Do it yourself

Thursday, September 15, 2016

Bank on Banking - 4

Thought for the day

"Always remember that you are absolutely unique. Just like everyone else."

—Margaret Mead (American, 1901-1978)

Word for the day

Phalanx (n)

A number of individuals, especially persons united for a common purpose.

Malice towards none

The game of mudslinging between AAP and BJP is no longer funny!

First random thought this morning

It is the nth time we are witnessing violence and disruption to the public life due to the dispute over the Cauveri water. The dispute over Satluj Yamuna Link (SYL) is also far from resolved, as Haryana and Punjab governments are sleeping over it. Nonetheless, given the current Punjabi non-Punjabi equation in Haryana, politicians like Arvind Kejriwal may ignite it anytime.

Similarly there are many unresolved issues between various states and the center and states. It is just like the situation in various courts in India where millions of cases are pending for decades.

The point to ponder over is - As a society, are we too afraid to seek closure of issues for fear of an adverse outcome?

Bank on Banking - 4

At present, (a) high incidence of non-performing assets (NPAs), (b) inadequate capital for growth and (c) poor credit demand are three primary concerns for the public sector banks. Besides, the rising competitive intensity from private sector peers is also clouding the outlook for growth of PSBs.

I am not sure whether the current prices of all PSBs are adequately factoring in these concerns. But I am getting increasingly confident that these concerns shall fade in next couple of years.

The reason for my confidence are simple, intuitive and arguable. If someone wants to contest, I have absolutely no problem in listening to their viewpoint; though I am in no mood to concede my ground on this.

The accumulation of NPAs in PSBs over past one decade is consequence of three factors - (i) Large scale corruption; (ii) Error of judgment on the part of bankers and/or entrepreneurs; and (iii) prolonged decline in economic cycle.

In my view, the corruption through connivance of unscrupulous businessmen, bankers and politicians has diminished considerably in past couple of year. The things should improve further in next couple of years.

Error of judgment relating to incremental demand for services and infrastructure led to huge accumulation of unserviceable debt in sectors like power, roads, steel etc. The case is reversing now. Market driven pricing of natural resources - minerals, airwaves etc., in future shall remove another area of speculation in future earnings prospects that has misguided the judgment of lenders and businessmen in past.

The economic cycle recovery globally has remained feeble since bottoming in 2010-2011. India is no exception. There is little sign that broader economic recovery will accelerate anytime soon. However, a sustained 7% growth over next couple of years shall generate enough business for banks as (a) consumer and farm sector demand strengthens; (b) balance sheets of many corporates is repaired making them eligible for new projects and credit; (c) lending rates moderate; and (d) financial inclusion efforts of the government start yielding tangible results.

Insofar as the rising competitive intensity is concerned, it shall certainly be a matter of concern for the investors in PSBs. Given their bloated and inefficient cost structures and operational inflexibilities vs. their private sector peers, it is likely that they may lose market share over next few years.

In my view, given their reach, fast expanding market and recent efforts to improve operational matrix, the top five PSBs may not be impacted materially by the competition in medium term. Acceleration in the efforts to consolidate PSBs will also add to their strength.

Insofar as valuation is concerned, I feel that the wide gap between the private banks and large PSBs may not be sustainable. Though I am not sure how it will be bridged, e.g., (a) steeper rise in valuation of PSBs; or (b) steeper fall in valuations of private banks and NBFCs. As a strategy therefore, I am inclined to buy top PSBs on all declines.

Also read:

Bank of Banking - 1

Bank on banking - 2

Bank on Banking - 3

Wednesday, September 14, 2016

Show me a miracle!

Thought for the day

"Man's role is uncertain, undefined, and perhaps unnecessary."

—Margaret Mead (American, 1901-1978)

Word for the day

Lucida (n)

The brightest star in a constellation.

Malice towards none

In a democracy, why an elected representative helping a citizen should be a NEWS?

Ain't that a total failure of our democracy?

Would someone mind informing this to the paean singers and cheer leaders at Raisina Hills and Ashok Road!

First random thought this morning

BJP has reportedly decided to go with PM Modi as its mascot in UP elections.

It's a pity. This state gave the party more than one fourth of its MPs in 2014 elections, and still the party does not have a local face to show to the people.

Show me a miracle!

