The rise of retail banking

Wednesday, August 8th, 2018

Nice piece by Vivek Kaul in the Mint paper on how Indian banks are changing the focus of their business.

It talks about how, without any regulatory push, Indian banks are increasingly moving toward narrow banking with a focus on the retail segment.

This is of course a direct result of the NPA mess that is hitting balance sheet of public sector banks.

The public sector banks have been particularly badly hit and their bad loans ratio stands at 15.6%. Clearly, lending to industry has turned out to be the worst form of lending for banks. As on 31 March 2018, 22.8% of the loans to industry had turned out to be bad loans. In absolute terms, ₹ 703,969 crore of loans to industry had been defaulted on. Hence, loans to industry form around 68% of the overall bad loans of banks.

 

And

What Chart 3 tells us very clearly is that once a bad loan is written off, its chances of being recovered are very low. Between April 2014 and December 2017, loans amounting to ₹ 272,558 crore were written off. Of this only ₹ 29,343 crore or 10.8% of the loans were recovered from defaulters. This means that the rate of default on bad loans was 89.2%. A large part of these loans, are loans given to industry, which have been defaulted on.

 

It is therefore makes a lot more sense for these public sector banks to focus more on retail banking. And we can see that in the data:

By 31 March 2013, lending to industry and retail made up for 45.8% and 18.4% of the non-food credit, respectively. Five years later, the situation has changed completely and lending to industry and retail make up for 35.1% and 24.8% of the non-food credit, respectively.

 

We see this trend in incremental loans:

Banking
 

However, public sector banks may even find this sector to be difficult because they have to compete directly with the private sector where banks are far more competitive, dynamic and agile. Just look at this chart from an article by Ira Dugal at Bloomberg Quint:

Banking

 

While this reflects deposits and not lending, it shows the disruptive shift of money moving away from public sector banks and increasingly toward the private sector.

Other reasons for the stagnation in lending to industry is that industry itself does not have much demand for credit:

The RBI Order Books, Inventories and Capacity Utilisation Survey (OBICUS) tells us that the capacity utilisation rate of Indian manufacturing companies has ranged between 71-74% for a while now. There is huge idle capacity in India’s manufacturing sector. More than a fourth of the capacity is not being utilised. In this scenario, it doesn’t make any sense to expand, until there is enough demand for companies to first utilise this idle capacity. This also explains why there is little demand for industrial credit from banks.

Add to that the fact that planned investments are also being dropped:

Data from the Centre for Monitoring Indian Economy tells us that the investment projects worth ₹ 6,51,509 crore were dropped in 2017-2018, an increase of 57.2% from 2016-2017. This is another factor which tells us that the demand for credit from banks by the industry is weak. If projects are being scrapped, there is no reason for firms to borrow.

And finally, there is a move by large corporates to increasingly taking funding from non-bank entities. The falling interest rate scenario over the last few years meant that NBFCs could offer more competitive interest rates than bank that were slow transmit rate cuts. In addition, in a move to deepen the bond markets, there is a proposed regulatory push by SEBI directing large corporates to start taking twenty five percent of their funding from the bond markets.

When you put all this together, it is no wonder that banks are increasingly avoiding industrial lending and focusing on the retail sector.

Over the last five or six years I have seen a number of analysts and fund managers talk about how the NPA mess in the banking sector has peaked. With strict measures from the RBI and numerous positive regulatory changes like the bankruptcy code over the years, it seems like at least fresh pain will not be created in the industrial sector. But with no demand from corporates and with  existing NPAs still to be digested, it seems like it will be a while before the sector turns around.


Coffee Can investing with S Naren

Tuesday, August 7th, 2018

Nice interview of S Naren by Saurabh Mukherjea on Moneycontrol in their new Coffee Can Investing Series.

A few excerpts from the video:
On the importance of a support system to help improve your investment calls:

So, what I guess Mr. Kamal Chaddha did was he got together a set of people like alcoholics anonymous. These were all people who made mistakes in investing. And it was anonymous at that point of time and got us to discuss our sorrows of losing money. What interestingly came out of that is the realisation that in investing, you sometimes go wrong, sometimes get it right.
When you go wrong, you need the equivalent of support system. A formal organization provides such a support system by the virtue of the number of people in the team, but when you are investing on your own, you don’t get that. So, a group really works. So, it’s like some kind of a psychiatric help which is required to… or a coaching, you can call it either which will help you to make very good investments decisions over a period of time.

