Rupee appreciation to keep inflation in check

20 Dec, 2007, 1438 hrs IST, PTI
NEW DELHI: The appreciation in rupee will continue to put a downward pressure on inflation, which is
forecast to stay around 4.4 per cent in the new year, global financial services major Goldman Sachs says.
“Our base case forecast for Wholesale Price Index (WPI) based inflation for 2008 is 4.4 per cent, allowing the
RBI to ease monetary policy in FY09,” the Goldman Sachs report said.
The upward pressures on inflation are manageable, as long as aggregate demand continues to slow down,
the rupee appreciates as per forecasts and authorities continue to resist a full pass-through of international oil
prices, it added.
“We believe loose liquidity will increasingly feed into higher inflation from current levels. However, we expect
a falling output gap, the primary determinant of inflation, and currency appreciation will keep inflation within
the RBI’s target range of below 5 per cent,” Goldman Sachs analyst Tushar Poddar said in the report.
The growth in the broad money, which comprises of the currency, savings and small time deposits, has been
growing at a multi-year high due to copious inflows, elevated oil prices and spending pressures on the fiscal
and there is a risk that inflation may accelerate in 2008, the report said.
However, Goldman Sachs believes that a falling output gap and further currency appreciation would keep a
lid on inflation and allow the Reserve Bank of India to start lowering rates in FY09.
“We assume that the 12 per cent appreciation in the rupee this year will impact inflation next year,” Poddar
said.
According to Goldman Sachs analysis, inflation would go from the current level of 3.75 per cent and an
estimated 4.5 per cent in FY08 to 4.4 per cent in fiscal 2009, as loose liquidity passes though into inflation.
Meanwhile, there are some risks to the Goldman Sachs’ outlook, which include liquidity becoming loose due
to continued inflows, a food price shock, fuel charges being fully passed through and a much higher fiscal
deficit.
In India, fuel prices are administered and not fully passed through and the timing of the pass-through matters
significantly for inflation.
“We estimate that currently, India’s’ domestic fuel prices need to be increased by about 20 per cent to reflect
global oil price movements and also allow oil companies to wipe out under-recoveries,” Goldman Sachs said.
But with oil subsidies increasing in magnitude, it is becoming increasingly difficult for the government to not
increase domestic fuel prices.
However, with elections around the corner, Goldman Sachs expect the government would raise domestic
prices by less than 10 per cent.
Besides, the report said the inflationary expectations remain well-anchored in India due to the credibility of the
central bank.
However, the inflation could go up to as much as six per cent, if fuel prices are hiked by about 20 per cent to
fully reflect international prices, the increase in fiscal deficit to one per cent of GDP and money supply growth
in excess of 20 per cent.

Foreign banks await RBI’s green signal to branch out

Constrained by the branch licensing policy, they are waiting for the sector to be opened up in April 2009

By Rana Rosen and Saumya Roy

What do Citibank India head Sanjay Nayar, HSBC India CEO Naina Lal Kidwai and ABN Amro country executive in India Romesh Sobti have in common? All of them have set their eyes on domestic banks and, given a choice, they will acquire the target banks before the regulator says, “go”. They have the money, aggression and willingness to grow in a market that promises big margin business.

Banking experts have no crystal ball to see the future landscape of the industry, but agree on the main ingredients: domestic mergers, more investment from foreign banks, some foreign takeovers of private banks and some consensual nuptials if the regulator opens up the sector. But the experts and foreign banks disagree on when, if and how much the regulator will do to welcome a greater foreign presence.

Many of the big foreign banks had come to India in some form or the other as far back as a century and a half ago, but it was only in 2005 that the Reserve Bank of India (RBI) drew the first clear roadmap on how they could operate here. And RBI promised to re-evaluate these rules four years later.

In the meantime, Indian banks were given time to strengthen their balance sheets, consolidate and overall become more robust, so that they could compete. The regulator, did not however, promise that it would take away the ring of protection around local players in April 2009, when the norms are due to be reviewed. Foreign banks in India are hoping and planning, but do not expect any major changes in 2009.

Standard Chartered in India is watching the space closely. “We feel constrained with the number of branches that we have,” says Neeraj Swaroop, head of Standard Chartered Bank in India. “Assuming that the Reserve Bank of India allows foreign banks to acquire, we will be interested, depending on the opportunities available and their pricing.”

Experts say, that before 2009, public sector banks would like to join forces, and note that finance minister P. Chidambaram has supported the idea. Yet public sector banks, like it or not, are unlikely to be taken over by foreign banks if the policy opens up in 2009, even though many are weak and ripe for a strong partner. It is the private sector banks that would be targeted.

“Private sector banks, although more expensive, would be attractive targets for foreign banks,” says George Chrysaphinis, a financial institutions analyst with rating agency Moody’s Investors Service. “Public sector banks have significant legacy issues, namely huge ageing workforces, inefficient networks and poor working practices.”

Sanjay Aggarwal, national industry director for financial services at KPMG India Pvt. Ltd says, “They (private sector banks) are not up to speed in terms of computerization and profitability.”

Also, private banks in India are relatively affordable to foreign banks. India’s largest bank, ICICI Bank, has a market capitalization of about Rs86,000 crore while Kotak Mahindra, for example, has over Rs20,000 crore. Citigroup’s market cap is over $271 billion (about Rs11.1 trillion). “In the international context, Indian banks are still very small,” says Robin Roy, associate director at PricewaterhouseCoopers Pvt. Ltd.

Banking analysts say foreign banks will be taking all this information into consideration as they form their strategies between now and 2009. They will be deciding whether to compete with Indian banks on volume, or go in for niche services as they have been, recently. They will be thinking about whether to expand geographically—maybe into smaller cities—or in their products and services, including offerings to small- and medium-enterprise (SME) clients. Roy says they are looking forward to newer models for SMEs and are expecting a relaxation on mandated lending. There may also be early meetings with private banks and investment bankers as some foreign banks scout the landscape for strong potential partners and acquisition targets. Roy says that clearly some will grow on their own, while others will look for ways to expand quickly.

Despite all these possibilities, experts and foreign banks do not expect much to happen in 2009. “I don’t think 2009 is going to be a magic year where, suddenly, foreign banks can come in, start acquiring banks and become very large, but they will have a much more liberalized regime than what it is right now,” says H. N. Sinor, chief executive officer of Indian Banks’ Association (IBA), a premier banker body in the country.

“But, still, it will take some time before they can have a complete free play in the system.” Aggarwal of KPMG India notes that 2009 is also an election year, and says, “I think the issue will get evaluated once the political climate is clear.” The foreign banks also agree that the political scenario could dominate the central bank’s decision.

“We are not expecting any big bang to happen in 2009 itself,” says Romesh Sobti, country head for ABN Amro bank. “There may be a gradual change in ownership, but that will take a while. Till then, we will have to make smart use of our resources.”

Others like Sanjay Nayar, chief of Citibank in India, also thinks that 2009 may not be a year of transformation, but hopes for the ability to be a wholly owned subsidiary of its parent. “Given the opportunity, we would be like any of our private banks in India, to look and feel like an Indian bank,” says Nayar, adding that acquisition may not be high on his agenda. “Till 2009, we will have grown substantially organically. Valuations may not be the best then, so acquisition will depend on what the market has to offer at that time. Till then, we will wait and watch.”

The timing may not be certain but most experts agree that the sector will have to open, and there have already been some signs. Roy notes that the increased cap in individual investment abroad is serviced by foreign banks. Ashwin Parekh, partner and national leader of global financial services at Ernst & Young Pvt. Ltd, highlights two occasions when individual permission was granted by the banking regulator. The first was to Citibank for its investment in Indian mortgage major Housing Development and Finance Corp. (HDFC), and the second, to Rana Talwar, former Standard Chartered global chief executive who took over Centurion Bank through a fund. “There will be more risk-based regulation,” Roy says. “Depending on the risks that a foreign bank presents, the regulator will try to bring in different regulations.”

