INDUSIND BANK: Q1 FY17

Yet, another Blockbuster performance by IndusInd Bank, one of the leading star performers of Indian private banking sector. IndusInd has become synonymous with double digit growth. As expected, Net Profit, Net Interest Income, deposits and advances all reported double digit growth rates. Net Interest Income, difference between interest earned and expended was at Rs. 13564 mn up by 38% YOY. Net Profit too zoomed 26% YOY at Rs.6614 mn in the current June quarter. Net Interest Margin at 3.97% completed the picture with 29 basis points jump buttressing the bank’s profitability in the present volatile scenario. Asset quality is stable with Gross NPAs and Net NPAs at 0.91% and 0.38%, rising by 4 bp and 2 bp respectively QOQ. Provisions & contingencies have risen considerably, 8% QOQ and almost doubled to Rs. 2305 mn compared to corresponding period previous year. Double digit growth rate is visible in all business segments except treasury, retail segment (23%) which constitutes 51% of the total revenue followed by other banking business (31%) and corporate (18%). Low cost funding CASA declined by 30 basis points YOY in the present June quarter which is a concern area for the bank. Other income which accounts for 23% of the total income for the bank climbed 28% YOY in Q1 FY17. Growth momentum continued for core fee with yearly growth of 23%. Deposits and Advances grew parallely at 30% growth rate YOY in Q1 FY17. Unpredictable Fed moves, China & Europe slowdown and now Brexit has kept equity investors on tenterhooks. Thus with uncertainty being the new norm, Indian Private sector offers ray of hope for value investors.  IndusInd bank with CAR of 15.42% (Tier I-14.81%), credit growth rate above industry average, growing profitability and stable asset quality is poised for high growth as one of the major players in Indian banking industry. Thus ‘BUY’ signal is recommended for the stock with the target price of Rs.1280 for medium and long term investment.  

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RISK AVERSE INDIAN GROWTH RATE

India no more following the Hindu growth rate in the present volatile global scenario has been a debatable issue over the last two years. Changing the GDP methodology from factor to market based price, has spurted our GDP making it one of the best performing Emerging Markets. Economists and analysts have made their observations quite vocal at regular intervals, so the recent US government report hasn’t come as a shocker neither for the government nor for the Indian masses. But what is of a major concern are the facts which have come to light in the recent Financial Stability Report.

Both credit and deposit growth rates of SCBs have not only remained in single digits but have declined. Credit growth rate has declined to 8.8% in March 2016 from 9.40% in September 2015. Deposit rate at 8.1% in March 2016, fell by around 180 basis points over the same period. As per Bloomberg report, syndicated loans of about $ 8.6 bn were signed by Indian borrowers, which is 44% lower in the second quarter than the previous three months. Corporate sector is on severe diet control due to over-gorging on easy stimulus available by Indian banks at the time of 2008 crises. So right now de-leveraging is the sole mantra for the Indian corporate and thus stimulating private investment or expansion is a farfetched goal both for the Indian government and banking industry. Small and medium enterprises have been the major martyrs facing double edged sword of a slowing economy and stringent bank credit regulations. As a result leverage or DER of small and medium companies has gone up.

Big companies and established industrial houses are busy giving endorsement to new government initiatives and policies, but when it comes to implementation, purse strings don’t loosen up and excess cash gets invested in mutual funds, bank deposits, government bonds and other financial assets bloating ‘other income’ of these companies year after year. Do we have poor risk taking ability? Everything insured and assured makes sense to us either by central or state government or some big industrial house. May be our general mentality is to play safe till the global tidal current settles down. We have already lost decades waiting for liberalization and now that we have reforms on daily basis we should not be looking at the FED or ECB or BOJ. What we need today is not just ease of doing business but easing ourselves mentally to take on the world as it comes.  I had recently read somewhere, “There are two main dangers in life, risking too much and risking too little”. And we Indians risk too little. 

POST BREXIT RALLY OR ETERNAL SUNSHINE OF SPOTLESS MIND

Nothing to do with fundamentals, this is what the analysts are saying these days, after markets have rallied spectacularly after Brexit. Even currency markets have stabilized now. Have the markets become immune after years of stimulus packages, interest rates close to zero or even negative and low confidence in central governments. Or has it got to do something with Eternal Sunshine of a Spotless Mind. Yeah may be global investors have erased Brexit memories…. Just joking….. 