Last week Mother Teresa was declared a saint. The church said that she fulfilled the condition of doing two miracles to attain sainthood. Regardless of the controversy around the miracles of the Mother as claimed by her order Missionaries of Charity, she is now a Saint forever.

The intense debate that has been going on in the world about according the status of science to Economics is no less than the process of canonization of a catholic saint.

The proponents claim the economics to be the youngest discipline of science, but a science nonetheless. Whereas, the opponents seek the evidence (read miracle), that has been elusive so far.

I am writing this because, the events of past one decade make me firmly believe that at best Economics is witchery used by politicians to impress upon their respective constituencies the need and urgency to afford them the power to run the state. The students and practitioners of Economics take side of the politician they like best.

The abject failure of so called "non-conventional" monetary policies used in past one decade in stimulating economic growth, challenges the claims of the ability to predict the likely behavior of consumers and markets on the basis of past data and trends. In hindsight it looks a farce. It's like a person riding on tiger's back claiming a victory over the tiger.

The conduct of central bankers, economists and governments, in past one decade in particular, makes it palpably evident that the concept like objectivity, data dependency, predictability, etc. have nothing to do with the economics.

US Federal Reserve is a classic case in this point.

The fact is that the market driven rate (LIBOR, etc.) have diverged too much from the policy rate. This may have created unusual arbitrage opportunities distorting the normal operations of the global financial market. This is an anomalous situation and needs to be corrected at earliest. The FOMC of the Federal Reserve is seeking a political correct reason and timing to bridge this chasm.

The effort to make this simple decision look like a major economic event driven by arduous study and analysis of data and evidence seem ludicrous. In the process, not only the US Federal Reserve but central bankers as an institution, are losing credibility.

Instead of bringing a higher degree of predictability to the markets, the conduct of central bankers may be causing just the opposite. The traders are naturally roiled. Many investors may also not like the avoidable volatility in the economic environment.

Insofar as I am concerned, I am not planning to stay awake till midnight on 22 September, to hear what Yellen has to say. Status quo or 25bps hike makes no change to my investment thesis. For, I am convinced that the global cost of capital needs to rise to rational levels to stimulate the virtuous cycle of economic growth.

Monday, September 12, 2016

Nifty: Choppy season ahead

Thought for the day

"We have nowhere else to go... this is all we have."

—Margaret Mead (American, 1901-1978)

Word for the day

Corybantic (adj)

Frenzied; agitated; unrestrained.

Malice towards none

Was including river water in List II (State List) under Article 246 of the Constitution a big mistake?

First random thought this morning

For the first time I travelled to Mumbai from Delhi was in 1992. Civil aviation sector was just opened to the private competition. The price I paid was Rs3493 one way. The one week advance fare on the same sector today is less than Rs2500. Air India is competing with Indian Rail!

Inflation has certainly missed few corners of the economy.

Nifty: Choppy season ahead

Despite a nervous end to the last week, Nifty managed to record its third highest weekly close and second highest weekly average traded value, ever.

ECB staying put and increasing chances of Fed acting to hike rates by 25bps at next week FOMC, should be a good news in a normal market as it signifies normalizing economic conditions. However, considering that global bond markets have been unusually complacent and aggressively leveraged - the rush to take shelter could end up in stampede (not a base case).

The mood in Indian equity markets this morning is certainly somber. Motivated by persistently lower implied volatility, traders running higher than usual positions are naturally jittery. The off loading that commenced on Friday, might continue this week.

In strict technical sense, benchmark indices are not showing any signs of collapse as yet. Any correction therefore is an opportunity to buy.

Regardless, technically speaking, Nifty is poised to move past 9000 mark sometime in next 7 weeks. Only meaning full resistance now exists around 8990 level. A strong support has developed in 8606-8630 range.

On bank Nifty, a good support has developed in 19340-19400 range. However, the strong support remains at 18600 level.

Friday, September 9, 2016

Bank on Banking - 3

Thought for the day

"Apartheid does not happen spontaneously, like bad weather conditions."

—Jonathan Kozol (American, 1936)

Word for the day

Nodus (n)

A difficult or intricate point, situation, plot, etc.

Malice towards none

If surge pricing by app based taxi operators is unacceptable; how could Indian Rail could be allowed to use it?

