Modi Throws $32bn At Indian State Banks – Share Prices Surge

Share prices of Indian state banks surged as the government announced it would hand over $32bn to recapitalize the sector. According to Reuters, the motivation was a bid by Prime Minister Narendra Modi to tackle a major drag on the economy that has frustrated his attempts to boost growth.

Once the world’s fastest-growing major economy, India has seen its growth rate plummet to the lowest in three years, far below levels needed to create enough jobs to absorb the million Indians joining the work force every month. Modi’s government has tried to respond by stepping up public spending, but the slowdown has stressed its finances, making it imperative that private investment picks up the slack. Officials privately admit they have struggled to revive private investment because state-owned banks, which provide much of the credit in the economy, are saddled with a mountain of bad debt…

 

Twenty-one state-run banks account for more than two-thirds of India’s banking assets. But they also account for a bulk of the record 9.5 trillion rupees ($145 billion) of soured loans. In addition to repairing their balance sheets, the banks need billions of dollars in new capital to meet global Basel III banking rules, due to fully kick in by March 2019. Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking rules. Moody’s expects the top 11 state lenders alone will need nearly $15 billion.

That’s what we call a trend reversal…

Here is Bloomberg’s take...

India’s government has won a resounding reception from investors and credit-ratings firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks.

The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.

“The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”

Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state-run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.

In the end, there was no alternative than for the Indian government to provide additional capital. While investors have shunned the state-owned banks due to poor profitability and asset quality, the situation was further complicated by the requirement for the state to maintain at least 51% ownership. Ratings agencies, Fitch and Moddy’s have been highlighting the weakness in capital ratios.

Delving into some of the details of the capital injection, Bloomberg explains, the government will sell 1.35 trillion rupees of recapitalization bonds, while banks will raise another 760 billion rupees through “budgetary support” and from the markets, according to the plan announced Tuesday. The funds vastly outstrip the 700 billion rupees that India had pledged two years ago to inject by 2019, and is likely a recognition that the government had underestimated the impact ballooning bad loans would have on credit growth…

“These funds will help in efficiently managing risk and credit capital-related requirements of the banks,” State Bank of India Chairman Rajnish Kumar said in an emailed statement.

Bloomberg summarised market reaction in stream of consciousness fashion.

Analysts say the step is “sentimentally positive” and will help lenders meet over 70% of their capital needs but lending won’t grow immediately. Punjab National Bank jumps as much as 40%, most on record; Bank of Baroda surges as much as 29%, State Bank +25%. Recapitalization amount is “huge,” will help banks meet higher provision requirements under new accounting rules starting April 2018 Citi (Manish Shukla, Abhishek Sahoo) Timely recapitalization of government banks will boost capital adequacy, even after they make provisions for soured loans However, private sector demand -- muted over past few years -- has to revive for loan-growth to recover CLSA (Aashish Agarwal, Prakhar Sharma, Aditya Jain) Plan should help satisfy more than 70% of lenders’ needs required for lending to increase, absorb “haircuts” on stressed loans Punjab National Bank, Union Bank raised to buy from sell JEFFERIES (Nilanjan Karfa) India plan is “sentimentally positive” and makes all state banks “a basket trade” Bank lending won’t improve immediately, but it “partially solves” supply of capital flow; stoking demand needs to be worked at separately MORGAN STANLEY (Anil Agarwal, Sumeet Kariwala, Subramanian Iyer) State lenders can now “take the required hits” arising from soured loans, make proper provisions, and move ahead Insolvency rule was helping bad-loan resolution, recapitalization will accelerate it NOMURA (Adarsh Parasrampuria, Amit Nanavati, Riddhi Jain) “Big state banks recap” is a game-changer; expect re-rating in state-owned banks Infusion “highly dilutive” but very positive for FY19 adjusted books

As ever, you can’t please everybody as Reuters noted...

Mohan Guruswamy, an economist in New Delhi, said the government should have taken action three years ago to revive the banking sector. "Now it"s more expensive, and we will not see results soon," Guruswamy said.