Bank of England has signaled monetary loosening and the FED, BOJ and ECB have nodded in unison bringing about this global rally fuelled by liquidity which may lead to overheating or overvaluation of Emerging Markets at least in the medium term. So the party goes on till some Act of God like Brexit, completely misread and miscalculated by the markets hits them again. After Brexit, no trigger factor in sight and central banks becoming more and more predictable, stock markets have become barometers of liquidity than economic fundamentals. Even in the current tumultuous times, we need not worry as the ongoing reform process has made it impossible for any class of investors to obliterate Indian economy from their investment portfolio. Reforms in aviation sector, harmonizing telecom spectrum, Rs. 6000 crore package for textile sector and the new National Mineral Exploration Policy in less than fortnight has shown commitment of Indian government to fight global uncertainty on the front foot.  Thus Indian investors are in a sweet spot and to make the most of it follow they just need to the fundamentals as Fundamentals Create Wealth.

BREXIT: EURO MEETS ITS WATERLOO

English is a very funny language, I learnt it while watching one of my favorite hindi movie. Well, ask the French, who are ready to remove it as one of their official languages. So not only Britain, its national language will no longer find place in the land of Napoleon. What about a French referendum for a Frexit? Nobody is going to promise that from now on. When the whole world is shocked and baffled, Indian politician are amused, arrrre yaar could have promised something else, refrigerator, television sets, gold chains, laptops, free electricity, water……. Whaaat is this referendum.

David Cameroon will be remembered for changing the course of history or geopolitics, whatever you want to call it. But can you actually blame him. Yes, he couldn’t understand what we call in India, pulse of the people. But he did help in bringing out the voice of dissent loud and clear. Anyone anywhere in the world will think first about themselves, their family, community and then about the nation’s GDP if given a choice. As a result, Britain has made its choice, Scots have made theirs. Do you think Scots have voted for globalization or free trade, No they would rather prefer being a smaller part of Europe than one of the four islands of United Kingdom.

Britain exports 44% of its goods and services to EU and has annual trade of about $ 575 bn, and as per political and economic analysts the so called old and middle aged people are unable to comprehend this. They have seen 25-30 years of EURO rule and are disillusioned with series of bailouts to save German and French banks, autocratic austerity measures imposed on EU members and continuing economic depression coupled with aimless monetary policy.  

Although quick divorce is recommended, EU & UK marriage was anyways not completely consummated with separate currency and Britain not joining Schengen agreement i.e maintaining its internal border controls. As Britain looses EU, EU has also lost one of its wealthiest members which contributes 3% of the world’s GDP. So instead of making it difficult for Britain, European Union should put its house in order, stop carrot stick approach and formulate cohesive socio-economic policies to sustain itself in the long run. As for Britain and its people, I think they followed what John Burrougs said, “LEAP AND THE NET WILL APPEAR”.

ADIEU DR. RAJAN: NEVER SAY NEVER AGAIN

He is one of the very few central bankers discussed not only in corporate boardrooms, bank headquarters but also in dinning halls and coffee shops across the world. Though the media has made his non extension a major issue, did he really need it? He has already accomplished in the last three years, what might have taken others five or six. After 1990, he is the second RBI Governor whose term has not been extended. With so many theories floating about his decision to quit, it would be unwise to believe what our political pundits want us to believe. I think the major bone of contention between RBI Governor and North Block was inflation v/s growth, the rest was just froth which added the unnecessary mystification to the whole episode. And it happens everywhere with central governments chasing growth and central bankers curtailing inflation. So nothing is new, history has just repeated itself after three years when the then Prime Minister had vowed in media that the government is ready to walk all alone.

So we just have to move on, there is so much to look forward to from Brexit to FED to ECB and then China. I don’t think we have time to brood and weave new theories to enthrall both foreign investors and media. Whatever might be the case, Dr Rajan will always be remembered as someone who shook the bureaucratic system, upset the capitalists and flogged the bankers after every rate cut. He also made the government extend Swachh Bharat Abhiyaan to banking sector and unleashed financial inclusion era by giving out small and payment bank licenses. This list can go on…..  