 

On how to value real estate:

No one understands the valuation of real estate. So I looked at rental yields and at mortgage interest rates. In the US, at the same time when Indian property prices were high, rental yield was much higher than the mortgage interest rate. Whereas in India there was a 7 percent gap. That means the mortgage interest rate was nine and a half percent, rental yield was 2 percent. I said the seven and a half percent gap can’t continue.

 

The hurdles to long term investing:

The problem with the best investing decisions is that the near term is very painful. When Warren Buffett invested in Goldman preference shares or GE preference shares in 2008 the near term was very painful. The long term was very good for him but the fear of the near term is a big problem. So, recently my company did something in December, January of returning money in small cap PMS (portfolio management schemes).

 

Timing the market:

Actually I must tell you how flows happen, so, if you look back at the last 20 years, which were the best years to invest in equities, it was when both FIIs and local mutual funds were sellers. The worst years to invest in equities was when both of them were aggressively investing.

 

How generating alpha today is far more difficult:

Once they became famous you could track their portfolios that give you additional insights, so,  these were  clear leads and I think the advent of the date and the advent of the data being available, so many companies and their shareholding patterns gives you such valuable insights over a period of time but I tell my colleagues, in the 1990s, we had nothing and that’s why it was easier to make money whereas today you know what every big investor has done, every quarter because his shareholding is very visible to you.

 

And, as this ability to create alpha goes down, the importance of asset allocation becomes even greater:

Increasingly the market is going to be more efficient, making it much more difficult for people like us, which is the reason why I believe that multi-asset construct where you are selling equities as the market goes up and buying equities as the market goes down is a much better way to try to create alpha for the customer because it is in pure equity funds, where actually this problem of Michael Mauboussin calls, efficiency is going to become more and more a problem

Check out the full video on the Moneycontrol website.


Linkfest – 86

Saturday, August 4th, 2018

I come across a lot of good articles from across the web. This linkfest will help you cut out the noise and focus on what was important in the last few weeks:

 

Indian Economy:

Firms paying out more in dividends – Livemint

The grim real estate market – Livemint

Core inflation inching up – Capitalmind

Shift in social sector spending – Bloomberg Quint

The sad state of farmers – The Economist

Mixed progress under UDAY – Bloomberg Quint

The Oil market Sulphur headache – Bloomberg Quint

Rate hike now to avoid more later – Bloomberg Quint

India’s agricultural paradox – Urbanomics

The life of an insolvency professional – Bloomberg Quint

Understanding the people behind the MPC – Bloomberg Quint

Depositors moving to private banks – Bloomberg Quint

India’s banking crisis is a power crisis – Bloomberg Quint

 

General:

The race to a trillion – Above Avalon

The market is rolling simply because it is rolling – A Wealth of Common Sense

Kylie Jenner: a disruptive brand in the make up space – Forbes

China’s retail disruption – PWC China

The coming JUMP disruption – Medium

Trade patterns of India vs. China – The Big Picture

Analysing Warren Buffett’s real estate investments – Safal Niveshak

 

 

Investing & Personal Finance:

Why diversify globally A Wealth of Common Sense

LTCG and bonus shares – Capitalmind

Mutual funds at 25 – Business Line

Inherited hindsight bias – Morningstar

 

Buffet’s timeless investment principles –YouTube

 

 

 

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Monthly Market Summary: July 2018

Thursday, August 2nd, 2018

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.

 

We use data for these charts from Investing.com

 

Global Equities

Monthly Market Summary

Market rallied across the board, with major equity indices showing stellar returns across the world. However there are rising concerns that the depth of the market is narrowing, with small and mid caps showing divergent performance.

 

Fixed Income

The 10Y G-Sec corrected over July, falling from near 8 per cent to 7.8 per cent. Rising oil prices, a depreciating rupee and fiscal concerns are putting a cloud on the Indian macro story.

 

Gold

Although it has fallen further in July, gold continues to trade in the 1200-1400 dollars per ounce range. A strong move of gold outside of this range would give a better indication of its long term trend.

 

Oil

Oil stayed relatively range-bound in July. Because of our large dependance on oil imports, it is important to keep an eye on this figure as it can have a destabilising effect on our macros.

 

Indian Rupee


The Rupee was stable against most major currencies but appreciated sharply against the Yen. This is a reflection of global trends of a strong dollar.

