Tag: NPA

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IndusInd Bank In Trouble Over Whistleblower Allegations

IndusInd Bank had a tremendous Q2 FY22 quarterly result after its profits rose by 72% YoY. Its Interest Income rose by 6.59%, Provisions and Contingencies fell by 7.6% and Gross NPA reduced by 2.77%. Despite such great results, IndusInd’s share price had a freefall last day. This piece covers the allegations made by a group of senior employees, IndusInd Bank’s stance on it, and the way ahead. 

What Went Wrong With IndusInd?

IndusInd Bank was set up in 1984 by the Hinduja Group and was one of the first private sector banks that helped in accelerating the process of reforms in post-liberalised India. You can read more about the Hinduja Group here.

IndusInd Bank, like any other bank, gives out loans from which it earns Interest Income. IndusInd’s loan book is managed by Bharat Financial Inclusion Limited (BFIL), a 100% subsidiary of IndusInd Bank.

Some of the senior officials at BFIL have alerted the Reserve Bank of India (RBI) and alleged some mismanagement and malpractices at IndusInd. The whistleblowers allege that IndusInd Bank has been ‘evergreening’ loans since the beginning of the COVID-19 pandemic. 

What Is ‘Evergreening’ Of Loans?

Banks give out loans to earn interest income. A portion of the loans disbursed by banks remain unpaid by borrowers, or certain borrowers tend to ‘default’ on loans. If the loan remains unpaid for a certain period, it gets classified as a Non-Performing Asset or NPA. For every loan declared NPA, the bank has to set aside some money as ‘provision’. These provisions are set aside as assets to pay for anticipated future losses. They eat into the company’s profits. To avoid cutting down on profits, it is in the banks’ best interest to reduce the number of NPAs.

‘Evergreening’ of loans is when banks try to revive loans on the verge of being classified as Non-Performing Assets. A Bank gives out loans to the same borrowers to pay their older dues. Essentially, borrowers are paying back the bank by borrowing from the same bank. Evergreen loans are also known as Revolving Credit or Revolving Loans.

The evergreening of loans benefits both the banks as well as the borrowers. It gives the borrower more time to pay back the loan amount and prevents banks from getting higher NPAs, eventually translating into profit. But it can also be seen as pouring fuel into a fire, trying to get back cash by doubling down on the bad loans. This is not ideal in the long run.

What Is IndusInd’s Stance On The Allegations? 

IndusInd Bank has refuted allegations made by the whistleblowers. In a PR statement, IndusInd has clarified the following:

  • It has refuted whistleblower allegations on loan evergreening as “grossly inaccurate and baseless.” 
  • Due to a ‘ technical glitch’, it admitted to disbursing 84,000 loans to customers without their consent in May 2021. The problem was reported within two days and rectified.
  • Due to ‘Operational Issues’ in the second wave of the COVID-19 pandemic in India, the bank disbursed some loans in cash at the village/panchayat level.
  • The bank continues to follow biometric authentication, and has disbursed loans only in the bank accounts of clients. 
  • Any additional liquidity or assistance given to borrowers was done within the ECLGS (Emergency Credit Line Guarantee Scheme) framework or other restructuring or moratorium guidelines issued by the RBI.

Even after the clarification by IndusInd Bank, its shares tanked 12% on both of the Indian exchanges. IndusInd Bank has reported an increase in stress in its microfinance loans portfolio. The NPA ratio in the microfinance segment went up from 1.69% to 3.09% in the September quarter. The allegations come after a stellar quarterly performance by IndusInd Bank. 

The possibility of foul play can neither be confirmed nor be denied. A panel of the RBI is conducting a technical audit looking into the whistleblower’s allegations. An external audit might be ordered in case the need arises. Till then, it is in the best interest of investors and shareholders to stay alert about any updates on the audit by the RBI. 