First random thought this morning

PM Modi is gaining in international popularity ratings with every flying mile he earns. His party, BJP, though is not able to match his steps. The party in fact may be losing some of its core support bases - Traders, small businesses, security forces for example.

In six months we would enter the election phase that shall continue till the 2019 general elections. A loss in UP & Gujarat could hit the party badly.

The question is should PM & FM make a mid-course correction in their policy focus for electoral considerations or continue with their long term strategy?

Bank on Banking - 3

In order to stabilize the collapsing currency and support the precarious current account position in the summer of 2013, the then RBI governor took a number of steps. The most famous amongst these measures was a swap deal on FCNR deposits whereby the RBI had opened a window to the banks to swap fresh FCNR dollar funds, mobilized for a minimum term of 3yrs at a fixed rate of 3.5%pa for the tenor of the deposit. The swap window was opened from September 2013 to December 2013.

Most banks offered 4.77% interest on fresh 3yr FCNR deposits. The cost of these funds to Indian banks was thus around 8.27% (4.77% interest and 3.5% swap cost).

Smart NRIs and foreign banks sensed this big opportunity and pumped more than US$34bn in Indian financial system. Most of this money was borrowed at less than 1% interest from foreign banks.

These deposits are now due for repayment. There is a sense of worry of that outflow of such a big amount in such short period of time will be disruptive for Indian financial markets - bank liquidity, bond yields and currency.

In my view, there is absolutely nothing to worry on this account, for the following simple reasons:

(a) The event was known 3yrs in advance to everyone. RBI has assured time and again that it has made adequate arrangements to provide the required foreign currency to respective banks for honoring their repayment obligations. It is public knowledge that RBI has enough ready forex and fully covered swap positions also.

(b) Banks who prepare their balance sheet on weekly basis have known this outflow 3yrs in advance and would have prepared well for it.

(c) The current rate of 3yr USD FCNR deposit offered by SBI is 2.11% p.a. and the current cost of 3yr swap is around 4% p.a. For EUR and JPY the interest rate is materially lower. The rate offered on a 3yr INR deposit is 7%.

The banks therefore could easily accept new deposits or offer to renew these deposits at much lower rates, provided they need this money to meet the credit demand.

The lending rates in US and Europe are much lower and liquidity much higher as compared to 2013. So for foreign banks and NRIs it will still be profitable to renew these deposits.

(d) Insofar as the bank's liquidity positions is concerned - the fear may be unfounded. RBI has many tools to infuse liquidity in the system. Increasing LCR, reducing SLR & increasing OMO are only few to name.

(e) Bond yields have moderated materially in past six months. If the spectrum auction and disinvestment program goes as per the budget, the yields may actually fall further. Irrespective of the 25bps hike by US Fed, the yield differential between Indian and other bonds is too high to sustain.

Thursday, September 8, 2016

Bank on banking - 2

Thought for the day

"Pick battles big enough to matter, small enough to win"

—Jonathan Kozol (American, 1936)

Word for the day

Peradventure (n)

Chance, doubt, or uncertainty.

Malice towards none

'K' is a popular word not only in Pakistan but in UP also:

Khan (Azam)

Khap (Jat and Yadav)

Khaat (Congress farm loan waiver)

Kashi (BJP)

Kanshi (BSP)

First random thought this morning

The UP elections have begun with Farm loan waiver (Cong) and free smart phone (SP).

The competition will intensify as BJP and BSP join the fray in next few weeks.

The voters will have really tough choices to make this time!

Bank on banking - 2

Regardless of the sharp gains seen in the stock prices of public sector banks (PSBs) in recent months, they have seriously underperformed their private sector peers. Multiple issues have been keeping investors away from these fallen angels. Though in recent months, some of the issues have been addressed, still investors appear skeptical.

The following five issues in particular have impacted the investors' sentiments insofar as PSBs are concerned.

(1) FCNR redemption: Potentially US$24bn redemption of FCNR deposits received from NRIs in 2013 is due between September and December 2016. It is feared that the redemption may cause material pressure on banks' liquidity & credit growth and may cause high volatility in currency and debt market.

In my view, all these fears are mostly unfounded. These appear premised on the fallacy that Indian banks and banking regulator are highly inefficient and are even unable to foresee 3months forward!