Experts and the foreign banks say the regulator will be concerned about the state of domestic banks and their ability to compete and based on that it will decide how far to open the faucet. “They (the foreign banks) will become a major player if they are allowed free operations in India,” Sinor of IBA says. “I am very sure they would immediately emerge as the market leader.”

The banks, particularly the public sector ones, have sufficiently strengthened their balance sheets, but have not joined forces to be able to compete with the foreign banks on scale and size.

In addition to these domestic concerns, many experts say that RBI will consider how welcome Indian banks are abroad when they try to expand. Roy says, “If reciprocity is not the order of the day, the local regulator will play the game as the others have played it.”

Traditionally, the driver for a majority of M&A deals in the Indian banking space is the regulator’s sensitivity to protect depositors’ money. While announcing the time frame for foreign banks’ play on Indian turf, ringfencing weaker financial intermediaries from predatory attacks, RBI has laid down certain norms for domestic players.

For instance, all banking entities must have at least Rs300 crore net worth (capital and free reserves) and a wider investor base with no single player holding more than 10% stake. In case of one bank holding stake in another bank, it is capped at 5%. RBI has not laid down any timeframe for this but analysts feel the deadline will coincide with the opening up of the sector.

Only a handful of old private banks have not yet fulfilled these norms. If they fail to do so by April 2009, they may be offered on a platter to the foreign player if RBI decides to open the sector.

Goldman Sachs..!!!???

Goldman Sachs

Modern Midas

Dec 19th 2007
From The Economist print edition

Bumper profits and a stellar reputation. Time to worry
“IT IS important to be a bit institutionally paranoid, especially when things are going well.” Thus Lloyd Blankfein, chief executive of Goldman Sachs at a conference in November. After the year Goldman has had, Mr Blankfein cannot be far off hearing imaginary voices.

On December 18th the investment bank unveiled full-year results that contrived to be both widely expected and astonishing. Earnings in the fourth quarter stood at $3.2 billion, a 2% rise on the same period in 2006. Even as most of its peers have been dragged down by subprime-related investments, Goldman’s fixed-income business has boomed, thanks in part to a proprietary bet that the value of mortgage-backed securities would fall. The rest of its businesses are also steaming ahead. Its share price, as of December 18th, remained (just) up from the start of the year. Its status as Wall Street’s employer of choice is gold-plated, not least because of a bonus-and-salary pool of $20 billion. “If Goldman Sachs comes calling, you have to consider it,” says one headhunter.

Mr Blankfein’s neurotic impulses are well founded, however. Being at the summit of the banking industry is all very well, but the only way left is down. There are reasons, besides the impact of a slowing economy, to think that Goldman’s triumphant 2007 contains the seeds of a less comfortable 2008.

The first is that success on this scale always reaps a harvest of envy (never mind that Mr Blankfein’s handsome bonus will be dwarfed by the pay-off given to Stan O’Neal for leaving Merrill Lynch in incomparably worse shape). Rich, well-connected bankers have a limited call on sympathy at the best of times. Goldman’s gamble that many of America’s overstretched borrowers would default on their mortgages is unlikely to win it new friends. Signs of a backlash are visible: Christopher Dodd, a Democratic senator, has raised questions about the part played by Hank Paulson, who ran Goldman before becoming treasury secretary, in fuelling the subprime mess.

The second cause for concern surrounds Goldman’s finely balanced (or horribly compromised: take your pick) business model. As well as acting as an adviser and financier to clients, Goldman makes lots of money from putting its own capital to work. Proprietary trading and investments accounted for two-thirds of the firm’s revenues in 2007. The tensions inherent in this approach are neither new nor unique to Goldman, but they have become much more obvious now that its traders have made hay taking short positions against debt instruments of a type peddled to clients by other parts of the bank. Accusations that Goldman has been issuing deliberately bearish research in order to drive markets down and make even more money are fanciful. But some of its clients may become more questioning.

The third trapdoor concerns Goldman’s risk appetite. You may think that serenely stable share price suggests Goldman is a safe haven; its low price-earnings ratio tells a different story. Between 2003 and 2006 Goldman’s traders were losing money on many more days than other Wall Street firms (see chart). The bank’s risk-sensitive culture is rightly lauded; its agility in times of trouble has been proven. But it is neither cautious nor transparent, qualities that investors are likely to prize in coming months. Mr Blankfein’s antennae are right to twitch.

Financial Markets Turmoil

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Tremors in financial markets: A problem of plenty

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To mitigate the risk of increased delinquency, the Indian banking sector would do well to put quality before quantity and not depend on higher interest rates.

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M. Sitarama Murty

The ambers in the sub-prime fire continue to simmer, erupting like a volcano now and then. The Citi Group’s reported loss of over $9 billion is one such flare, the total market losses estimated to run into hundreds of billions of dollars. When an earthquake occurs the epicenter is quickly identified. The ‘how’ of it is also explained as movement of the earth’s crust along the fault lines. But the ‘why’ of it always remains a mystery. For the present crisis the epicenter has been identified as the sub-prime crisis. But the fault lines are yet to be located.

Several international financial institutions, badly bruised in the crisis, are still licking their wounds and are clueless about the final outcome. Availability of credit for even genuine productive purposes has been scarce despite pumping in of funds and assurances of support by central banks. Confidence level remains low. President Bush had to announce that for five years to come the sub-prime interest rates would be frozen, highlighting the uncertainty prevailing in the markets. A loss of such magnitude (Rs 40,000 crore) in India would have shaken the foundations of the financial system.

Not much difference At the first sign of default or sickness the tendency has been to foreclose all options and enforce recovery or write-off the loan. In the Indian market the scenario is not much different. Inaction, induced by the welfare-oriented loan melas and directed lending, was the norm for decades. To combat the bulging NPAs problem, a quick fix solution of write-off was found handy during the 90s, particularly in the PSBs. Only after the SARFAESI Act came into being, banks found reason to tackle recoveries through coercive and legal action.

In the case of sub-prime loans it is not clear as to what steps have been taken, if any, to enforce security. The real estate or housing markets in the US and Europe, where the crisis has its roots, haven’t crashed either. Though servicing debt might have been a problem for the NINJA borrowers (No income, no job), the last letter ‘A’ now seems to symbolise ‘no assets’.

Loan appraisal systems Then questions arise about the quality of mortgages and the assets. If the rating agencies, which mostly go by the records, failed to protect the investors, the loan appraisal systems seem to have to have failed the banks.

That the banks were able to write-off such huge amounts in the first place, prompts a lay man to think that the institution/s were making huge profits fleecing the customers, leading to such situations.

Though the investors have reportedly lost a third of their investments, for salvaging the situation, there is a case for a massive rehabilitation package of concessions and rescheduling. If the investors are left in the lurch, the financial markets would have to face further upheavals.

Unanimous view Analysts seem to be unanimous that the crisis is an outcome of problem of plenty. With the markets flush with liquidity and mandates to maximise income and profits, all the time the financial whiz kids have to look for new opportunities and churn out innovative products to attract investors.

‘Collateralised debt’ was one. Money in circulation has a multiplier effect. But creating money out of nothing, defying the fundamentals of science that matter can neither be created nor destroyed, seems to be an innovative idea. Creating wealth through production or trade of goods and services is old fashion. Speculation is the in thing.

Financial engineering appealed to many when derivatives such as forward contracts, options and futures were introduced to protect margins against uncertainties. Regulators too gave a measure of freedom to provide depth to the markets. Innovation graduated from being a mere hedging technique to a tool for maximisation of profits. While the underlying securities remain the same, the volumes traded in money, forex, stock and commodity markets are mind boggling.

Land mines If the stock markets boom, the managers of the economy are happy. It is considered an index of confidence of the investors. The level of productivity or production of goods and services or the dividends on shares has no relevance to the multi-fold jump in the index. Cough syrup is a common household remedy. Persons looking for some thing new and different all the time found an alternative use for it, changing its character. The derivatives, meant to manage risks, have themselves become land mines.