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Federal Bank’s Stellar Q2 Performance: Analysis

Federal Bank declared its financial results for the July-September quarter (Q2 FY22) on October 22. There was high demand for the stock in Dalal Street on the same day and surged ~8%. During the same period, ace investor Rakesh Jhunjhunwala added 2 crore shares of Federal Bank (~1% of the total equity share capital) to his portfolio. Currently, his holding value in the bank is ~Rs 750 crore.

In this article, let us analyse the recent financial performance of the bank and compare it with that of its peers.

Federal Bank’s Q2 Results

The bank’s Net Interest Income (NII) increased 7% year-on-year (YoY) and 4% quarter-on-quarter (QoQ) to Rs 1,479 crore in Q2. NII is the difference between the interest income received on loans and the interest paid to depositors. Meanwhile, Net Interest Margin (NIM) improved to 3.2%. For every Rs 100 issued as a loan, the lender can generate Rs 3.2 as an income after paying interest on deposits.

The net profit of the bank increased 49% YoY and 25% QoQ to Rs 460 crore. The increase in profits can be attributed to increasing NII and a decrease in the provisions made for bad loans.

Net Non-Performing Assets (NNPAs) are the loans given out by the lender that fails to generate interest. Thus, if the bank does not manage the NPA wisely, it can eat up the profits of the bank.

Here, we can see the trend of Net NPA. Even though the current position is greater than that of the previous year, its decline across the previous quarters is a good sign. Federal Bank has an NNPA of 1.12%, meaning that for every Rs 100 given out as a loan, Rs 1.12 turns as NPA.

Comparison with Peers

For any sector, analysing a company along with its peers gives us a clear picture. Let us compare and analyse Federal Bank with the top-performing banks in India.

Net Interest Margin

Net Interest Margin (NIM) is a measure of a bank’s net interest income (NII) to its assets. A higher NIM is always appreciable. 

Although Federal Bank has a lower NIM, the metric increasing over the quarters is a good sign.

Non Performing Assets 

A loan becomes a Non-Performing Asset (NPA) when it fails to generate income for the bank. Net NPA shows the percentage of money given out as a loan that cannot be retrieved by a bank. Thus, a very low NPA is preferable for a bank.

Federal Bank has higher NPAs than its peers. Fortunately, the decline of bad loans across the years is a good sign. Even though the other banks have reported higher NPAs over the previous quarters, Federal Bank was able to reduce the same. 

CASA Ratio

Current Account – Saving Account (CASA) are deposits that provide relatively low interest. If a bank has a high CASA Ratio, it means that the bank’s expenses are low. If a bank has a lower CASA ratio, expenses will be high and it will affect Net Interest Margin (NIM).

Federal Bank has a CASA Ratio of 36%. It means that for every Rs 100 deposited in an account, only Rs 36 belongs to CASA. Here, the CASA of Federal Bank is relatively lower compared to other banks. Therefore, picking up CASA is essential for the lender to gain a better income.

Valuation

For investors, it is always a key strategy to buy a stock when it is cheaply available. Let us look at one of the valuation ratios— the price to Earnings (PE) ratio.

As we can see, Federal Bank has a very low PE ratio compared to industry leaders. A PE ratio of 11 says that investors are ready to pay Rs 11 for every Rs 1 generated as profit by the company. PE stands at above 20 for every other bank, which makes Federal Bank cheaply available.

Conclusion

Federal Bank is a midcap stock with a market capitalization of Rs ~22,000 crore. We have compared the lender with the top-performing large-cap banks for our analysis. Hence, we can state that the bank has a long way to go in certain metrics. 

In the past year, the stock has outperformed the BANKNIFTY index by ~34%. The recent quarter results have beaten all street estimates and various brokerage houses have given a major upside for the stock.

Looking at the financial performance, a decreasing NPA and an increasing CASA will unlock better profitability for the bank.

Federal Bank is a professionally run company with no promoters. The 3-year extension of Mr. Shyam Srinivasan as MD & CEO of the bank by the Reserve Bank of India (RBI) will ensure that current operations and future projects will be given more focus and importance.

Have you added Federal Bank to your portfolio? Let us know in the comment section of the marketfeed mobile app.