I do not subscribe to this notion and therefore not worried at all about this event. (More on this tomorrow)

(2) Underreported NPAs: The asset quality review mandated by RBI may have taken care of a large part of this problem. My discussions with many bankers and their auditors suggest that in many cases material over provisioning has been made.

In my view, though in the current economic environment one cannot rule out new accounts slipping into red, the problem from hereafter should be a normal business proposition and not a catastrophe.

(3) Capital inadequacy: This is a serious problem at this point in time, but certainly not incapacitating. Many PSBs need material capital infusion to meet the Basel III norms in next 2-3years.

In my view, they should have no problem in raising fresh capital from government or public, provided they are in a position to deploy this capital profitably. This could be a chicken-egg story in the short term, but in medium term it should not be. Those who are profitable get the capital, and those who are not get acquired by big brothers.

(4) Competition from private banks: This is a serious issue and needs to be adequately factored in investment decisions.

I believe, given the dominant market share of PSBs and vastly underpenetrated market, the large five PSBs could survive profitably and grow for next one decades at the least. I am not inclined to look beyond these five for my portfolio.

(5) Credit growth: This is normal business cycle issue and not a structural one. In my view, the credit growth is bottoming and should begin to pick up in next 3-4 quarters.

I would share my views about these issues in detail, over next few days.

Wednesday, September 7, 2016

Bank on banking

Thought for the day

"The answers I remember longest are the ones that answer questions that I didn't think of asking."

—Jonathan Kozol (American, 1936)

Word for the day

Paean (n)

Any song of praise, joy, or triumph.

Malice towards none

Is Big B guilty of breaching the privacy of two young girls by publically releasing a letter written to them by their grandfather?

If the intent was "public good", then the grandfather could have very well addressed the subject letter to all the daughters of this country.

First random thought this morning

I do not understand the paranoia of so called liberals in our country. Why cannot they accept that people have personal likings about things like - how people should dress; what people should eat; what students should study; etc. It is common behavior to consider and propagate one's parochial view as the worldview. Forcing such view (legally, emotionally or socially) might be criminal, but mere suggestion is innocent.

There are enough evidence of so called developed societies enforcing attire (Burkha, Turban etc.) and food restriction through legal means. At least, we have not seen any legal restriction so far, to my knowledge.

Bank on banking

In past three years, the Indian banking industry has witnessed a number of changes in almost all areas of operations.

Many of these changes are operational in nature and would go many miles in improving the operational efficiency of Indian banks.

Some of these changes are structural in nature and have the potential of transforming face of the Indian banking industry to make it competitive in the global market.

The following three structural changes, in particular, are note worthy, in my view:

(a) Technological upgradation: Traditionally the Indian banking industry has suffered from capacity constraints in terms of man and material. Introduction of technology based tools like Unified Payment Interface (UPI) and UIDAI based KYC have made it possible to scale up the business both in terms of geographical reach and number of customers.

Increased use of technology makes the implementation of financial inclusion objectives thus facilitating the exponential growth of banking industry (secure remittances, improved social security, higher small savings, lesser need for holding cash, etc.)

Use of technology in banking makes delivery of government subsidies and grants efficient through direct benefit transfer scheme (DBT) thus materially improving the systemic efficiencies both on fiscal and monetary sides.

(b) Encouraging competition: Removal of entry restrictions and making banking licensing a simple over the counter (OTC) affair has been a tremendous effort by both the government and the regulator. We have seen how the face of services like civil aviation, telecom, power generation and distribution, highways etc. has changed over past two and half decade. Expecting a similar change in the banking sector over next decade would not be an exaggeration.

There could be an argument that with higher and deeper use of technology, we may not need more banks. To some these two may even appear incongruent to each other. In my view, these two changes are perfectly complimentary to each other and much needed.

As we have seen in civil aviation and telecom, each new player brings a new set of ideas, innovation and rise in competitive intensity. Some become large in generic services and some choose to become niche players in selected areas. In due course the best survives and the inefficient fades into oblivion.

(c) Bankruptcy law: Implementation of a practical and modern bankruptcy law is also a major structural change in the operation of the Indian banking industry. On one side it would act as a deterrent to the unscrupulous businessmen who have been routinely misusing the banking system and legal system; on the other hand it would encourage the bankers to take the required risk without fear.....to continue

Tuesday, September 6, 2016

Nifty: All set for mount 9k

Thought for the day

"The cause of homelessness is lack of housing."