All over the globe the pay packages have gone up multi-fold. Corporate profits are soaring. The surpluses have to be parked in profitable investments. The pressure to invest and increase income only gets compounded.

Only for the ‘haves’ To improve standards of life and generate employment, spending as well as investment have to increase. An element of inflation is inevitable. But human ingenuity results in generating surpluses hundred-fold only for the ‘haves’, while the 95 per cent ‘have-nots’ continue to remain vulnerable. The benefits of decades of progress can be wiped out in one major financial catastrophe.

Banks that have engaged agents for recoveries faced the wrath of the judiciary as well as the RBI, in the recent past. Surprisingly the RBI, knowing the markets too well, reacted rather sharply, coming out with a code for recovery. The tightening of the recovery mechanism seems to have resulted in higher interest rates. This is not a positive response. To mitigate the risk of increased delinquency, the Indian banking sector would do well to put quality before quantity and not depend on higher interest rates.

(The author is a former Managing Director of State Bank of Mysore and can be emailed at murthy@mandavilli.com).

India’s worry – Capital imflows….Does India need to worry?

Date:17/12/2007 URL: http://www.thehindubusinessline.com/2007/12/17/stories/2007121751060800.htm

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Changing patterns in global fund flows S. VENKITARAMANAN

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We need to revise our approach to the questions relating to the origin of funds flowing into India, considering that the US and China have a more relaxed attitude. Either we need more funds or we do not. If we do need more funds, we should not put too many obstacles in their path, argues S. VENKITARAMANAN

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The early years after the World War saw New York taking over the place as financial capital of the world from London. Capital moved freely out of New York to many countries of the world. No wonder the ‘Big Apple’ became an International Financial Centre. But things have changed radically in the past few decades, especially with the rising oil prices.

Rising oil prices have transferred huge amounts of wealth to oil-producing countries in the Middle East, Russia, Venezuela and Norway being the beneficiaries. Abu Dhabi is one of those enriched as a result at the expense of oil consumers in the US and elsewhere. In this context, the news that Abu Dhabi Sovereign Wealth Fund has invested $7.5 billion in the equities of the troubled Citibank has brought both relief and bewilderment to US financial circles, as the Wall Street Journal of December 3 points out.

Citibank has been in trouble having incurred large losses running into billions of dollars, mainly as a result of the US’s sub-prime crisis and miscalculations by its hedge funds. It is, indeed, interesting that Abu Dhabi’s Fund should think of investing in shares of a distressed bank, like Citibank, however, glorious its past history. Be this as it may, this infusion of resources has been a considerable relief to US financial authorities since the Citibank needed capital input badly.

Question mark Incidentally, it is worth considering why the Abu Dhabi Fund chose to invest in an apparently declining asset, like Citibank, whose shares have fallen sharply. Maybe it is because the present diminished valuations offer a potentially rich harvest in case Citibank rises to its full potential. Also, the decline of the dollar leads to the valuations appearing even more attractive than they would otherwise.

The fact that an ailing behemoth in US finance has been rescued by an OPEC member is an irony that has not escaped the attention of observers. This is part of the changing global financial scenario. Who would have thought in an earlier era that a country linked like Abu Dhabi, albeit remotely, to a hotbed of jihadi terrorism, should rescue the bulwark of US finance, the Citibank? (Of course, one cannot ignore that the Saudi royal family has a stake in Citibank.)

One recalls how in the 1980s the US was worried about Japan’s purchases of shares in US icons, including such items as Hollywood Picture Companies, Rockefeller Centre and so on. This was because then also the US had a BoP problem, whereas Japan had huge forex reserves arising from large trade surpluses. The situation has tended to repeat itself. Now, with US dollar being cheaper, the US’ assets are being available for grabs. Observers point out that one reason for such purchases is partly because of the tightness of bank finance, which used to help Wall Street firms raise prices of American assets. This development makes them more attractive for foreign buyers.

It is also intriguing that there have been gripes in the US about a foreign invasion when American financial structure badly needs such infusion. It is a case of the victim desiring the attacker’s advances while all the persons around find the development both bewildering and a nuisance.

The Wall Street Journal referred to cites how scarcely two years ago, the Chinese Oil Company CNOOC tried to buy a stake in the US oil company UNOCAL. Strident protests by US Congressional sources helped put off the deal. Similarly, recently the Dubai Port Authority tried to invest in certain US Ports, but that also raised the Congressional hackles. But, of late, foreign Sovereign Wealth Funds having had an easier access is illustrated by foreign acquisition of stakes in Nasdaq Bear Sterns and now the Citibank.

There is inevitability about this process, which is implicit in globalisation. The US cannot simultaneously preach open borders to other countries and close them itself as far as its own assets are concerned. Especially is this the case when the US is currently a net debtor and is in current account deficit.

It is worth bearing in mind that Sovereign Wealth Funds have an army of advisers, who include amongst their experts from well-known Wall Street firms, who help assess the value at risk of the assets on offer in the US and elsewhere.

The availability of resources with Sovereign Wealth Funds is assessed at levels ranging up to $10 trillion. It might go up to $20 trillion to $ 30 trillion by 2020. In such a case, the US will definitely have much to gain by welcoming the entry of such funds to buy its national assets.

Process of scrutiny In order to answer concerns of politicians and nationalists, the US has instituted a process of scrutiny of whether the intending purchaser is a fit and suitable person. Considerations of national security are brought into the process of analysis. Technology rights also become significant in such transactions.

Access to national companies, such as those in IT, may open intellectual property rights. These are particularly important in companies manufacturing defence equipment. Anyway, the US has to recognise that being a debtor nation, it cannot have the luxury of being too choosy that will amount to turning away fresh capital inflows.

Alongside the news of Abu Dhabi’s investment in Citibank, The Wall Street Journal again features a similar aggressive investment by another Sovereign Wealth Fund — Temasek, Singapore’s Sovereign Wealth Fund. This time, it is investing $ trillion in a China-based Goldman Sachs subsidiary-managed fund. This represents an increase in stake of Singapore’s Sovereign Wealth Fund in China.

Truly, it signifies an increasing willingness of China to encourage two-way flow of funds, even as it increases its own investment in US’ private equity firms and investment banks. China demonstrates a greater flexibility and willingness to access capital nobility than does the US, which, however, unlike China, sorely needs more such inflows.

Lessons for India What lessons does all this to-ing and fro-ing of global capital flows have for India? In our preoccupation with P-Notes and eagerness to identify the source of funds, we may be putting blocks to the movement of funds from known sources, such as Temasek. I cannot imagine our politicos accepting without much ado the West Asian countries’ infusion of equity into our national banking icon — the State Bank of India — what a contrast to the US!

Above all, we need to revise our approach to the questions relating to the origin of funds flowing into India, considering that the US and China have a more relaxed attitude. Either we need more funds or we do not. If we do need more funds, we should not put too many obstacles in this path. Perhaps, we need to learn a lot more from the Chinese way of handling the increasing flows of resources. Maybe they have some procedural freedom and flexibility, which we may have to introduce. Maybe their fiscal environment promotes a greater recourse to sterilisation and hence tolerance of capital inflows than does ours.

The solution lies in converting our fiscal situation, not stopping inflows which we sorely need to balance our current account deficit, which is increasing — thanks to our appetite for imports of oil and other commodities in general. The flow of funds on an international scale continues apace. We need to re-examine our attitude to such flows in the light of the US and other countries’ experience.

