Deepak Shenoy

Indian Banks Still Interesting

Indian banks must place at least 24% of their deposits into government securities. G-Sec yields have dropped about 200 basis points in the last quarter, and the bonds have gone up nearly 20% in price, in the quarter.

Treasury income is likely to be through the roof, but they can't book all of it (unless they've actually got the profit home by selling stock). They can use part of the mark-to-market profit to set up provisions for potential losses elsewhere (like equity etc.)

It's likely that HDB and IBN get some leeway on treasury which has been losing money the last couple quarters. Indian PSU banks, not listed in the US, are in much better shape and much lower in price. (relatively)

Indian Banks Still Interesting

Indian banks must place at least 24% of their deposits into government securities. G-Sec yields have dropped about 200 basis points in the last quarter, and the bonds have gone up nearly 20% in price, in the quarter.

Treasury income is likely to be through the roof, but they can't book all of it (unless they've actually got the profit home by selling stock). They can use part of the mark-to-market profit to set up provisions for potential losses elsewhere (like equity etc.)

It's likely that HDB and IBN get some leeway on treasury which has been losing money the last couple quarters. Indian PSU banks, not listed in the US, are in much better shape and much lower in price. (relatively)

Seeking Alpha in Indian Real Estate

Prices are already going down in India (though urban real estate and condos are hugely valued and people tend to pay huge premiums as compared to the US, even in a slump). Specifically, in Bangalore panic pricing is setting in. Even in Delhi and Mumbai prices have slowed down and there aren't too many transactions happening - both in commercial and residential real estate.

I'm in India and I can short them all - but I just don't think it's right to do it now. The national budget, usually a big important thing here, is up on the 29th and could contain sops for the sagging real estate sector, or for real estate investments in general. 29h is also the first day after the current month's futures expiry so if I had to short, I'd choose the end-of-day of the 29th to start.

Are Indian Stocks Getting Too Far Ahead of the Pack?

The Sensex has a trailing 12 month PE of 23.5. Earnings season is just starting so at current levels PE will come down. Why will earnings increase? Most of the non-IT pack based Sensex companies (Reliance, Bharti, Tata Steel) have foreign loans (either as ECBs or FCCBs) which are rupee adjusted every quarter, and the dollar is down about 2-3% from last quarter (Note: in Q1 - Apr-Jun - the dollar was down 5-7% adn resulted in humongous forex gains as other income) Top level IT companies are hedged (at least for hte last quarter) and will probably squeeze their earnings through.

Natural growth, hedged and other forex gains look like they will override the lackluster performance by auto, and the losses incurred by the public sector oil marketing companies.

With the rapid increase in oil prices, refineries are bound to make a killing if they (like the larger ones in India) process heavy crude. Estimates are that margins will be higher than $15 a barrel for hte quarter.

Yet, this is all going irrational, because looking one year ahead or two isn't quite that great. IT companies hedge themselves for like one or two quarters, that's it. Forex gains are other income, but there is a slowdown in the growth of operating income, evident last quarter. High interest rates are affecting interest rate sensitives, though we're easily ignoring that for all the banks.

Furthermore everyone thinks there's no "subprime" problem in India. But hear this piece: Since there's no credit quality checking method in India, all home loans are granted on the basis of paychecks and bank statements. A large part of these loans are taken by people who buy from builders before the house is constructed, a phase that can take three-four years. (Most such houses have been delayed, in my knowledge)

Indian tax laws do not allow tax deductions for principal repaid BEFORE the house is complete, so what do the banks do? Offer "pre-EMI" - meaning pay only interest until the house is complete and when you get possession, start paying back the principal.

These are ARMs but what resets in general is the tenure of the loan, not the payment, so everyone is happy. Until the tenure becomes unmanageably huge, so they have to raise the monthly payment.

Interest only loans, with a potential spike in payments required, and high interest rates prevailing...sound familiar?

If the dollar keeps going downwards, IT employees aren't going to get the huge increments they're used to. Asset prices here (which are typically 5-10x annual salaries) are already slowing down and flippers are starting to find their shoes. Some of the top banks have indicated higher default rates on housing loans; and rates are currently 12% or higher.

I think we'll be hit, except we'll only know after the event. But for now, enjoy the run - nothing better than to watch as your portfolio multiplies itself.