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Questions & Answers on State Bank of India-VRK100-22Jul2021

(Updated chart on 21Sep2022, with Central Bank of India out of the PCA Framework, at the end of the article)

On 08Sep2021, India's central bank Reserve Bank of India took out a public sector bank namely, UCO Bank, out of RBI's Prompt Corrective Action (PCA) Framework taking into consideration some improvements made by UCO Bank in certain business metrics. It may be mentioned that UCO Bank was put under PCA by RBI in May 2017.

As of now, only two banks are still in the RBI's PCA Framework--they are Central Bank of India and Indian Overseas Bank, both state-owned banks.

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Banking Questions & Answers 71

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Introduced in 2002, PCA Framework is a regulatory action whereby RBI puts weak banks under lending / other restrictions, so that the weak banks' future health will improve. A weak bank will be subject to this arrangement based on certain parametres, like, capital adequacy, profitability, asset quality and leverage.

It is interesting to note that there were 11 banks (all public sector banks or PSBs) under PCA mandate as of December 2018 (when total PSBs were 21). And now there are only two banks under PCA, as mentioned above. The list of PCA banks shrivelled from 11 to two!

So what magic had occured in the past three years that resulted in nine PSBs coming out of the PCA mandate? RBI governor change happened. On 10Dec2018, Urjit Patel resigned as RBI governor. On 12Dec2018, Shaktikanta Das replaced Urjit Patel as RBI governor.

Within 11 weeks of his taking over, RBI under Shaktikanta Das removed five banks out of the PCA mandate. Dena Bank's amalgamation with Bank of Baroda effective 01Apr2019 took the former out of the PCA, without any action by the RBI. In another round of mergers, Oriental Bank of Commerce was amalgamated with Punjab National Bank effective 01Apr2020--as such the former too was out of PCA through the amalgamation route.

In 2021, IDBI Bank and UCO Bank were taken out of PCA. IDBI Bank is technically a private bank now, which is a separate issue.

Detailed timeline of PCA Framework is given below: Table 1:

Banking experts may not agree with my viewpoint with regard to RBI's abrupt actions in weakening the foundations of PCA regulations. But the circumstances that surround the PCA regulation compel me to believe that people at the helm decide on what to regulate, when to regulate and when to look elsewhere.

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Appendix 1: Public sector banks that were under PCA framework as of December 2018:

Appendix 2: List of PSBs as on 25Sep2021:

Appendix 3: Details of recent Bank amalgamation / merger in recent years:

P.S. 2: Update 21Sep2022: On 20Sep2022, RBI removed Central Bank of India from the PCA Framework. Now, no more PSBs are in the PCAF. See updated image >

P.S. 1: Update 29Sep2021: On 29Sep2021, RBI removed Indian Overseas Bank from the PCA Framework. Now, the only public sector bank (PSB) under PCA is Central Bank of India. See updated image >

References:

Tweet thread dated 06Oct2015

Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

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BSE Broad and Sectoral Indices Returns - vrk100 - 25Sep2021

BSE Broad and Sectoral Indices Returns

(A new blog post is available here with an update of the information as of 31Dec2021)

BSE Sensex reached all-time high yesterday. So are other indices from BSE Limited and NSE Limited. Sensex closed at 60,048, while Nifty 50 closed at 17,853 on 24Sep2021.

Year-to-date, Sensex delivered a return of nearly 26 per cent, whereas BSE Mid cap and BSE Small cap indices delivered a return of 40 and 55 per cent respectively. Among sectoral indices, metals, basic materials, realty, information technology and power have done well this year.

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BSE Broad and Sectoral Indices Market Cap

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The broad and sectoral indices returns are as follows:

Table 1: Annual Returns:

If you observe the returns in the table 1 above closely, you will notice that Sensex and BSE 500 indices have given negative or negligible returns in 2013, 2015, 2016, 2018 and 2019. Only in 2014, 2016, 2020 and 2021 we've seen some decent returns.

But if you look at table 2 below, the one-year, three-year and five-year trailing returns look spectacular due mainly to recency bias of tremendous returns Indian stocks have witnessed since the COVID-19 pandemic lows of March 2020.

Among sectors, stocks in information technology, healthcare, FMCG and banking have done well over 10 years (see table 2 below). The leadership changes among sectors every year as can be observed from the annual / calendar year returns (table 1 above); the same goes for large-, mid- and small-cap stocks.

As compared to the US and other markets, Indian stocks have underperformed over a period of five to 10 years. But in 2021, India has outperformed other markets.

Table 2: Trailing returns:

You could look at the difference in returns between Sensex and Dollex 30 indices in the above tables. The difference represents the changes in the US dollar and Indian rupee (USD-INR) exchange rate. For example in 2013, Sensex delivered a return of positive nine per cent (table 1 above), whereas Dollex 30 index returned minus 3.5 per cent--as Indian rupee depreciated heavily against the dollar in that year.

And if you look at table 2 above, the 10-year annualised return (in rupee terms) for Sensex is 14 per cent, whereas the Dollex 30 delivered an annualised return of just 9.5 per cent (in dollar terms). The difference is reflective of the heavy depreciation of rupee versus dollar between 2011 and now.