Stock splits

Stock splits refer to dividing the outstanding shares of a company into a larger number of shares, without affecting Stockholder’s Equity or the total market value of the stock. For example, if a company declares a 2-for-1 stock split of its stock, of which has a current market value of Rs 500/share and 200,000 shares outstanding, the following results occur: Pre-split: Outstanding shares: 200,000 Market Value: Rs 500 Market capitalization: Rs 100,000,000 Post-split: Outstanding shares: 400,000 Market Value: Rs 250 Market capitalization: Rs 100,000,000 Essentially, in the 2-for-1 stock split, the company’s outstanding shares are simply doubled and the stock price is divided in half. The market capitalization, or market value of the stock, remains the same at pre- and post-split conditions. This is because stock splits have no impact on the value of a company’s stock. A stock split is merely an accounting transaction in which no equity is exchanged. Companies can split their stock in any number of ways. These splits may occur in different combinations. When a company declares a stock split, the price of the stock may decrease, but the number of shares will increase proportionately. A stock split has no effect on the value of what shareholders own. If the company pays a dividend, your dividends paid per share will also fall proportionately. Companies often split their stock when they believe the price of their stock exceeds the amount smaller individual investors would be willing to pay for the stock. By reducing the price of the stock, companies try to make their stock more affordable to these investors. Usually, stock splits have a positive affect on the stock price. Over the long term, stock splits seem to have a considerable effect on the company’s stock price. Although stock splits have no direct effect on a company’s equity, the event of a split does forecast hints and signs of how the company is performing. Companies usually tend to split their shares when the company has an optimistic view of its future and operations. The announcement of a stock split can be a symbol that a stock has attained a certain level of success. The fact that a company has a record of multiple stock splits usually indicates that the company is among one of the faster growing firms, since their stock has been split numerous times. Generally, a company is motivated to split their stock to attract more investors with a lower share price. However, some people can only buy lower priced stock because they may not have the buying power to make a larger investment. Thus, they wait till a stock splits so they can afford some shares. Just because a company declares a stock split, it does not mean that the stock price will inevitably rise in reaction. There are many other variables that influence investors’ decisions in the result of a stock split including economic reports, market stability, earnings, interest rates, external conflicts, etc. Companies also split their shares if they need to broaden their shareholder base and make more shares available to investors. A motivation for this could be a company’s defence to a potential hostile takeover. Stock splits make the company more liquid, allowing more investors the opportunity to purchase an ownership in their company. The timeline of a stock split consists of four main dates: Declaration or announcement date, Record date, Payment date, Ex-dividend date. The two key dates that are important to investors are the announcement date and the payment date. The announcement date is important because no one knows for sure if and when a company a will declare a split of their company’s stock. Thus, investors speculate on whether the company will announce and when they will announce. The payment date is crucial as well because this is the day before the company actually splits its share price, after which investor activity changes as the new share price targets a different audience. Moreover, there is another factor that engenders the announcement of a stock split. Companies tend to try to keep their stock within a certain price range. Therefore, when a stock hits the company’s price target, the company, upon approval of the Board of Directors and the shareholders, will announce a stock split. A stock split simply involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate. This in no way affects the intrinsic value or past performance of your investment, if you happen to own shares that are splitting. With lower-priced shares, a stock’s liquidity increases and making it easier to trade. As a stock price rises, some people will be psychologically unwilling to pay that ‘high price’ so a stock split brings the shares down to a more ‘attractive’ level. Again, the intrinsic value has not changed, but the psychological effects may help the stock.

Subprime woes for Citi and UBS

Under intensive care
Dec 13th 2007
From The Economist print edition

UBS and Citigroup take steps to reassure investors. But big questions remain

SURGERY, as any doctor knows, is just one step on the road to recovery. Two of the biggest banking casualties of the carnage in America’s mortgage market are out of the operating theatre—though not by any means in the clear. On December 11th, after five leaderless weeks, America’s Citigroup announced that Vikram Pandit, the head of its investment-banking division, would be its new chief executive. The previous day Switzerland’s UBS had unveiled write-downs and capital injections designed to reassure investors that the worst of the subprime crisis was over. But the long-term prognosis on these two huge banks remains decidedly uncertain.

UBS looks the healthier. Its announcement of a $10 billion write-down on its exposure to subprime-infected debt, to go with a third-quarter hit of $3.6 billion, hardly sounds like good news. UBS now expects a loss for the fourth quarter, which ends this month. It may end up in the red for the entire year. But in today’s topsy-turvy market, the bank’s decision to take a much more conservative view of the value of its assets was welcomed as a sign that further big mark-downs are less likely.

What is more, UBS strengthened its tier-one capital, an important measure of bank solidity, by SFr19.4 billion ($17.1 billion). Most of that money will come from sovereign-wealth funds, the white knights of choice for today’s bank in distress. Singapore’s GIC, which manages the city-state’s foreign reserves, has pledged to buy SFr11 billion of bonds convertible into shares in UBS; an unnamed Middle Eastern investor will put in a further SFr2 billion. UBS will also raise money by selling treasury shares, and will save cash by issuing its 2007 dividend in the form of shares. Its capital ratio is expected to exceed 12% in the fourth quarter, a strong position.

Citi is following a similar course to UBS but it has more to do. It too has admitted that it might make huge losses, but further bad news is likely. Its estimate of an $8 billion-11 billion fourth-quarter hit on its collateralised-debt obligations was made in early November, since when the market value of subprime-related debt has declined further. It too has attracted money from a sovereign-wealth fund (last month’s $7.5 billion investment by the Abu Dhabi Investment Authority) but its capital ratio remains under scrutiny given its exposure, not just to subprime-related investments but also to off-balance-sheet vehicles and to a wider deterioration in consumer credit.

Citi has mimicked UBS in cleaning out the management suite, but the search to find a successor to Chuck Prince, who was ousted as chairman and chief executive last month, revealed both a dearth of suitable candidates inside the bank and a lack of interested ones outside it. Doubts circulate about Mr Pandit’s credentials for the role, despite his distinguished career in investment banking at Morgan Stanley, a spell running his own hedge fund and a reputation for cerebral calm. He joined Citi only in April, snipe the critics; this is his first time in the boss’s chair at a listed company; and he has scant experience of consumer banking, which accounts for half of Citi’s earnings.

For Mr Pandit and Marcel Rohner, his counterpart at UBS, the priority is to stabilise their banks. But each of them must then answer two, more fundamental questions. The first is what went wrong with their approach to risk management. Both banks wound up with larger exposures to toxic instruments than their rivals did; shareholders want to know why. (The line from UBS‘s top brass that, like hooliganism, the problems were down to a small number of people in one part of the company, does not wash: according to Simon Adamson of CreditSights, a research firm, the Swiss bank has long had a greater appetite for risk than its peers.)

The second question is whether the banks’ business models need to change in light of the credit crunch. Mr Rohner stands by UBS‘s approach of combining an investment-banking arm with its booming wealth-management franchise, but there are clearly tensions between the needs of risk-averse private-banking clients and the volatile profitability of an investment bank. Mr Rohner promises to shrink the bank’s balance sheet and to reduce the amount of proprietary trading it undertakes, as well as to tighten risk controls.

Mr Pandit has even thornier problems to resolve. Doubts about Citi’s sprawling business model and disparate internal cultures predated the credit crunch: the bank’s shares performed anaemically throughout Mr Prince’s tenure. But diversification seems to have multiplied Citi’s woes. Given the continuing questions about its capital base, the case for a break-up looks stronger than it did—although size has its own benefits, not least making institutions too big to fail. Mr Pandit, true to his reputation, is not going to rush any decisions. But sooner or later, more surgery looks inevitable.

Domestic Brokerage houses on the radar of PE firms

Date:16/12/2007 URL: http://www.thehindubusinessline.com/2007/12/16/stories/2007121651600100.htm

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PE majors queue up for slice of domestic brokerages Anil Sasi New Delhi, Dec. 15 The rally on the Indian bourses is stoking strong interest among private equity (PE) funds in brokerages and financial services firms.

Domestic brokerages, a majority of whom have been traditionally family-owned ventures, are also showing willingness to infuse PE funding to spread their reach.

This is primarily to counter increasing competition from new foreign entrants and also to leverage the global stock market expertise brought in by PE biggies.