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Can IDFC First Bank Bounce Back from its Troubles?

IDFC or Infrastructure Development Finance Company and its subsidiary IDFC First Bank (formed in October 2015) have been under fire over the past few months. The IDFC Management has organized an informal conference call on September 14 to address concerns from investors. The management was bombarded with questions about their poor loan book, unsatisfactory financial performance, and dangerous exposure to the distressed teleco Vodafone Idea (Vi). As of August 31, 2021, its share price is much above than it was exactly a year back, yet still less than what it was in September 2016. In this piece, we explore what’s pricking IDFC First Bank and what lies ahead for its shareholders. 

Poor Loan Book And Additional Credit Costs

The company booked consistent profits in the financial year 2020-21. However, it recorded a loss of Rs 621 crores in its last quarter Q1FY22. The poor performance is owed to a jump in credit costs, poor quality of loans, and its high exposure to Vodafone-Idea. 

The company’s revenue for the quarter did go up by 11.08% over last year and 2.15% over the previous quarter. However, the credit costs and increasing provisions ate into its revenue. A loan book’s health is measured by two metrics, its Provisions and its Non-Performing Asset Ratio(%). The company’s Gross NPA went from 1.99% in June 2020 to 4.61% in June 2021. Its Net NPA (Gross NPA minus Provisions) has gone from 0.51% to 2.32% in the same period. 

To ensure that a bank doesn’t get into big trouble, it sets aside some money in proportion to its bad loans/NPA ratio. The process of setting aside such funds is called setting aside a Provision. IDFC First’s Provision went up by 54% from Rs 646 crore in Q4FY21 to Rs 1,001 crore in Q1FY22. The more the borrowers default on loans, the higher provisions the bank has to set aside. This time, the second wave of COVID-19 and poor asset quality led to IDFC First setting aside higher provisions. Additionally, the bank has been unable to control its operating expenses. Its Operating Expense went up by ~54% over a year, while its Total Revenue increased only by ~11% in the same period. 

Unsafe Exposure To Vodafone Idea

In the past few months, IDFC First shares were hammered down till August-end. Nevertheless, the stock regained its position throughout September. The stock has been under pressure since its loan book has high exposure to telecom operator Vodafone Idea. Vi is a financially distressed company. It has Rs 62,000 crore pending in Adjusted Gross Revenue (AGR) dues to the government. The company’s total debt is worth Rs 1.8 lakh crore. Out of the total debt, Vodafone Idea owes IDFC First Bank around Rs 3,240 crore. 

Essentially, IDFC First has 3% of its total loan book exposed to Vodafone Idea. The single-digit number isn’t insignificant. Even SBI, the largest lender to Vodafone Idea, has only 0.5% of its total loan book exposed to Vi. If the telecom company were to shut down completely, IDFC First Bank could face a huge blow. However, Vi’s shutdown is not certain as the government has provided a four-year moratorium to all telecom companies with pending AGR dues. IDFC First Bank had set a provision of Rs 324 crore, which is 15% of total exposure to Vodafone Idea.

Ideally, IDFC First’s share price revolves around news regarding Vodafone Idea. The day the government announced the moratorium for Vodafone-Idea’s AGR dues, IDFC First Bank’s shares rallied by ~4.5%. Apart from other indicators, an ideal investor should watch out for the status of Vi to map the share price of IDFC First Bank. 

Shareholder’s Concern

IDFC First Bank’s parent company IDFC Ltd is performing worse than its subsidiary. On September 14, 2021, IDFC Ltd. held an informal conference call to address investor’s concerns about the company’s performance in recent months. They were bombarded with questions from its shareholders. The entire conference call hinted towards dissatisfaction amongst the shareholders. They questioned the top-level management on CEO salary, management decisions, and the complexity in the structure of the company. They even addressed the loss in value for its shareholders and questioned the company about how it plans to address it. 

In the conference call, shareholders suggested two things: the sale of the Asset Management Business and a ‘reverse merger’ with its better-performing subsidiary IDFC First Bank. IDFC Ltd indeed plans to reverse merge with its subsidiary IDFC First Bank in which it holds close to 36.5% stake, mostly after the sale of its asset management business. You can check out the whole conference call here.

