-adjusted-book value for fiscal year 2018, investors too don’t seem perturbed.

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