Among the latest in a string of deals, ICICI Venture Funds Management and Baring Private Equity Asia are slated to invest $44 million in Hyderabad-based Karvy Stock Broking Ltd.

US-based PE fund Balyasny Asset Management marked its first exposure to the Indian financial services space by investing $10 million in Prabhudas Lilladher Advisory Services — the holding company of brokerage firm Prabhudas Lilladher — for a three per cent stake.

Deal base Among other recent deals, Singapore-based private investment firm Orient Global picked up a 22.5 per cent stake in India Infoline Investment Services for $76.7 million, while World Bank’s private sector lending arm, International Finance Corporation, is in the process of picking up an 18 per cent stake in Angel Infin Pvt Ltd, the parent company of Angel Broking, according to industry players.

Earlier, Citigroup’s private equity arm, Citigroup Venture Capital International, picked up a 19.97 per cent stake in Anand Rathi Securities, while Motilal Oswal Financial Services sold 9.48 per cent stake to private equity venture, New Vernon Private Equity Ltd and Bessemer Venture Partners.

PE major General Atlantic had also invested about Rs 144 crore in retail brokerage firm Sharekhan. With a number of brokerages going for listing of late, PE investments have come in as pre-IPO deals.

According to PE players, home-grown brokerage firms are in expansion mode as several foreign competitors are eyeing the booming equity broking business in India.

While BNP Paribas, US online brokering firm E*Trade and BankMuscat are among global financial services majors that have already entered the Indian broking market through strategic tie-ups, others including Citigroup, UBS, Australia’s Macquarie and France’s Societe Generale are said to be in the process of doing so.

UAE Exchange and Finance Ltd also recently signed up as a participant with Central Depository Services Ltd, while HSBC India is also looking to enter retail broking.

Central Banks role

A dirty job, but someone has to do it
Dec 13th 2007 | WASHINGTON, DC
From The Economist print edition

Illustration by Satoshi Kambayashi

In concert, central bankers try showering cash on the credit crisis
CENTRAL bankers are supposed to be boring and predictable. But on December 12th the rich world’s monetary authorities stunned financial markets with a dramatic, joint plan to ease the liquidity squeeze in global money markets. America’s Federal Reserve, the Bank of England, the European Central Bank (ECB), the Bank of Canada and the Swiss National Bank all pitched in. The central banks of Sweden and Japan said they, too, were watching developments and would act as necessary. All told, it was an impressive show of central-bank co-ordination.

Financial markets have been seizing up for weeks. The spreads between the federal funds rate and the prices charged by banks to borrow from each other have widened dramatically since early November (see chart). By some measures, the financial system is more blocked than it was in September. And it has long been clear that central banks’ attempts to sort out the mess were failing. The Fed’s discount window, for instance, through which it lends direct to banks, has barely been approached, despite the soaring spreads in the interbank market.

The quarter-point cuts in its federal funds rate and discount rate on December 11th were followed by a steep sell-off in the stockmarket. This was only partially reversed the next day after the central-bank effort. On December 12th the crucial interbank market did reflect more confidence, however. The three-month lending rate in dollars fell more than a quarter of a percentage point.

The central banks have pinched each others’ best ideas for how best to ensure that liquidity gets where it is needed. And they have also, in effect, acknowledged the international nature of the liquidity squeeze, by promising to provide reciprocal currency-swap lines.

The Fed made the most dramatic changes. It introduced a “term-auction facility” through which all banks eligible to borrow from the discount window could bid for one-month money. The first two auctions are to be held on December 17th and 20th, with $20 billion to be sold at each. Two more are to follow in January. The Fed also announced temporary swap lines with the ECB and the Swiss National Bank, worth $24 billion, allowing those banks to lend dollars to banks pledging euros or other currencies.

The Bank of England promised to inject more money into the markets, increasing its two forthcoming term auctions, on December 18th and January 15th, from £2.85 billion ($5.8 billion) to £11.35 billion each time. In all, £20 billion will be supplied at three-month maturities, where strains have once again become particularly acute. And unlike its previous emergency auctions, in late September and October, the price of these funds will be determined by market demand at the auction, not set at the penalty rate that deterred any bank from bidding for the money.

The hope is that by extending the maturity of central-bank money, broadening the range of collateral against which banks can borrow and shifting from direct lending to an auction, the central bankers will bring down spreads in the one- and three-month money markets. There will be no net addition of liquidity. What the central bankers add at longer-term maturities, they will take out in the overnight market.

In some ways, the announcement is a triumph for the ECB. Both the Fed and the Bank of England have shifted away from the familiar tools of a lender-of-last resort—providing funds freely to institutions at a penalty rate. They have moved closer to the ECB‘s approach of auctioning funds to a broader set of actors against a wider range of collateral—in effect becoming a market of last resort. The shift makes sense: in both Britain and America it was increasingly clear that the stigma associated with approaching the central bank directly was deterring deserving borrowers. Bagehot’s dictum needed updating when the crisis of confidence affected entire markets rather than single banks.

But there are risks. The first is that, for all the fanfare, the central banks’ plan will make little difference. After all, it does nothing to remove the fundamental reason why investors are worried about lending to banks. This is the uncertainty about potential losses from subprime mortgages and the products based on them, and—given that uncertainty—the banks’ own desire to hoard capital against the chance that they will have to strengthen their balance sheets. Nor is the shift from direct lending to auction sure to work: for all the praise heaped upon the ECB, the spread between the ECB‘s repo rate and euro-denominated interbank rates is no less worrying than that in America or Britain.

Furthermore, central banks will now be more intricately involved in the unwinding of the credit mess. Since more banks have access to the liquidity auction, the central banks are implicitly subsidising weaker banks relative to stronger ones. By broadening the range of acceptable collateral, the central banks are taking more risks onto their balance sheets.

Set against the dangers of all-out financial seizure, these risks seem worth taking. More important, if they succeed in even modestly loosening the money markets, they will reduce the pressure on central banks to use the broader tool of lower policy rates. Across the developed world monetary policy is becoming increasingly hard to steer. Growth is slowing, because of the fall-out from the financial turmoil and the weakening American economy. In its recent Economic Outlook the OECD revised down expectations for 2008 growth in virtually every country. Yet strong growth in emerging economies is stoking commodity-price inflation. Even if financial markets were functioning normally, central bankers would face hard choices. With the system gummed up, that calculus is harder still.

Increase in Non food credit in November

Non-food credit surges in November

Retail, mid-corporate sector demand seen strong

Our Bureau

Mumbai, Dec. 15 Banks saw a huge increase in commercial credit in the month of November, after a slowdown in October that had sparked fears of a downturn in industrial activity. Bank officials cite increase in seasonal activities post-monsoon and the busy season effect as reasons for this increase.

According to the figures released by the Reserve Bank of India, the increase in November was Rs 62,083 crore. As against this, the increase in October was only Rs 1,622 crore.

This trend of an increase in credit in the second half is noticed every year, said bankers. In the first half of this fiscal, the credit offtake for the banking industry was less than 21 per cent said a senior official from one of the larger PSU banks. Bankers expect it to remain the same or increase marginally in the second half. But it is not likely to see the growth of 25-30 per cent that was seen last year.

Monsoon effect “Credit offtake usually picks up in November-December compared to the early months. The first half of the fiscal is slack due to the monsoon,” said an official in charge of credit, of a public sector bank. Interestingly the credit offtake in November 06, at Rs 26,116 crore, is roughly only forty per cent of the latest figure.

Mr Sitaramam Komaragiri, Deputy Managing Director and Group Executive, National Banking, State Bank of India, said that the bank saw huge growth in the retail and mid-corporate segment. “We have not yet analysed our data. But at first glance, figures for November and December show huge growth in retail and mid-corporate sectors.”

Lag effect While the restrictions imposed on External Commercial Borrowings may force Indian corporates to look at rupee loans, the impact will be seen with a lag effect, said bank officials. “As those corporates who have already taken approval will be permitted to borrow, the effect of the limits imposed on ECBs will be seen with a lag effect,” said a bank official.