The Way Ahead

Despite some headwinds, why could IDFC First Bank be a good buy for investors? The reason is simple. Supportive technical indicators and a strong plan by the management. The company is ~30% below its 52 week high of Rs 51.4 per share. The moratorium provided by the government to telecom companies on AGR dues provided relief to IDFC First Bank shareholders. The share price rallied ~4.5% after the decision.

IDFC First’s management has some plans to turn the game around. The company plans to reduce its wholesale business (lending money to other big institutions) and increase its retail business (housing loans, personal loans, etc). The bank further plans to have at least 70% retail loans in its loan book in the next few years. This allows the company to diversify and reduce the burden of increasing corporate debt. India’s booming housing market in the coming years may support IDFC First’s plans of pressing on its retail business.  

IDFC First Bank is expecting to gain traction, reduce its credit costs, provisions for bad loans, and NPAs. This will eventually translate into very good profit numbers in the coming quarters and a rally in stock prices for the coming months. 

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Banks Q4 Results, NPA Bomb and More…

In November 2020, we at marketfeed talked of an NPA or Non-Performing Asset time bomb which might go off around this time, sending banks into a pool of bad quarterly results. You can check out the article over here.

During the first wave of COVID-19, when businesses took a hit, the Supreme Court had asked banks all across India to give a stay or moratorium to all those who had borrowed money from them. Whenever someone does not repay their loans on time, banks are required to set aside some money or ‘provision’ as a precaution so that the banks do not go bust in case of an unexpected event. The ‘provision’ money comes right off a bank’s profits, which impacts the profit and loss statement of a bank. RBI had asked the banks to set aside 10% provision for all loans that came under a moratorium which shaved off a few thousand crores in profits last year. However, the provisions were necessary to save banks from greater damage. 

RBI asked banks to set aside provisions only for the amount under restructuring or moratorium and not on those which did not fall under these, this helped protect banks from higher provisioning The overdue loans which were not classified as NPA before would now be classified all at once which could severely impact the banks’ balance sheet. This sudden classification of NPAs is what the whole NPA bomb scare was all about. 

Fast forward to May 2021, all major banks have started coming up with their Q4 results. Interestingly enough, banks like HDFC, ICICI, Axis Bank, IndusInd Bank, AU Small Finance Bank, Equitas Small Finance Bank, and others have posted some really good profit growth for the quarter. A lot of public and private sector bank results that are due this month can go on the same lines. So did we miss out on something? Did the bomb not burst? What are the banks headed for? Let us find out. 

Bank Results Outlook For Q4

  • Good Profits: For Q4FY21, banks have posted fairly good revenue growth and profits. These good numbers were mostly because of High Net Interest Income(NII) and decreased provisions. HDFC Bank posted YoY profit growth of 15.8%. Axis Bank went from a loss of ~Rs  1262 crore to a profit of  ~Rs 2941 crore. State-owned Bank of Maharashtra recorded yearly profit growth of ~214%, and IndusInd Bank recorded yearly profit growth of 193.76 crores. AU Small Finance Bank and Equitas Small Finance Bank both recorded YoY profit growth of ~38% and ~162.8% respectively. 
  • Increase In Deposits: Deposits in banks grew fairly well in the fourth quarter of FY21.  For ICICI Bank the total deposits rose 21% YoY. Deposits in HDFC Bank grew ~16% YoY. For Axis Bank deposits grew by ~10% YoY. For AU Small Finance Bank deposits increased by 37.5% YoY and 52% YoY for Equitas Small Finance Bank. According to an RBI report, total bank deposits increased by ~11.4% in the financial year ending March 31, 2021. 
  • Bad Debt Position Improved: According to credit rating agency CARE, gross NPAs declined from 8 Lakh crore in December 2021 to 7.5 lakh crore in March 2021. The gross NPAs of Scheduled-Commercial Banks, in particular, declined by 2.3% over a year’s time. The bad debt position improvement is also accredited to recoveries that the banks made. According to Care Ratings, banks made the following recoveries in Q4: SBI Bank: Rs  5,657 crore, ICICI Bank: Rs 1,776 crore, Union Bank of India: Rs 1,554 crore, Bank of India: Rs 1,495 crore, Bank of Baroda: Rs 1,471 crore, Canara Bank: Rs 890 crore, Indian Bank: Rs 744 crore, Central Bank of India: Rs 631 crore and Axis Bank: Rs  621 crore
  • Loan Advances Increased: According to RBI, loan advances rose by ~7.2% over a year. HDFC Bank’s advances grew 14% YoY. Axis Bank’s advances grew 15%. AU Bank’s Net Advances were up ~28%. 