 

Bank Deregulation Back in Vogue: It’s time to dance the last fandango!

The Great Recession was so great for the only people who matter that it is time to do it all again. Time to shed those bulky new regulations that are like clod-hoppers on our heals and dance the light fantastic with your friendly bankster. Shed the encumbrances and get ready for the new roaring twenties  that are just around the corner.

The banks need to be able to entice more people into debt because potential borrowers with good credit and easy access to financing are showing no interest in taking the banks’ current enticements toward greater debt. That could indicate the average person is smarter than the banks and apparently recognizes they are at their peak comfort levels with debt. The banks, on the other hand, want to reduce capital-reserve requirements in order to leverage up more.

Thus, President Trump, blessed be he, is working (in consort with the Federal Reserve) on cutting bank stress tests in half to once every two years and working to significantly reduce the amount of reserve capital banks are required to keep. He also wants to make the stress tests a little easier to pass. Such are the plans of his Goldman Sachs economic overseers to whom Trump has given first chair in various illustrious White House departments.

That should all go well. Why maintain a high bar on matters of national economic security? After all, we know stress tests are needless regulations because Alan Greenspan told us prior to the Great Recession that banks are naturally self-regulating for the obvious reason that self-preservation is in their own best interest. (Just like sharks in a feeding frenzy are more concerned about careful self preservation than about simply getting the biggest chunk of meat the quickest.)

Banksters in all their brilliance are, of course, applauding the changes as something that will boost jobs and expand the economy. That’s the sales pitch for deregulation. The truth, of course, is that the banks want to leverage up more so they can invest more money in stocks now that the Fed has stopped QE and is even looking at rewinding QE. That is how banks make their money these days, since fewer people want to take on additional loans anyway. (Those they buy stocks from will also just reinvest in other stocks, continuing the cycle that has been going on since 2009.)

Not only are people sitting tight on loans, but with immigration tightening up there will be fewer new people to seek new housing and new loans down the road. Banks see this coming. That’s the real reason the federal government long maintained loose immigration policy: more people equals more customers and more GDP growth and cheaper labor due to more and tougher competition in the labor pool!

(Full disclosure note: I am one of the oddballs that thinks we have enough people, thanks — of any color or nationality, including my own. I love different colors and cultures (including my own); I just don’t want more people. I don’t agree with an economic foundation that is predicated on the unsustainable notion that you have to keep overpopulating and developing real estate forever in order to have a sustainable economy. Let’s all become Mexico City in order to succeed forever and improve our standard of living? There’s a worthy goal! And that IS where a real-estate-development, immigrant-sucking based economy has to wind up. Just keep squeezing in more and more people endlessly so you can keep the economy going.)

We need to deregulate banks so the money will trickle down

That"s the party line.

On the one hand, banks face a growing apathy in the general market toward taking on more debt, and they face a slower-growing marketplace (in terms of the growing number of clients). On the other hand, why should banks want to make loans that always have an element of risk anyway when the stock market remains virtually risk free under central bank guarantee? I mean, if you"re working with money given to you by the central bank, why not invest it all where that same central bank has your back, telegraphing to you that the stock market is where they want it invested? If you do it the way they want, they"ll keep printing new money for you.

Now that all the talk is about reversing the money presses, banks have to find other sources of money if they are to continuing investing in stocks. That"s why banksters are now touting the goal of improving wages in the job market. Evidence of their actual desire to boost jobs can be seen in Bank of America, the United States" second-largest bank. It is in the process right now of expanding its layoffs in order to streamline operations and boost profits to shareholders. It is also replacing higher-paid employees with lower-paid ones.

Wasn"t the Fed"s goal of bringing the job market up to "full employment" supposed to translate into wage improvements for the middle class? Whatever happened to that central-bank objective? Who benefited more from the Fed"s efforts to create full employment than banks to whom all the Fed"s free money freely flowed? So, if you don"t see it happening in banks, you won"t see it happen anywhere. And it clearly ain"t happenin".