Another senior official said that oil companies could be resorting to huge remittances due to the high oil prices. “As oil prices are very high, oil companies could be drawing huge amounts to make payments.”

Other industries that could see demand picking up in the second half include cotton and sugar, as these are seasonal activities and start post-monsoon. The loans growth could also include lending for the rabi crop, which starts around November, the official added.

Sensex PB ratios

Indian markets among most expensive globally?

Price- to-book value ratio of Sensex stocks is at record 6.5

Lokeshwarri S.K.
Aarati Krishnan

Chennai, Dec. 15 With the key stock indices at new highs, the Indian markets may now look quite expensive by most valuation parameters.

But do you know that India is now among the most expensive major global markets, based on the price-to-book value ratio (PB ratio)?

The Sensex PB ratio is now at a record high of 6.5, making the Indian benchmark the most richly valued among the global indices on this valuation parameter. The PB ratio is a measure of the value that the stock market is willing to assign to a company, based on the tangible assets on its books.

It is computed by dividing the market price by the book value per share. The PB ratio is the most widely used measure, after the PE multiple, to value stocks.

While the Sensex PB ratio rules at 6.5, data published in Forbes.com in mid-November, reveals that the developed markets in US and Europe trade at PB ratios of between 2.4 and 2.8.

Emerging markets such as Brazil (4.3) and Mexico (3.5) sport PB ratios that are a tad higher than developed markets, but they are still well below Indian levels.

Even the Shanghai Composite Index hovers pretty close to the Sensex, if you go by its PB ratio.

Rapid rise The current PB ratio of the Sensex is 80 per cent above its eight-year average. What is more, it has climbed from 4.8 in August to the current value of 6.5, in less than three months. The rapid increase in the stock prices over the last three months could be partially responsible for the distortion in this gauge.

Another bit of disturbing news is that it is not just the 30-stock Sensex that is stretched on this parameter. The more broad-based BSE 500 index too is ruling at a PB ratio of 6.2.

This indicates that the widespread rally in recent months has expanded valuations across-the-board.

However, PB ratio for the BSE Small-cap index is at a relatively modest 3.4.

Understated values However, there is a section of investors who believe that a high PB ratio isn’t particularly worrying for Indian stocks.

Explains Mr Shriram Iyer, Head of Research at Edelweiss Capital: “Price to Book Value, as a valuation measure, usually sets a floor for valuing a stock. It doesn’t capture future earnings potential.” He explains that while a company’s book value typically captures the cost incurred to build assets, it doesn’t reflect the earnings that can be generated by these assets over the next few years.

Mr Iyer also feels that “book value” in the Indian context tends to be understated in balance sheets due to several reasons. He cites the example of natural resource companies.

“The value of mining rights, gas reserves or other resources held by companies such as ONGC, Reliance Industries, Tata Steel, SAIL and so on has risen sharply in recent times, but these assets are captured at cost in the company’s books. To that extent, the price-to-book value may not reflect the earnings potential of such companies.”

“There could also be several intangibles that are not reflected in the books. The value of an insurance subsidiary for a financial service company or the earnings potential of land held by a realty company will not be reflected in book value; yet they may have high earnings potential.

However, it would be difficult to comment on whether a PB ratio of over 6 is expensive for the Indian market,” he adds.

Increasing overseas borrowing

Overseas borrowings continue to grow

Despite tightening of norms, cap on interest rates

N.S.Vageesh

Chennai, Dec 14 There has been a 63 per cent increase in external commercial borrowings made by Indian companies during the first seven months of this fiscal. About 384 companies have borrowed about $19 billion during the seven months ended October 2007, according to information released by the Reserve Bank of India.

During the whole of the last fiscal, about 921 companies borrowed money worth about $25 billion abroad.

This year the heavy borrowing comes despite steps taken by the Reserve Bank of India to limit access to external commercial borrowings to certain sectors and also tighten it generally by imposing a cap on the interest rates that can be paid on such borrowings.

Of the $19 billion raised so far this fiscal, about $11.64 billion was raised through the automatic route while $7.5 billion was raised through the approval route. Under the automatic route, borrowers only need to report their plans after raising the money, while under the approval route, prior sanction of the RBI is required.

About four months ago, the RBI had said that external borrowings of over $20 billion (about Rs 80 crore) for the purpose of rupee expenditure would require its approval. Subsequently, there were reports that the RBI was keeping a number of applications for borrowing pending in view of the unprecedented inflows of forex during this period.

Interestingly, the rise in external borrowing comes when there is a perceived tightening in interest rates in international markets following the unravelling of the sub-prime crisis troubling a number of American and European banks.

Looking at the numbers, there has been a noticeable drop in the number of companies who have accessed the ECB route. From a high of about 109 companies that tapped the ECB route in March 2007, the number dropped to just about 30 companies in the latest month of October 2007 for which figures are available. Yet, the amounts borrowed by the few have been higher.

© Copyright 2000 – 2007 The Hindu Business Line

Subprime in India – Is it possible?

Date:14/12/2007 URL: http://www.thehindubusinessline.com/2007/12/14/stories/2007121450540800.htm

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How India has steered clear so far

Fallout of Sub-prime crisis

C. J. Punnathara

The sub-prime crisis that strangled the US economy is leaving nagging questions in the minds of Indian investors and FIIs: will the contagion stifle the Indian stock market? Subsequently, every time a bank or a financial institution in the West caught a cold the Indian markets sneezed. And, taking a cue from the US stock market, alarmists pummelled the Indian stock indices to record one-day lows.

This, despite the market being poised to ride on good corporate results for three quarters in a row this year. No doubt, the unmitigated appetite for frontline stocks by FIIs has been stretching valuations beyond reasonable levels.

There are reasons for a nuanced market correction from these bloated valuations. However, is a similar correction on the anvil as a fallout of the sub-prime crisis? Facts and figures released by the Reserve Bank of India last week should dispel such worries.

Scorching pace Virtually doubling every year, the real estate sector grew at a scorching pace in the gross non-food credit. From Rs 13,546 crore in fiscal 2005, real estate credit grew by 97 per cent to Rs 26,693 crore in 2006 before levelling to 70 per cent at Rs 45,328 crore in 2007.

One of the prime reasons why the ebullient growth was tempered would have been the Finance Ministry directly talking down credit to the sector, which was promptly followed by policy initiatives. And yet the overall growth remains startling.

While a cursory glance at this rapid growth and gross numbers should ring alarm bells in the corridors of power, at 2.5 per cent of gross non-food credit, the overall macroeconomic picture is still not daunting. However, timely intervention by the Government to stave off a potential crisis should be welcomed.

It was an unprecedented demand for housing and commercial space during the last decade that triggered the real estate boom. The decade-old surge in demand for housing and commercial space stems from recent spurts of accelerated economic development.

This transferred increased wealth and purchasing power into the hands of India’s booming middle-class — fuelling an unbridled demand for goods and services, which in turn triggered the unprecedented demand for housing and commercial space. The Government further stoked this demand by encouraging liberalised and easy credit norms, nurturing a fall in interest rates and offering lucrative tax breaks. The demand for housing has never really looked back since then.

Yet, there have been stark differences in the volume of bank credit to the real estate sector vis-À-vis the magnitude of housing loans extended to the borrower. The extension of credit to the housing sector was almost five times the credit extended to the real estate sector in 2007.

Two years earlier, in 2005, the difference was almost ten-fold. Extension of housing credit grew from Rs 1,33,908 crore in 2005 to Rs 1,85,181 crore in 2006 and settled down to Rs 2,30,689 crore in 2007.

The slump in growth rate of housing loans, from 38 per cent in 2006 to 24 per cent in 2007, is an indicator that the surge in interest rates has forced several customers to defer housing investment plans. But it is just a matter of time before they re-enter the market.