Why Banks Performed Well

Aggressive Fundraising Via QIP and NCDs

After the pandemic struck, banks were assigned with safeguarding their position. They had increased their provisions to fight off bad debt but impacted their profit. They needed money to boost their lending and increase bank credit. Banks started aggressively raising funds by selling Non-Convertible Debentures(NCDs) or the sale of equity shares. 

In August last year, HDFC Bank raised Rs 14,000 crore through a combination of NCDs and Qualified Institutional Placement(QIP), ICICI raised Rs 10,000 crores through QIP, and Axis Bank raised Rs 10,000 crore via QIP. In November 2020, RBL Bank raised Rs 1566 crore. In December 2020, IDBI raised Rs 1435 through QIP, Canara Bank raised Rs 2000 crore through QIP.  The list goes long.  Banks now had leverage and could focus on normalizing banking operations. The aggressive raising of funds helped mitigate the effect of increased provisioning, banks could now focus on lending.

Decreasing NPAs and Provisions 

Banks started decreasing provisions plus their Net Interest Income and Gross Advances increased. Since there was an economic stimulus, businesses had started to flourish and employment levels went to normalcy. The asset quality of banks increased due to low slippage. Slippage = New NPA. However, the asset quality might go down for banks in Q1FY22, where Gross NPAs or bad loans might go up.

Banks Wrote-off Huge Overdue Loans

When a bank has enough provision for an NPA when it is overdue for three years, the bank can write off the bad loan. What this does is that it removes bad loans from the company’s accounts and improves the company’s balance sheet. It improves the company’s NPA ratio and the company can reduce the provisions which in turn improves its profits. As of March 31, 2020, banks have written-    off loans worth 1.15 lakh crores in the first three quarters of the previous financial year. In fact, Indian banks have written off 8 lakh crores worth of bad debt in the past decade. Once you write off a loan, it ceases to exist, it doesn’t matter. This could be another major reason why the NPA time bomb couldn’t tick off. 

Update: RBI Governor Shaktikanta Das’s Announcements

RBI Governor Shaktikanta Das made an uninformed announcement on May 5, 2021. In the speech, he announced some key reforms that will again benefit banks, micro, small and medium enterprises(MSMEs), pharma companies, vaccine makers, drug manufacturers, medical oxygen suppliers, and other essential health services. He also announced some provisions to financially assist state governments in times of pandemic. These reforms have now allowed banks to restructure more loans. They have also announced measures to selectively induce liquidity into the markets that have to an extent safe guarded banks from the devastating second wave of COVID-19. We have talked in detail about Shaktikanta Das’s Speech at marketfeed. To know more, click here.

A lot of loans are still under restructuring by banks. This has simply delayed the NPA spike that was expected. Banks raising funds through QIPs and NCDs did safeguard them. However, the second wave of the coronavirus will amplify the magnitude of the NPA crisis. The first quarter of FY22 doesn’t seem too bright for the banks. Shortage of Medical Oxygen, COVID-19 drugs, and vaccines has acted as a barrier to economic revival. Can a situation similar to last year occur again for banks? Or could it be worse than that? Is there something that we are not able to see? Let us know in the comment section in the marketfeed App. 