Ah well, once again, money didn"t trickle down. It got caught in the banks" multiple filters. The banksters, richer than they have EVER been, are actually working to reduce the amount they have to pay employees by getting rid of the more expensive ones (down in the lower tiers of course) so that the one percent who run the banks can be richer still.

Surprise! Money doesn"t even trickle down when you are an employee closest to all the free money that is supposed to trickle down. (And it never will!) The Federal Reserve talks a good game about wanting to see wage growth and about being concerned about growing income disparity, but its member banks don"t seem to be getting with the program. So, if the Fed cannot even persuade its member banks, after all these years of their recovery program, to improve wages in the lower tiers by giving them lots of free money to distribute, it certainly cannot persuade anyone else with less of a connection to the free money.

Obvious or what? Surely, you never really believed the upper crust would let wage inflation happen! It"s still the same trickle-down talk of deregulating the banksters at the pinnacle of the economy so that the economy can keep growing and wages can expand, but the real goal is simply reducing reserve requirements in order to free up more money during this tightening phase for the banks to continue to play with in the Wall Street Casino.

Another big move at deregulation happened in congress yesterday

Targeting government regulations, the Republican-led House on Tuesday voted to nullify a rule that would let consumers join together to sue their banks or credit card companies rather than use an arbitrator to resolve a dispute.

The repeal resolution passed by a vote of 231-190, almost entirely along party lines.

The Consumer Financial Protection Bureau finalized the rule just two weeks ago. It bans most type of mandatory arbitration clauses, which are often found in the fine print of contracts governing the terms of millions of credit card and checking accounts.

Republican lawmakers, cheered on by the banking sector and other leading business groups, wasted no time seeking to undo the rule before it goes into effect next year. (Newsmax)

God forbid you should ever be allowed your normal citizen"s right to your day in a real court against your favorite banksters if they stoop you in the middle of their bump-and-grind dance.

They saved the last dance for you

So, let"s deregulate the banks all over again in order to improve jobs and help the economy grow and make sure you cannot hurt your banksters if they first hurt you! Let"s buy into the same promise again ... and again ... and prove the masses are nothing but dumb oxen, always ready to shoulder the burdens of the infernally rich.

Now that the same banks are even more too big to fail, it"s certain to be the last fandango this time. So, grab your favorite fat bankster while you can, and let"s have us one big whoop-ass dance! Come on, Everyone! Of course, you will be expected to caddy all of his or her money on your back while you dance with him or her so he or she can enjoy the dance. You cannot expect a man or woman of such rotundity to carry a load when he or she"s so fat! And, who knows, maybe a single coin will spill out of that money bag this time and finally be yours! It could happen! Bet your life on it; bet your nation"s life on it. If you shoulder the entire money bag on your back, there may be a coin spill out for you ... maybe. That"s the trickle-down guarantee:  maybe next time will be different and some of the money will become yours ... maybe.

So, you"ll bear the burden because that"s what you"re supposed to do if the hope is ever to become true.

This article by David Haggith was published first on The Great Recession Blog. 

Business Customers Are Tired Of Being Bilked Of Billions; Demand Rate Increases On Their Bank Deposits

As we"re all well aware by now, once Trump was elected on November 8th the Fed suddenly decided it was no longer necessary to prop up asset prices in the United States with artificially low interest rates.  As such, they"ve embarked on their first rate-hiking spree since the last one ended just over a decade ago. 

Meanwhile, in light of the fact that the Fed has raised rates by 75bps over the past 6 months, we recently wondered aloud just how long the big banks could continue to stiff Americans out of interest payments on their deposits.  As the Wall Street Journal points out today, despite three Fed rate hikes over the past several months, the average rate paid on deposits at the 16 largest banks in the U.S. has risen a paltry 10 bps.

Meanwhile, with nearly $12 trillion held in deposit accounts at U.S. commercial banks, each 25bps of foregone interest is costing depositors about $30 billion a year, all of which is flowing straight to the bottom line of the large banks.

In the end, we concluded that the banks would continue to suppress deposit rates for as long as their customers continued to ignore the fact that they were getting shafted but that, over the long haul, math and greed would prevail and depositors would demand higher rates.