Major Anomaly This brings out a major anomaly: while the requirement of funds from the demand side – housing loans – have been most lavishly provided for, the requirements from the supply side – development of real estate – have been virtually starved. Could this have created the present real estate price bubble? Not necessarily.

The price bubble is still confined to a few cities and there too, often in isolated pockets of affluence. Left to the market forces, economic development has a tendency to concentrate in such pockets, leading to far higher real income enjoyed by the people of the locality.

This leads to a heightened demand for goods and services and a spiralling location-specific demand for housing and commercial space. Since neither land nor real estate is infinite commodity, the prices sometimes bubble out of control. It is, therefore, not surprising that the price for commercial space and housing in the heart of Mumbai is among the highest across the major cities of the world. But, thankfully, the contagion has not spread as rapidly across the rest of the county. And yet, this should still be no cause for consolation.

Catalysts for boom/bust Experience from the developed world show that demand-supply economics and paucity of funds by themselves may not be the long-term accelerator or brakes in real estate markets. Instead, it is often the direct outcome of economic development. Demand-supply and availability of funds act as facilitators and catalysts for the process.

These catalysts can either hasten or slow down the natural dynamics in the real estate market.

As the economic development process intensifies, cities and towns grow and mushroom and often real estate price bubbles become an inevitable consequence. Despite the seeming inevitability of the process, the government should intervene and prevent such bubbles.

In the US, the real estate bubble spread from prime locations of major cities as banks vied with one another offering credit at high rates (sub- prime rates) to cover increasingly risky real estate investments.

The investors found quick and easy returns as real estate prices went up, justifying the risky investments.

The cycle began to collapse as the pace of economic development began to cool and rates of interest remained strong.

Real estate prices began to wilt even as rates remained high, and the first casualty was the investor. As their numbers began to proliferate, its impact began to manifest on the bottom-lines of banks as well.

Signs of bubble In a similar fashion, bubbles have begun to form in certain pockets in India. But they are unlikely to take alarming proportions as yet, since the base of credit to real estate is quite low and that for the housing sector is still manageable. Moreover, credit extension to both the sectors has contracted during last year on account of high interest rates and government intervention.

Also, there are no prime and sub-prime rates based differential risk perception in India. Finally, real estate prices in India seems more real since they continue to be backed by accelerated economic development and better purchasing power.

For a sector which has locked in huge potential value in land, the funds and investments coming into the sector are still small. And, looked at from the overall macroeconomic perspective, the numbers are not yet threatening. The inherent value of land gets unlocked only as economic development accelerates. In a stagnant or slow-growing economy, real estate prices are more likely to be ephemeral bubbles.

And yet, vigil should remain the catch-word. There have been reports of bank funds being diverted and deployed into the booming real estate sector.

Also, huge funds are on tap from the capital market. As long as Indian institutions are left unscathed, the possibilities of a sub-prime crisis overtaking the economy remain remote. However, if huge and disproportionate funds are mobilised and deployed into real estate, several people could eventually burn their fingers.

© Copyright 2000 – 2007 The Hindu Business Line

Corporate profits to grow more than 20% for next five years

India Inc profits to grow by 20% in next five years
14 Dec, 2007, 2209 hrs IST, PTI

MUMBAI: India Inc’s profits are expected to grow more than 20 per cent over the next five years, a top in the financial sector official said.

“Corporate profits may grow 20 per cent-plus in the next five years” from the present level, Motilal Oswal Securities’ Managing Director, Raamdeo Agrawal, told reporters while releasing the 12th Annual Wealth Creation Study here on Friday.

“India’s net trillion dollar GDP journey in 2007 will see distinctly buoyant corporate profits and a boom in savings and investment. At current valuations, margin of safety in the market is low. However, very high liquidity can lift the market to rich levels of valuations for quite some time,” Agrawal said, adding India will hit $2-trillion GDP by FY 12.

The top 100 wealth creators created Rs 7,065-billion of wealth between FY-02 and FY-07.

Agrawal said that Reliance Industries has climbed its way up the list of biggest wealth creators this year having created net wealth of Rs 1,856-billion, followed by ONGC at Rs 1,490-billion and Bharti Airtel by Rs 1,366-billion.

The IT bellwether, Infosys, ranked fourth with net wealth of Rs 855-billion, ICICI Bank Rs 566-billion, BHEL Rs 512-billion, SAIL Rs 451-billion, L&T Rs 433-billion, State Bank of India Rs 407-billion and Wipro Rs 394-billion.

During the study period 2002-07, MNCs mainly led by FMCG and pharma stocks underperformed the Indian companies both in terms of earnings CAGR and price CAGR.

However, Indian markets still believe in the long-term potential of MNCs as indicated by their significant P/Es.

Over the last ten years, MNCs have lost significant share, both in terms of number of companies and amount of wealth created. Within MNCs, there is a sharp change in composition with engineering and capital goods companies like ABB, Siemens and MICO, replacing FMCG companies like Hindustan Unilever and Golgate.

Given India’s capex boom, the financial and stock market performance of MNCs is still in line with Indian companies, the study said.

The PSUs in aggregate also underperformed the Indian companies both in terms of earnings CAGR and price CAGR. The PSU laggards in price growth are Neyveli Lignite, Shipping Corporation, Indian Oil, NALCO and GAIL.

A steady growth rate of 16 per cent between 2002 and 2007 has already led to exponential growth in businesses such as telecom and cement. “We believe the next five years will accentuate this exponentially, which will also spread to several more sectors of the economy,” Agrawal said.

India’s forex reserves have bulged from close to zero in 1991 to a healthy USD 200-billion in 2007.

“Huge forex capital flows do pose problems for the Reserve Bank of India (RBI), to manage the triad of exchange rate, interest rate and inflation. However, the overall impact of such flows has been positive for India,” Agrawal said.

Rupee Strengthning

Rupee may rise on inflows
13 Dec, 2007, 0950 hrs IST, REUTERS

MUMBAI: The rupee could climb on Thursday in anticipation of more capital flows into a record-setting stock market, but the dollar’s rise versus the yen could keep the Indian unit’s gains muted.

Foreigners have bought shares worth $1.1 billion in the eight days to Tuesday, taking the total purchases since the start of January to $16.9 billion. The BSE Sensex hit a record high for the second day on Wednesday.

The dollar was near one-month highs against the yen as the US Federal Reserve and other central banks announced measures to ease the credit crunch and support financial firms struggling to secure funds before the year-end.

The partially convertible rupee ended at 39.375/385 on Wednesday, down from the previous close of 39.35/36. It hit 39.16 last month, its strongest since March 1998.