—Jonathan Kozol (American, 1936)

Word for the day

Abeyance (n)

Temporary inactivity, cessation, or suspension

Malice towards none

Does AAP need to be taken seriously in Goa and Punjab elections; or it is merely a Delhi phenomenon?

First random thought this morning

Metaphorically speaking, presently the global economy is just like Dead Sea. Nobody sinks in this, but chances of any life surviving in this are remote. Floating with your eyes and mouth shut is the only option.

These days it is becoming marketed aggressively as a popular exotic health tourism destination.

Nifty: All set for mount 9k

Nifty moved higher last week, trampling many resistances on it way. However, given that the rally was purely liquidity driven with not much support from data side, the up move lacked conviction.

Volumes were not commensurate with the level of activity. Implied volatility crashed to further lows. Market breadth was absolutely flat.

Regardless, technically speaking, Nifty is poised to move past 9000 mark sometime in next 8 weeks. Only meaning full resistance now exists around 8990 level. A strong support has developed in 8606-8630 range.

On bank Nifty, the resistance at 20k has weakened materially last week. The next 1000 point move could be fast and furious. A good support has developed in 19340-19400 range. However, the strong support remains at 18600 level.

Friday, September 2, 2016

Hope prevails!

Thought for the day

"A budget tells us what we can't afford, but it doesn't keep us from buying it."

—William Feather (American, 1889-1981)

Word for the day

Auriferous (adj)

Yielding or containing gold.

Malice towards none

The perfect storm:

- The government would want Telcos to participate aggressively in the forthcoming spectrum auction.

- Banks would be reluctant to lend aggressively to Telcos given the intensifying tariff war and poor revenue growth visibility.

- Telcos may not like to bid aggressively, but to survive competition they would need abundance of spectrum and tower infrastructure.

First random thought this morning

All national parties ally with the smaller parties with parochial agenda for electoral gains. But after winning the elections they find these smaller parties' agenda regressive and want them to abandon it.

This is not gonna happen, Sir!

You are condemned to live with it and suffer.

Hope prevails!

The market was unusually indifferent to the below expectation GDP data on Wednesday evening. No intense discussions in the TV studios; no press conference or media release from PMO or the finance ministry; no significant criticism from the opposition parties; and almost no reaction of benchmark stock, currency market or bond market. This is a classical case of bull market.

The participants are either ignoring poor data points or deliberately deriving positive inferences from it (rate cut etc.), knowing well that in a world flirting with the specter of recession and deflation, high growth will be hard to come by; regardless of what the government and its planners may wish or claim.

I have been insisting that ~7% sustainable economic growth (5.5% as per the old methodology) would be a truly great achievement under the current circumstances, provided we can make it inclusive.

Aiming for 8% and higher growth by focusing on the top 20% population would solve no problem at all, in my view.

From the data released on Wednesday, it is clear that so far there is no respite to the rural populace which has been suffering from severe drought for past two years. The standing crops are good. But these may not results in immediate improvement in the rural income.

For one, the debt at household level has swelled in past two years. A loan waiver by banks may be a partial relief as still a dominant part of the debt could be outside the formal banking channel.

Secondly, like the last onion crop, many other vegetable crops may not fetch remunerative prices to the farmers. Oil seeds, pulses may also see lower realization.

A lot of hopes are being pinned on the seventh pay commission and OROP payouts. As the payments are being made in the supposedly inauspicious month, the spending may occur only in October, i.e., 3QFY17. My informal inquiries from the trade channels are suggesting that except for automobile, most other consumer durables (and staples also) are witnessing inventory rundown. Acute shortage of cash in the trade channel, poor capacity addition and widespread floods in many parts of the country could be the possible reasons.

The Christmas shipments of exporters are almost done. What I could gather from a few exporters is that the season is not great on any parameters.

The leverage for the government to keep spending is much lower now. With fiscal targets almost breached, and budgeted spectrum revenue under cloud, the growth in government revenue expenditure may not sustain. So it would prudent to keep the expectations for 2QFY17 growth numbers also at moderate level.

On positive side, the grand plans are beginning to take off. 3Q could see positive momentum on the investment side.

I would not be surprised if an accounting jugglery or shifting the goal post is used to show data in good light. After all we are competitors to China!