Alas, it seems as though the "long haul" that we predicted has arrived well ahead of schedule...at least for business customers anyway.  As the Wall Street Journal points out today, corporate customers are starting to demand higher rates on deposits and, for the most part, the large banks are acquiescing.

Consumers are giving banks a pass when it comes to shopping for higher interest rates on deposit accounts. Businesses, on the other hand, are becoming more demanding.

With short-term interest rates on the rise, corporate depositors are seeking bigger payouts for their deposits, and big banks have started capitulating.

The reason: Small rate increases are often worth just pennies to many consumers, but they can translate into meaningful dollars on large corporate deposits of millions or even billions of dollars.

And companies have greater leverage with banks since in many cases they also bring in lucrative investment banking and trading business.

“The jig is up,” said James Gilligan, assistant treasurer at Kansas City, Mo.-based power company Great Plains Energy Inc. He said many companies, including his, have negotiated better deposit pricing with banks where they also borrow. Treasurers who have the flexibility to move their money are also seeking out higher rates.

Of course, the reality is that banking institutions offer fairly commoditized products with minimal differentiation and barriers to switching, aside from the pure hassle, are not that extensive.  So while banking executives may tout their position of power in negotiating to keep deposit rates lower for longer, in the end they"ll be forced to take whatever rate the market demands...

“The way we approach pricing these days is, we defend our turf,” says Tayfun Tuzun, chief financial officer at Fifth Third Bancorp , the Cincinnati-based bank. Mr. Tuzun said U.S. banks are also being pressured by competition from overseas banks that want to build their deposits. Some are willing to pay 1.25% or 1.3%, he said, while a typical corporate deposit rate for a large account in the U.S. currently is about 0.9% to 1%.

More corporate customers say that day is now passing. “A year ago, it was not worth the time it takes to make a phone call” and push for a higher rate, said Jeff Glenzer, vice president at the Association for Financial Professionals, an industry group for corporate treasurers. “The higher the rate becomes, the more attractive it is to worry about where the money sits.”

Most banks are already awash in more deposits than they need, causing some analysts to predict they’ll be stingy on corporate deposit rates, especially with loan growth softening in recent months.

“We’ll use pricing to start relationships,” said Darren King, CFO of M&T Bank Corp. , based in Buffalo, N.Y. “But over time, relationships need to work for both us and the customer.”

And, then again, maybe Yellen will completely cave on rate hikes if equity markets ever decide to decline for more than 30 minutes at a time and this whole discussion will be moot.

Bill Blain: Here Is Southern Europe's Next Tipping Point

By Bill Blain of Mint Parnters

"The Braavosi have a saying too. The Iron Bank will have its due....”

One of the things that’s been niggling me for years has been the question of just how unfixed the European banking sector is.

This morning I’ve attached a note my associate Ben Stheeman and I have put together on Non-Performing Loans (NPLs) in Second Tier European Banking. It’s a simple look at the publically available numbers.

Nobody will be surprised a North/SouthWest line divides Europe into good banks and less good banks. North of the line there are a few issues. Italy remains the problem - 16 out of 19 Italian banks don’t meet European standards on NPLs! We conclude the Italian second tier banks need to raise some €32 bln of new capital just to cover their existing holes. (€32 bln isn’t a massive number any more, but it’s a very large number for what are essentially very small banks – meaning further calls on Italian tax-payers look likely!) 

In recent weeks we’ve seen a gamma burst of activity across European banking: the resolution and bail-in of Banco Popular, the bailout and transfer of the Veneto banks, and a number of completed NPL sales by Italian banks. However, this morning, the FT highlights how new European Securitisation laws may kill the market for Hedge Funds and PE Funds to buy NPL and fund them via Securitisation.

That sums up much of the confused thinking on European banks.

The Eurocrats have made grand assumptions, plans and visions for European Banking Union, including a single regulator, rules and definitions. But the reality is European banks remain very national in their characteristics and outlook. They have little in common that would define a “European Bank”.  