Vikram Pandit at the Helm of Biggest Bank in World

Printed from

Citi never sleeps, and so also may Pandit 13 Dec, 2007, 0150 hrs IST, REUTERS

NEW YORK: Vikram Pandit, Citigroup’s new chief executive, has taken on one of the toughest jobs in Corporate America. Whether he is up to running the largest US bank and fixing its many problems remains to be seen. Pandit replaces Charles Prince, who resigned on November 4. Prince’s rocky four-year tenure culminated in the largest US bank’s announcement of up to $12.8 billion of charges tied to subprime mortgages, with potential for billions of dollars of additional losses from home loan and credit card operations. Now Citigroup is in the hands of a former Morgan Stanley banking and trading head with no experience leading a consumer business, which generates more than half of overall revenue. And Pandit has been with the bank only five months. He has never run a company close to the size of Citigroup with its $2.4 trillion in assets. William Smith, CEO of SAM Advisors, a Citigroup shareholder and long-time critic of the company, panned Pandit’s ascension, which was announced on Tuesday. “It’s disappointing. Pandit is probably a decent manager, but he is a segment manager,” Smith said. “He is not a CEO.” Smith is pessimistic about the bank’s future. He expects more stumbles, which could force a break-up of the company. Citigroup shares have fallen 40% this year, and the bank agreed last month to sell a $7.5 billion stake to Abu Dhabi’s government to shore up capital. Analysts have said a dividend cut is possible, and there is talk of job cuts above the 17,000 announced in April. Citigroup employs in excess of 300,000 people in more than 100 countries. Born in Nagpur, India, 50-year-old Pandit earned bachelor’s and master’s degrees in electrical engineering from Columbia University in New York City. He received a doctorate in finance from the school in 1986. At Morgan Stanley, he headed institutional securities, overseeing banking, trading, prime brokerage and investments, and was credited with expanding outside the US. While his unit performed well, Pandit often sparred with fixed-income chief Zoe Cruz, who said he was too conservative and unwilling to use leverage to magnify bets. When Chief Executive Philip Purcell promoted Stephen Crawford and Cruz to co-presidents in March 2005, Pandit left. Purcell, Crawford and Cruz have all since left Morgan Stanley — the latter after getting burned by ramped up trading risks. Pandit resurfaced at Old Lane Partners, a hedge fund and private equity group he set up with other Morgan Stanley alumni. Assets grew to $4.5 billion. When Citigroup agreed in April to buy Old Lane for about $800 million, analysts viewed it as a costly way to shore up the executive ranks following a string of departures, including Willumstad, consumer banking chief Marjorie Magner and wealth management chief Todd Thomson. Pandit was originally hired to lead alternative investments, but in October added oversight of investment banking after yet another management shake-up in the wake of billions of dollars of losses from mortgages, leveraged loans and trading. Quickly, he combined equity and debt market operations, two years after Morgan Stanley did the same. Pandit was not the only person approached for the job. NYSE Euronext’s John Thain passed up a possible shot at running Citigroup for the same job at Merrill Lynch & Co. Josef Ackermann, chief executive of Deutsche Bank, also rebuffed an approach, according to press reports. Others whom outsiders had suggested might make a good fit included American International Group chairman and former Citigroup chief operating officer Robert Willumstad, Barclays president Bob Diamond, Wells Fargo & Co chairman Richard Kovacevich, and internal candidates like Latin American chief Manuel Medina-Mora and chief financial officer Gary Crittenden. Crittenden joined Citigroup in March after Prince said he wanted a CFO who might eventually ascend to chief executive. Timothy Ghriskey, chief investment officer at Solaris Asset Management, said when the dust settles there will be positive reaction to Pandit’s appointment as CEO. “Pandit’s name has obviously been floated out there for quite a while now, that big investors would have had time to speak up,” Ghriskey said. “They would not have done this if they hadn’t gotten favourable response from their large investors. People have already gotten used to the idea.”

Fed Rate cut to 4.25%

The Fed

From Santa to Scrooge
Dec 12th 2007 | WASHINGTON, DC
From Economist.com

The Fed’s quarter-point cut is followed by plans to ease money market tensions

AP

Get article background

BACK in September, Ben Bernanke wowed Wall Street with a larger-than-expected interest rate cut. Stockmarkets soared after the Fed slashed its policy rate by half a point as investors were convinced that America’s central bank would pull out all the stops to prevent turmoil in financial markets from infecting the broader economy.

This week Mr Bernanke had the opposite effect. On Tuesday December 11th, despite new tensions in the credit markets, the central bank’s rate-setting committee cut the federal funds rate by a modest quarter point, to 4.25%. Share prices slumped in response. The Dow Jones Industrial Average fell almost 300 points (2%) in the hours after the announcement, while the broader S&P 500 index lost 2.5%. Far from bearing gifts to alleviate financial woes, investors moaned, the Fed was behaving like Scrooge.

Financial markets were disappointed on three counts. The rate cut was more modest than many wished for. The quarter-point cut was also more modest than one Fed official wanted: Eric Rosengren, president of the Boston Fed, dissented from his colleagues’ decision, preferring a half-point cut.

And the central bankers announced no new steps to alleviate the short-term financial crunch. With banks increasingly reluctant to lend to each other, speculation had been rising that the Fed might cut the discount rate—the price at which banks can borrow from the central bank—by more than the federal funds rate; or even that it might announce new, looser rules on discount-window borrowing. Those hopes were dashed. The Fed cut the discount rate by a quarter point to 4.75%, leaving the differential with the federal funds rate unchanged.

Finally, the central bankers left no clear signal of more cuts to come. Though the statement accompanying their decision no longer said that the risks of inflation and weak growth were balanced, there was no explicit bias towards future loosening. The statement simply said that the Fed would act “as needed to foster price stability and sustainable growth”. For a febrile stockmarket, whose strength has been largely predicated on the expectation of sharply looser monetary policy, this was bad news.

But on Wednesday the Fed followed up with a new announcement, saying that it is coordinating a new temporary liquidity facility with other central banks to ease money market tensions. America’s stockmarkets promptly surged.

Wall Street, of course, is not the arbiter of good central banking. And the Fed’s task is not to feed Wall Street’s craving for cheaper money, but to gauge the relative risks of inflation and economic weakness many months ahead. In the short term, it is clear that the economy has slowed sharply. Most forecasters expect output to grow at an annual pace of 1% or less in the last three months of 2007. And with credit markets in turmoil, house prices weakening and consumer confidence plunging, there are plenty of reasons to fear a longer and nastier downturn.

At the same time, strong evidence of that nasty downturn is not yet at hand. The economy created 94,000 jobs in November, a substantially slower pace than at the beginning of 2007, but hardly a collapse. The unemployment rate, at 4.7%, is still extremely low. And the combination of a weak dollar and high oil prices means inflation risks cannot be ignored. Thanks to the surge in fuel costs, November’s consumer-price figures, due on December 13th, may show overall consumer prices up 4% from a year ago. More worrying, the December survey from the University of Michigan suggested that consumers’ expectations of future inflation are rising slightly.

The central bankers have to pick a careful path amid these potholes. On the one hand, the monetary reins have been loosened quite a lot. Cumulatively, the Fed has now cut short-term interest rates by a full percentage point in less than three months—a pace that is rare unless the economy is sliding into recession. On the other hand, if the economy is on the verge of recession, policy is not yet terribly loose, particularly once wider credit spreads are taken into account. After adjusting for underlying inflation, the real fed funds rate is still not far off 2%. Traditionally when the economy is in a slump, real rates have fallen to zero or below. Given the dollar and oil prices, such a dramatic cutting seems unlikely. But if America’s economy is truly in trouble, the Fed has a lot further to go.

PSU banks make profits, but not from lending

Other income boosts Q2 profit 23%; slowdown in loan growth

N.S.Vageesh

Chennai, Nov 2 Corporate India may be reporting good profit numbers. But lending money didn’t make much for public sector banks as a group in the second quarter ended September 30. Their net interest income (or interest earned less interest expense) did not grow at all in this quarter. Yet profits grew 23 per cent for a set of 21 public sector banks for which the figures are available.

Non-lending income It was liquidation of some of their equity investments, cashing in on the stock market boom, some recoveries of old bad debts, some treasury gains from the bond and forex markets and some other non-interest income that rescued public sector banks this quarter. Other income grew 45 per cent for these banks contributing almost the entire profits for this quarter.

MIXED Performance As is the norm, the performance of public sector banks spanned the entire range – with Bank of India doubling profits while Oriental Bank of Commerce reporting a 30 per cent drop in profits. The median growth for this group of 21 banks was about 14 per cent.

Big banks such as State Bank of India and Canara Bank reported a drop in net interest income. For all public sector banks, the drop in loan growth (a slowdown to 23 per cent after four years of 30 per cent growth) contributed to the dip in net interest income.

The high-cost deposits that they had picked up towards the end of the last fiscal ate into the margins of these banks.

Comparatively, private banks did better. The profits of about 16 private banks grew 34 per cent riding on a robust 38 per cent growth in net interest income and a healthy 33 per cent growth in other income.

All banks are hopeful of improving their net margins in the third quarter. This is the busy season for credit. So, one can expect a pick-up there. As for deposit costs, there are indications that a cut may be around the corner. Banks can then hope to make more money by just lending it.