How fair are equity analysts?


Shares of Yes Bank Ltd lost more than 7% in one day in the first week of July after UBS Securities India Pvt. Ltd downgraded the stock to sell. UBS’s major concern is the bank’s rising exposure to financially stressed companies. The 7 July dated so-called deep dive analysis of corporate credit quality, authored by Vishal Goyal, Ishank Kumar and Stephen Andrews, is based on a survey of at least 7,000 documents that are used to secure about $100 billion in loans, filed with the Registrar of Companies (RoC) by 100 potentially stressed companies.

Large corporations such as Jaypee group, Essar group, GMR group, GVK group, Lanco Infratech Ltd and Abhijeet group have seen a significant increase in debt as well as deterioration in cash flows and the ability to service debt in the past three years between 2012 and 2015, the report points out. Estimated loans approved to these companies as a percentage of loans in 2014-15 was the highest for Yes Bank at 19%. The estimated loans approved as a percentage of net worth, too, was the highest for Yes Bank (125%).

UBS’s other concern is the quality of securities that Yes Bank entertained to give loans to such companies. About 20% of term loans given by the bank are backed by unlisted shares and movable assets. The research report has caveated its findings saying the RoC website is the source of all data and UBS has adjusted these numbers for expected repayments and “Yes Bank’s current loan exposure to these groups could still differ” from its estimates.

Upset with the “highly biased” report, Yes Bank last week asked market regulator Securities and Exchange Board of India (Sebi) to probe the “intentions” of the analysts. It also said the UBS report is based on information from the RoC and that the research firm did not seek comments from the bank regarding the data. According to Yes Bank, the report violates the code of conduct prescribed by Sebi for research analysts as the “analysts have failed to make full and fair disclosure with regard to their personal interests, if any, as prescribed in the regulations”.

The bank has called for a probe to find out whether the research analysts were actively aiding or abetting the short sale of Yes Bank shares before publishing the “questionable report”. Short sale refers to a market transaction in which an investor sells borrowed stocks in anticipation of a price decline.

This is not the first instance of a company threatening action after a brokerage publishes a negative report. Earlier, Indiabulls group had sued Canada-based research firm Veritas Investment Research Corp. in connection with an alleged defamatory report in 2012 and charged Veritas with extortion. Among other things, the 105-page report, released in August 2012, had said disclosures made by Indiabulls Real Estate Ltd, Indiabulls Power Ltd and Indiabulls Financial Services Ltd were not reliable and that select insiders at Indiabulls Real Estate were gaining at the cost of institutional and retail investors.

Neeraj Monga and Nitin Mangal, who wrote the report, had earlier authored critical reports on several other firms, including Kingfisher Airlines Ltd, DLF Ltd and Reliance Communications Ltd.

Sebi put in place a code of conduct for research analysts in December 2014; the CFA Institute, which runs the chartered financial analyst programme, a professional credential for analysts, also has its guidelines. While they bring in discipline, the analysts do not necessarily enjoy unfettered freedom. Typically an investment bank has two wings, investment banking and broking which consists of trading, sales and research. As a sell report by the research wing dents the investment banking business, despite the existence of the so-called Chinese wall, all sell reports do not see the light of day.

Many in the banking industry are wondering whether UBS would have come out with this report had its investment banking division been involved in Yes Bank’s fund-raising activity. I don’t know the answer, but two key things to watch out for always are the credibility of the analysts as well as the profile of the company involved.

The biggest problem that banking sector analysts face in India is the quality of disclosures. Most banks are not willing to talk about their large exposures as they are not compelled to do so. Stonewalled by banks, the analysts sift through annual reports of borrowers for the first clue and, at the next stage, they dig into project-level data at the RoC website. Typically, if a bank is not happy with a particular brokerage, it restricts access, forcing the analysts to depend entirely on publicly available data.

Transparency is the key here—bank balance sheets must reveal more. For instance, every bank must be mandated to disclose their largest sector exposures and, within each sector, five or six biggest loans given to corporations. Similarly, we need more disclosures for liabilities also. Currently, every bank discloses data of the so-called CASA or current and savings accounts but keeps mum on the maturity profile and cost of wholesale deposits. CASA per se also does not say much as its cost varies from bank to bank. For instance, the cost of savings accounts for most banks is 4% but Yes Bank pays 7% for savings accounts of Rs.3 lakh and above.

However, too aggressive a push for transparency may not be a great idea at this point when most banks have piled up bad assets and are starved of capital. Gross bad loans of 39 listed banks are 40.76% of equity and net bad loans, 22.67%. If total transparency reveals that bad loans are actually more than 100% of equity, this will create a crisis of confidence, particularly when the banks of a large neighbour in Asia are thriving by being opaque. It needs to be done with skill and when the going is good for the banking system.

About the author

Leave a Reply

Your email address will not be published. Required fields are marked *