Launched in 2001, BSE Dollex 30 consists of the same 30 stocks that are in Sensex, but the former is expressed in US dollar terms--so it is impacted by the dollar-rupee value.

Now coming back to Sensex, trailing returns give a distorted picture; hence it's better to look at annual returns for a better perspective of market returns.

It may be mentioned in the Sensex, BSE 500 and BSE AllCap indices, the stocks belonging to Banks, Finance, information technology, oil and gas, fast moving consumer goods (FMCG), pharma & healthcare, transport equipment and capital goods have the highest weights. Data for sectoral indices in the above two tables is given approximately in the order of the weights (free float) in BSE AllCap index.

The following table gives the weights of the sectors in BSE AllCap index:

Table 3:BSE AllCap sector weights as on 23Sep2021:

The total market capitalisation of all BSE listed companies reached Rs 261 lakh crores yesterday. As can be seen from the enclosed image, the total number of listed companies on BSE stock exchange is more than 4,000.

To sum up, equity returns are highly volatile. Investors tend to rotate among stocks and sectors. Even institutional investors can't escape this proclivity towards sector rotation. One year, healthcare stocks do well, the next year not so as we've seen in the past two years. In some periods, stocks in other sectors do well.

Instead of looking at trailing returns, it's better to be aware of the volatile nature of stock markets and look at the pattern of annual (calendar year) returns. If you find interesting patterns ahead of others, you're likely to beat the market.

References:

Value Research annual returns

Value Research trailing returns

BSE sectoral indices levels as on 24Sep2021:

BSE broad indices levels as on 24Sep2021:

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

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Wednesday 22 September 2021

Do Paint Stocks and Crude Oil Tango? - vrk100 - 22Sep2021

Do Paint Stocks and Crude Oil Tango?

It's often said that rising crude oil prices are a negative for paint stocks in India as crude oil is the major raw material for paint companies. On business television, we often hear that paint stock prices are under pressure due to rising crude oil prices. Is this view really correct?

If companies have competitive advantages and pricing power in the market, higher crude oil prices are not an immediate dampener for paint stock prices. Indian companies, like, Asian Paints and Berger Paints have demonstrated over the years that they are able to pass on higher raw material prices to consumers--while maintaining their sales growth and profitability. (This is not a recommendation for stocks or commodities; this is just for information purpose only).

A rough glance at the price chart (TradingView) for the past five years indicates that there is little correlation between the stock price of Asian Paints and Brent crude oil price. For comparison, the Nifty 50 index is also included.

Five-year chart: (click on the image for a better view)

As can be seen from the above graph, the Asian Paints stock has increased by 178 per cent in the past five years, while Brent oil has gone up by 55 per cent and Nifty 50 has doubled in the same period.

It's always a good idea to check the facts before we believe what many market people tell us on television day in and day out.

One could argue that correlations need to be checked over long periods of time, not just five years or 10 years. It's a fair point. However, as we've seen in Indian stock market, paint stocks have done well even in times of rising crude oil prices. That does not mean paint stocks will do well even when oil prices skyrocket to say USD 100 or USD 200 per barrel.

In stock market, there are various factors that affect stock prices. At any point of time, a few factors outweigh other variables. As investors, we need to be careful of the market narrative and always watch out for the real factors.

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

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Tuesday 21 September 2021

India Macro Data - vrk100 - 21Sep2021

India Macro Data

The following are some of the important data points relating to Indian economy.

1) G-Sec Outstanding: Rupee outstanding loans of Government of India (GOI) as on 20Sep2021 are Rs 77.02 lakh crores (excluding special securities). This figure is also known as G-Sec (Government Securities) outstanding. The data source is Reserve Bank of India.

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Read more:

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Indian Economy's Strengths and Weaknesses

Rising Government Debt and Fiscal Deficit

Cash Management Bills and Government Borrowing

Basics of Inflation-Indexed Bonds

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The data from 1999 to 2021: As can be gleaned from table 1 below, the outstanding G-Sec amount has increased by 120 per cent during the Modi Government regime (from Rs 35.14 lakh crore in March 2014 to Rs 71.68 lakh crore in March 2021). During the Manmohan Singh Government (2004 to 2014), the outstanding G-Sec surged by 280 per cent.

The G-Sec amount does not include other public debt and external debt.

Table 1:

2) Ownership pattern of Govt of India Date Securities: The biggest holders of G-Secs are commercial banks. They hold 37.8 per cent of total outstanding, which is Rs 71.68 lakh crore as on 31Mar2021. The second and third biggest holders are insurance companies (25.3 per cent) and Reserve Bank of India (16.2 per cent). The next in line are provident funds (4.44 per cent), mutual funds (2.94 per cent) and FPIs (foreign portfolio investors 1.87 per cent).

Table 2:

3) Ownership Pattern Over the Years: As per the latest data, as at the end of June 2021, available from Reserve Bank of India (RBI) and Govt of India, the biggest holders of Govt of India Dated Securities are commercial banks (36.0 per cent), insurance companies (25.8 per cent) and Reserve Bank of India (17.1 per cent). The outstanding amount is Rs 78,82,533 crore (end-Jun2021).