 

 


Linkfest – 85

Wednesday, July 4th, 2018

I come across a lot of good articles from across the web. This linkfest will help you cut out the noise and focus on what was important in the last few weeks:

 

Indian Economy:

Power problems for India – Bloomberg Quint

Indian banks: Let a hundred CEOs bloom – Livemint

IBC may just be the bitter pill power projects need – Livemint

One year of GST: Still miles to go – Livemint

Aparna Iyer on PCA – Livemint

What if stressed loans are higher than expected? – Livemint

LIC and IDBI – Bloomberg Quint

The risks of InvITs – Capitalmind

GST and the textile industry – Bloomberg Quint

Indians love for electronics is a macro headache – Bloomberg Quint

 

General:

The world of finance in a decade – Bloomberg

Amazon’s private label business – The New York Times

Emerging market panic and valuations – Research Affiliates

 

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Monthly Market Summary: June 2018

Wednesday, July 4th, 2018

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.

 

We use data for these charts from Investing.com

 

Global Equities

Monthly Market Summary

The S&P 500 and the Sensex were flat in June but continue to show great returns over the one and three year horizons. However the returns of the Sensex mask the much deeper correction happening in the small and mid cap space. This is part of the much deeper correction happening in emerging markets as well as other developing markets outside the USA. As can be seen in the charts above, both MSCI EM and MSCI EAFE have corrected sharply in June. This could be as a reaction to increased likelihood of trade wars as well as a rising interest rate environment led by the US Fed.

 

Fixed Income

The 10Y G-Sec continued to trade higher on concerns on the macro environment and even touched eight per cent in June. Rising oil prices, a depreciating rupee and fiscal concerns are putting a cloud on the Indian macro story.

 

Gold

Although it corrected sharply in June, gold continues to trade in the 1200-1400 dollars per ounce range. A strong move of gold outside of this range would give a better indication of its long term trend.

 

Oil

Oil stayed relatively range-bound in June. It appears that this commodity now breaking out on the higher side. Because of our large dependance on oil imports, it is important to keep an eye on this figure as it can have a destabilising effect on our macros.

 

Indian Rupee


The Rupee depreciated against the Dollar and the Euro and stayed relatively rage bound against the Yen and Pound. This is a reflection of global trends of a strong dollar.

 

 


Linkfest – 84

Friday, June 22nd, 2018

I come across a lot of good articles from across the web. This linkfest will help you cut out the noise and focus on what was important in the last few weeks:

 

Indian Economy:

Agriculture: The age of surplus – The Indian Express

Transparency in state bonds – Business Standard

RBI gives UCBs another shot – Bloomberg Quint

UPI 2.0 – Business Standard

Bond yields continue to rise – Bloomberg Quint

Rising risks to financing the CAD – Livemint

Malls are back with a vengeance  – Business Standard

India in 2017 suffered a net loss of 2 percent of its millionaire population – New York Times

Brewing subprime mortgage crisis in India? – Bloomberg Quint

Credit Growth numbers breakdown – Moneycontrol

TV Disruption – Bloomberg Quint

The big cost of small business – Livemint

But also, MSMEs driving commercial credit flows – Bloomberg Quint

 

General:

Private Equity myths busted – Urbanomics

Private Equity is not a silver bullet – A Wealth of Common Sense

The case for European equities – The Economist

AI and investing – Morningstar

Fed raises interest rates – Bloomberg Quint

China starting to reign in shadow banking – The Economist

Howard Marks on index investing, algorithmic investing and AI  – Oak Tree Capital

 

Investing and Personal Finance:

Why do stocks generally go up over time – A Wealth of Common Sense

What will your children inherit – Subramoney

The unexpected leads to the unexpected  – A Wealth of Common Sense

Too big to be simple? – A Wealth of Common Sense

 

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Linkfest – 83

Friday, June 8th, 2018

I come across a lot of good articles from across the web. This linkfest will help you cut out the noise and focus on what was important in the last few weeks:

 

Indian Economy:

4 year tax trends – Bloomberg Quint

Survey of digital banking in India – Business Standard

The latest quarterly GDP growth figures – Bloomberg Quint

Cheap data driving profound shifts in India – Business Standard

SEBI Surveillance and its impact on the market – Bloomberg Quint

Unintended consequences of e-way bill – Twitter

RBI Policy: Regulations to boost competition in pricing of state bonds – Livemint

That LCR change – Capitalmind

 

General:

The billionaire mindset – The Big Picture

The way forward for CPG companies: Case study of Unilever – L2 Inc

Andy Mukherjee: Inflation drivers – Bloomberg

Japan’s recovery is the greatest economic success never told – The Washington Post

Inflection point for the ECB – Bloomberg Quint

 

Investing and Personal Finance:

The psychology of money – Collaborative Fund

Arnold Schwarzenegger: Total Recall – Of Dollars And Data

Psychological biases in a panic – The Eighty Twenty Investor

 

Macro Overview: JP Morgan vs Bank of America – YouTube

 

Mary Meeker Internet Trends report – YouTube

 

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