On 20^th June, FDI reforms announced by the NDA government might be considered astute by some political analysts, but it makes one thing very clear, Indian reform process will be fast-tracked at every impediment whether it is opposition to GST or Rexit. As for Mr. Rajan after resignation also he was able to influence government policy, if not the content, then at least the timing.

ARE WE READY FOR THE NEXT GLOBAL FINANCIAL TSUNAMI

Everyone salutes the rising run, that is absolutely true both in the case of R3 (Raghuram Rajan) and MSD (Mahendra Singh Dhoni). Why, because both can be replaced any time. Both termed as game changers are subject to acute criticism, just because people think there time is over. Like politicians, analysts are also playing the Indian blame game, though a subtle and a veiled one as one of them in the monetary policy conference asked whether the Governor would be there to oversee the whole FCNR bonds redemption process in September- November period this year.    

In September 2013, when global currency markets were writing obituaries for Indian rupee, RBI opened a special swap window for Indian banks at 3.5% annually for a tenor of 3-5 years for raising Foreign Currency Non Resident bonds to stop outflow of dollars from the Indian economy initiated by US Fed tantrums and augmented by what pink papers termed then as policy paralysis. So now that the redemption of FCNR bonds of around $ 26 billion fully covered with RBI’s forward purchases is just round the corner, it has started appearing like a self planted land mine.  Short term volatility is expected in the currency markets at the time of redemption which can be easily smoothened by RBI intervention by supplying dollars to banks to honor their commitments without even using the forex reserves which stand at $ 363 billion.  This short term event would be over in less than 2 months and Indian currency markets along with Indian Rupee will be back on track. But what about the financial weapons of self destruction planted all over the world ticking every second making this financial world volatile, uncertain and unpredictable. Can no one hear the deadly ticking in the US economy with FED having no idea, which wire to cut to defuse it, what about the Chinese conundrum, the Middle East oil crises and yeah Brexit. All of these need to be cleared and diffused.

We can’t go and vote for British referendum or get Lehman Brothers again to court, but we can of course put our house in order. What will we do if there is another financial Tsunami. Instead of playing this blame game, why don’t the self proclaimed learned generals of our economy gather consensus for passing GST which will fortify us and enhance our GDP by 1.5% or prepare for rising crude price which might cross $70 in next few months.  This list could go on…. Right now in the present uncertain scenario change in captaincy will add to short term volatility, so are we ready for this with Rupee Dollar exchange rate already crossing 67. Whatever might be the decision the good work initiated by RBI under Dr. Raghuram Rajan has at least diffused PSU banking sector suffering for over 20 years saving the Indian economy and general public for decades to come.

INDIAN CORPORATE MONSOON TO DROWN WESTERN SHOWERS

While I was going through hibernation last month, rest of the world was moving pretty fast. Don’t worry I didn't go through low body temperature or slow heart rate, just a state of inactivity. But there were lot of melting moments in the scorching month of May, SEBI tightening P notes, government re-writing Mauritius treaty and of-course our RBI governor’s re-appointment for which at least Indian corporate may ask for a referendum.

The fourth quarter results which are still pouring in gave the needed relief to investors even before rains arrive as FMCG companies gave encouraging numbers, not to forget heavy stalwarts like Hindalco, L&T, Tata Motors, Airtel and the usual upbeat private sector banks. Public sector banks are also witnessing recovery encouraging long term investors to go for value investing. So do we need core sector or IIP numbers which are usually contradicting GDP data.

Though Indian monsoon is expected to hit in the second week of June, for rest of the world there might be beginning of financial drought and upheaval for emerging economies as US prepares for its second rate hike. Europe with its first quarter growth at 0.5% compared with 0.3% in the previous two quarters is exhibiting signs of gentle recuperation. Rising oil prices have further fuelled inflation hopes of depressed western economies. Thus what we need is getting equipped for a more turbulent financial scenario at least in the short term, the contours of which would be evident in the upcoming OPEC, ECB meet tomorrow and FED meet in the third week of this month.  All of this including the British referendum is going to keep everyone busy. For us monetary policy on 7^th June would be keenly followed both by economists and political analysts for future projections. Come what may we have steadied our boat, we just need to follow the North Star. And for retail investors follow the fundamentals, as fundamentals create wealth.