In the past five years, the share of commercial banks has decreased to 36 per cent (Jun2021) from 39.9 per cent (Jun2016); the share of insurance firms rose to 25.8 per cent from 22.6 per cent; and the share of RBI rose to 17.1 per cent from 14.9 per cent five years ago.

In the past three years, the RBI has been buying government securities (G-Secs) aggressively which is reflected in its increased ownership pattern. It may be noted this period is coincided with the current RBI governor Shaktikanta Das.

Table 3:

4) Yield and Maturity of Govt of India Dated Securities: Despite persistently high inflation above six per cent for most of the past 20 months, RBI has been able to borrow government securities from the market at or below six per cent yield (see table 4 below). RBI in the past two years, has been resorting to heavy buying of government securities through its Open Market Operations (OMO), which has kept the India 10-year G-Sec yield well below six per cent.

It may be noted RBI is the money manager for Gov't of India in the sense that RBI borrows money from the market on behalf of Gov't of India.

Table 4:

Weblinks:

RBI public debt statistics

RBI Time Series on public debt

Govt of India public debt management - quarterly reports

RBI 15Sep2021 Handbook of Statistics on Indian Economy - RBI DBIE (click on 'Handbook of Statistics on Indian Economy' section)page

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

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Friday 17 September 2021

JP Morgan Guide to the Markets Aug2021 - vrk100 - 17Sep2021

JP Morgan Guide to the Markets Aug2021

JP Morgan Asset Management publishes a comprehensive presentation every month end, containing various slides on global markets, especially those relating to the US markets.

This is a very useful and informative guide for financial market professionals or FMPs. This "JP Morgan Guide to the Markets" can be accessed here. The following are some of the highlights presented in this guide: all the data are at the end of 31Aug2021:

1) S&P 500 index at inflection points: this contain the index level and the forward PE ratios at important inflection points in the past two decades:

2)S&P 500 valuation measures: contains 25-year average forward PE ratio, Shiller PE ratio, P/B, standard deviation and other ratios:

3) Sources of EPS growth of S&P 500: annual growth broken into revenue, changes in profit margin and share count:

4) Value vs growth relative valuations: S&P 500 sector correlations to real US GDP: Industrials have high correlation, while consumer staples, utilities, consumer discretionary and healthcare have very low correlation:

5) S&P 500 index concentration: PE ratio of Top 10 and the rest; weight of top 10 stocks and earnings contribution of top 10 stocks:

6) Factor performance: return matrix: returns of small-cap, large-cap, value, growth, defensive, cyclical, momentum, quality, etc:

7) S&P 500 intra-year declines vs calendar year returns:

8) Interest rates and equities: in the US, stocks and rates move in tandem until 10-year yield rises to 3.6% and then they move in opposite direction:

9) US stock market since 1900: S&P 500 composite index at several events, like, New Deal, WWII, Vietnam War, Reagan Era, Tech Boom, GFC, etc; and during recession periods:

10) Components of US GDP: 69% consumption, 17.7% govt consumption, 12.6% investment ex-housing, 4.7% housing and - 3.9% exports:

11) Income inequality in the US: Top 10% of pre-tax income reaches the highest level of 50.5% now:

12) Long-time drivers of US economic growth: In the last decade (2011-2020), the real GDP growth is driven by productivity or growth in real output per worker (1%) and growth in workers (0.7%):

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P.S.: The following sources of information / images are added (all data as of 31Aug2021 for items 13 to 23 also), as additional information, after the above article was published on 17Sep2021:

13) High-frequency economic activity: high-frequency economic indicators like, mortgage applications, consumer transactions, hotel occupancy, travel and navigation app usage, seated diners and TSA traveler traffic.

14) Unemployment and wages: 50-year average unemployment rate is 6.3 per cent and 50-year average wage growth is 4.0 per cent.

15) Employment and income by educational attainment:

16) 50-year average inflation (headline CPI) in the US is 3.9 per cent.

17) The US dollar drivers are US trade balance (current account deficit) and developed markets' interest rate (10-year bond yields) differentials.

18) Oil markets: US, OPEC and Russia output; global consumption and crude oil prices.

19) The Fed balance sheet expansion (QE1, QE2, QE3 and QE4):

20) Interest rates and inflation: Real 10-year US Treasury yield is the nominal 10-year yield minus year-over-year core CPI inflation. Real yield as on 31Aug2021 is minus 2.93 (1.30 - 4.23) per cent.

21) Global equity markets: Year-to-date (01Jan2021 to 31Aug2021), Indian stock market outperformed major stock markets. YTD, India delivered 26.1 per cent vs S&P 500 21.6 per cent.

22) Asset class returns (asset return matrix):

23) Diversification and the average investor: Of all asset class returns, returns earned by average investors are among the bottom.

UPDATE for Nov2021 JP Morgan Guide to the Markets

References:

JP Morgan Guide to the Markets 30Jun2021 PDF

Tweet thread dated 05Jun2021 - charts of old dates

Tweet thread dated 17Jan2021 - asset class returns / return matrix

Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

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