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Banks are Sitting On A Bad Loan Time Bomb!

Indian Banks have performed unexpectedly and exceptionally well in the second quarter(Q2) of this financial year. Markets too were not sure of why the big banks in India are posting such good profits, reduction in bad loans, and improvement in asset quality. BANKNIFTY, the benchmark index for all the retail banks in India, too didn’t reflect for long on the profits that the banks were posting. This kind of exceptional performance wasn’t expected since India’s 23.9% April-June GDP contraction, the damage done to businesses by the COVID-19 Pandemic, and the RBI being vigilant on rising Bad Loans/Non-Performing Assets(NPAs). 

The reason is clear for these high profit numbers. The banks are sitting on an NPA(Non-Performing Asset) time bomb, which will explode sooner or later.

  1. Why Are The Banks Posting Such Good Profits?
  2. What is The NPA Time Bomb?
  3. What Next?

Why Are The Banks Posting Such Good Profits?

In the second quarter, ICICI Banks has posted a profit of 242.46% (YoY). HDFC Bank has posted a profit of 15% (YoY), RBL and IDFC First Bank have posted profits of 185% and 116% respectively. None of the 12 listed PSU banks have posted a loss. Even banks which have posted consecutive losses earlier have posted profits in this ‘stressed’ quarter. All of this, while the ill-effects of the COVID-19 pandemic still continue to impact businesses in India. 

There are mainly two reasons for such good profits.

  1. Net Interest Income: The Net Interest Income is the difference between the interest paid out and interest received by banks. The Net Interest Income has increased substantially. This means that banks received more interest money than the money it gave out to account holders, lenders, etc. As the economy gets back to normalcy, businesses and people are more likely to pay back the money that they had borrowed from these banks.
  1. Improved Asset Quality and Reduced Provisions: The banks have seen an improved asset quality because they are vigilant and cautious while lending money. Banks aren’t lending money as freely as they did before. This decreases the NPA to some extent. The banks have to set aside “provisions” for these NPAs. Provisions are funds set aside by a company as current liabilities to pay for anticipated future losses. These provisions were reduced to almost half of what they were in the last quarter in many banks. The amount of provisions reduced coupled with reduced NPAs gets added to the companies’ book of accounts, thus increasing the profits.

What is The NPA Time Bomb?

India has been struggling with rising NPAs, low borrowings, and a low growth rate even before the COVID-19 pandemic came around. The RBI has been working on these problems for a long time through regulation and open market operations. It hasd implemented Long Term Repo Operations or LTRO to boost borrowing. The RBI has also announced frequent moratoriums and debt restructuring schemes for Micro, Small & Medium Enterprises(MSMEs).

This is where the problem arises. Banks were asked not to classify many loans as Non-Performing Assets(NPA) in case somebody defaulted during the moratorium period. The loan moratorium and debt restructuring schemes have been around way before the COVID-19 lockdown period. The Supreme Court has said that accounts that were not declared as NPAs till August 31, shall not be declared NPA till further orders. As said before, reduced NPA equals reduced provisions, equals more profit. The impact of NPAs has just been delayed and not written off. 

SBI has funds worth Rs 8.2 lakh crores under the moratorium scheme. Kotak Mahindra Bank has Rs 9,000 crores, ICICI Bank has Rs 14,000 crores and HDFC Bank has 15,000 crores worth of loans which are under debt restructuring schemes or moratoriums. A huge chunk of them may turn out to be Non Performing Assets (NPAs), all at once. This will lead to banks keeping higher provisions aside which will eat into the operating profits of the company. You can expect an explosion of NPAs somewhere around Q3 FY 2020-21. 

What Next? 

The government has announced a waiver on the interest-on-interest on the loans availed for the period between 1st March and 31st August for an amount of upto Rs 2 crores. This might be a slight relief for borrowers and reduces the burden of NPAs on the banks.

Apart from this, there has been not much activity by the centre or the RBI to mitigate the burden of the bad debt that will arise in the future. One shall prepare for a turbulent ride for the banks in Q3 of this financial year.