Readers may recall European banks were barely touched by the initial outbreak of banking uncertainty in 2007 and 2008. I remember being told how stupid the British banks were in comparison to the clever European names that hadn’t got involved in structured and secured debt. And then the Lehman moment changed everything and the Global Financial Crisis went critical. Then we tumbled into the European Sovereign Debt Crisis and European banks became mired in a deepening crisis. A collapse in sovereign confidence triggered worries across weaker European banking names.

Since then we’ve seen multiple rescues, bailouts, handouts, defaults, restructurings, recapitalisations and bail-ins across Europe. Regulators and politicians talk big about banks being fit to fail without recourse to taxpayers – therefore they should have lots and lots of capital.

But, it’s never a lack of capital that kills a bank. Its access to liquidity – which depends on confidence.  Folk will keep depositing in a bank as long as they are confident they will get their money back. When confidence unwinds, the bank will fail. Simples.

Regulators have made the assumption you can solve the confidence problem by putting in enough capital to cover any event. Because of the importance of national banking systems, pre-2008 investors read that as a bail-out charter, correctly anticipating banks would be bailed out.

Now it’s changed – but only slightly. The Veneto and MPS events demonstrated the Italians have little choice but to continue bailing out their banks because there was no large private sector to help out.

Otherwise, the reasons confidence in banks collapses is different every time. It might be because of fears a massive mismatch on the derivative book will trigger overnight crisis (watch this space), or might be something more simple. Some of the triggers are obvious – like how certain Irish banks got sucked into unwise property games because they thought they understood the market and the politics of property better than anyone else. Or it might be German and Austrian banks overwhelmed by toxic investments. Some names were simply swept away in the Netherlands. I watched a sinking property market trigger crisis in Spain. (On the other hand, I’m still struggling to understand how the French banks seemed to skate across the thin ice largely unscathed – a story for another day perhaps..)

What became quickly apparent is that there is no such thing as a European Bank. That was particularly true before the ECB became the regulator across the Eurozone. National self-interest trumped Europe every time – still does in many countries. National Characteristics and Politics still define the way in which banks operate.

Post crisis there has not been a clean banking sweep across Europe. Some countries; notably Spain and Ireland, addressed the crisis and have come out with stronger banks. Selective names were rescued, rebuilt and rebranded. Some names were mercy-killed.

But in most cases the symptoms of chronic unwise lending and resulting undercapitalisation were treated with sugar lumps, lashings of free ECB money and a general hope banks would recover as/when/if the European economy recovered.

In the US, banks were put on diet of forced recapitalisation and clean up – it worked.

There has been much talk about European Banking Union – trying to create common rules and practice to make real the illusion European banks are homogenous group. But they aren’t – and won’t be if the rules only apply to large banks. 

Years of regulation, and selective memory gives us a European Systemically Important Financial Instututions (SIFI) Banking sector of some 30 core banks that could be described as healthy(ish). They all meet the core capital tests. They are recapitalising themselves to the levels determined as appropriate by the regulators.

But, there still isn’t any standard definition of European capital, and there is still no single Pan-European banking champions! The German banks seem to be retreating into their home market. The Dutch are focused on their domestic markets. Only the French show any real ambition – and even they have learnt caution from just how doomed they would have been if Greece, Portugal or Ireland had actually exploded! (Now I wonder how large French exposures to Turkey might play out…)

I could ramble on for paragraphs about how national banks reflect national outlook – The UK banks as mercantile commercial funders and mortgage providers, the German banks as instruments of regional economic policy, French banks as lending conduits for the State’s industrial policy, or Italian banks as SME lenders.. Too simplistic – but bear with.. 

Let’s not worry about the big banks. Sure there is a chance the next European financial crisis might be spawned within one of them.. but, it’s far more likely we’ll continue to see a series of smaller crisis gestate in lower down the European banking food chain. There are simply far too many of them..

We’ve looked at European banks with a balance sheet of €10bln plus. We didn’t worry about subsidiaries. Most of Europe’s second and third tier banks are perfectly fine. But a worrying number aren’t – they have flashing red signal lights screaming Danger, Danger! I suspect many depositors (including investors in their bond issues) to these second tier banks continue to lend because, contrary to the evidence, they think they are safe. Maybe it’s national interest, politics or implied government support – but a significant number of Southern European banks still look in crisis, but still attract deposits.

After looking at capital, management, and focused on NPLs, guess what? The bulk of Europe’s smaller banking problems are bound up in Southern Europe – Italy in particular. Surprised? Thought not.

We’d be interested in any feedback on the attached file.

How Long Will Banks Screw Their Customers On Deposit Rates...As Long As You Allow Them To

As we"re all well aware by now, once Trump was elected on November 8th the Fed suddenly decided it was no longer necessary to prop up asset prices in the United States with artificially low interest rates.  As such, they"ve embarked on their first rate-hiking spree since the last one ended just over a decade ago. 

Of course, equity investors have failed to realize so far that the party may be coming to an end as every debt-fueled asset bubble, from autos to residential mortgages, is about to experience the demand destruction that comes along with a tightening of credit.  That is, if Yellen and her fellow bankers can stay the course.  But that is all a story for another post. 

For now, in light of the fact that the Fed has raised rates by 75bps over the past 6 months, we"re wondering just how long the big banks can continue to stiff Americans out of interest payments on their deposits.

Take, for example, the following chart from Bank of America"s Q1 2017 earnings presentation.  Despite the Fed"s target rate increasing 50bps from the end of 1Q16 through the end of 1Q17, Bank of America actually slightly decreased the rate they paid on consumer deposits...which was basically nothing already.  At the same time, their net interest income has soared.

Which has understandably delighted bank shareholders...

...but it does raise the key question of just how long depositors will allow their banks to get away with this highway robbery.  Afterall, with nearly $12 trillion held in deposit at U.S. commercial banks, each 25bps of foregone interest is costing depositors about $30 billion a year, all of which is flowing straight to the bottom line of the large banks.

The answer, of course, is quite simple as the banks will continue to suppress deposit rates for as long as their customers continue to ignore the fact that they"re getting shafted.  And how long that will take is anyone"s guess. 

On the one hand, there are a lot more online banking options that pay attractive rates on deposits now compared to the previous rate hike cycle suggesting that customers have more options for moving their money around to find a better deal.  On the other hand, banking relationships can be somewhat sticky because people simply don"t want to deal with the hassle of having to move their accounts.  Per the Wall Street Journal: 

“Many bank management teams believe we could be one to two hikes away from an increase in retail” deposit rates, John McDonald, a bank analyst at Bernstein, wrote in a recent note. “At the same time however, we’ve never quite seen a cycle like this play out before, so it’s tough to know for sure.”

Banks have been dealing with interest-rate cycles and depositors for decades, but a number of factors, both psychological and technological, make this time of rising rates different. A decade of near-zero rates, more competition from online firms, less loyalty from customers and new capital rules, among other factors, are making preparations more difficult.

“We’ve never really seen this movie before,” Marianne Lake, chief financial officer of J.P.Morgan Chase & Co., told investors recently.

But while banks can rely on the "stickiness" of deposits in the near term, over the long haul, we suspect that math and greed will prevail...

A number of online-focused banks, like Ally Financial Inc. and Synchrony Financial , are able to pay higher rates because they are less encumbered by brick-and-mortar expenses. An even newer competitor, Goldman Sachs Group Inc., has been driving rates higher to draw deposits to its new consumer bank. It currently offers 1.2% interest on online savings accounts.

All those factors combined raise the prospect that when consumers do decide to move, banks may be forced to raise rates at a faster pace than investors might be expecting.

Nelson Bonilla is part of that threat. His savings account at Synchrony pays about 1.15% interest. But Mr. Bonilla, a software developer in San Francisco, is on the lookout for institutions that might pay more.

Though he has already moved his savings account twice in recent years, he’s open to being wooed away a third time. “I wouldn’t hesitate,” Mr. Bonilla says, “to switch again.”

And, then again, maybe Yellen will completely cave on rate hikes if equity markets ever decide to decline for more than 30 minutes at a time.