Help Find Urgently Needed But Apparently Missing US Congressman

Have You Seen This Congressman?

Pictured above is Representative Darryl Issa, (R) California 49th District, Senior Member of the House Foreign Affairs Committee, dogged investigator on national security. 

Apparently missing.

He's urgently needed to conduct at least one and perhaps three investigations on matters of national security. 

GFH 2016 Results: Settlement Assets

It Depends ...

This is the third in a series of three posts on GFHFG’s 2016 earnings.

Today’s post looks at GFH’s US$ 464 million out-of-court settlement.

What precisely did GFH get?

Well for one thing, not a dime or even one fils of cash.  

Instead GFH got illiquid hard-to-value assets, primarily real-estate.  

GFH’s 2015 financials state that “The fair values were determined by independent external professional firms using a combination of market and income approaches, as appropriate for each asset”.  Determining fair value of illiquid assets like these is no easy matter (euphemism of the post).  Different assumptions would lead to different “fair values”. 

Time will tell whether GFH gets more or less than the current carrying value.

For details let’s turn to note 19 in GFHFG’s 2016 financials which contains key information.

If you look at the auditor’s opinion, you’ll see that GFH’s auditor used a “matter of emphasis” comment to call attention to this note.  Presumably they felt it was critical information for readers of the financials. So exploration of the note is worthwhile for just that reason alone.  But we’ve got another purpose:  determining what was received and what the impact and implications of that receipt are.

The following table is based on note 19.

Litigation Settlement - USD Millions
Development Property		$118
Investment Property		$192
Unlisted Equity Securities		$9
Investment in Associates		$28
Other		$117
Total		$464

Let’s take a closer look.

Development Properties—US$ 118 million. As per GFH’s financials (page 21), “Development properties are properties held for sale or development and sale in the ordinary course of business. Development properties are measured at the lower of cost and net realisable value.”   As per note 8, the properties are in UAE, Bahrain, and North Africa.   There appears to be no cashflow from these assets until they are sold.  Note that in 2016 GFH sold DP with cost of US$ 43 million and declared a profit of US$ 46 million.  Of which some US$38 million remains uncollected as of 31 Dec 2016 (note 11). 

Investment Properties—US$ 192 million (net of financing).  As per GFH’s financials (page 21), “Investment property comprise land plots and buildings. Investment property is property held to earn rental income or for capital appreciation or both but not for sale in the ordinary course of business, use in the supply of services or for administrative purposes. Investment property is measured initially at cost, including directly attributable expenses. Subsequent to initial recognition, investment property is carried at cost less accumulated depreciation and accumulated impairment allowances (if any). Land is not depreciated.”  I didn’t see a disclosure of the amount of revenue from IP.  Any revenue associated with the IP acquired via the settlement would accrue only from October.

Unlisted Equity Securities—This amount is so small as to not be worthy of attention.

Investment in Associates—The US$ 28 million in value is ascribed to 20% interest in Global Banking Corporation Bahrain and 33.33% of  Ensha Development Company Bahrain.  Another small irrelevant amount, except those who follow the financial sector in Bahrain might question the ascription of value to GBC and wonder what this means for valuation of the larger amounts in the “windfall”.   

GBC’s 2015 audited annual report repeats the going concern qualification in the 2014 report (note 2.1). The auditors state that GBC’s Board decided in May 2014 not to undertake any new business and dramatically reduced staff from 31 to 10, including key management and risk control positions.  As in 2014, 2015 note 6.1 discloses that there is material uncertainty about the full recovery of one of GBC’s investee companies.  GBC reported losses in fiscal 2014, 2015, and for the first nine months of 2016.  

Since GFH does not show separate values for GBC and EDC, it’s not possible to determine the value ascribed to GBC.  AA would not expect GBC to have much, if any, value from continuing operations.  Even though GBC reduced staff to 10 and has no interest expense (GBC is essentially funded by equity and non-interest bearing accruals), it still cannot generate a profit. 

So any value ascribed must be liquidation value.  Taking values in 3Q16 financials for investment properties (real estate assets) and bank deposits at face value, 20% of GBC would roughly equal US$ 14 million, though liquidation values—particularly for real estate-- can often be much less than carrying values.   What would happen to values in liquidation is anyone’s guess.  I couldn’t find anything on Ensha either but both are relatively small amounts in the grand total.

Other Assets—US$117 (net).  This includes three assets related to Al Areen, including the Lost Paradise of Dilmun Water Park, and the British School of Bahrain.  Note 19 provides additional information on the determination of the value.  Some US$55 million of the US$212 million gross value of assets roughly 26% is “goodwill”.   

My impression is that the LOPD is not a major cash generator but would welcome readers’ comments.  There was an article back in 2010 or 2011 in the GDN with expectations for 180,000 patrons for the year.  There doesn’t seem to be any news reports more recent.  Nor could I find any financials or financial data.  Not surprising because it’s not a listed company. 

Looking at the summary financials for all of the US$ 117 million in other assets, it’s a bit troubling to see so little cash and cash equivalents on hand given the US$ 32 million in deferred revenue (payments made by customers for services to be provided).  This money has apparently been spent but the services not provided yet and expenses likely need to be paid, e.g., teachers' salaries. 

Some closing observations.  

The settlement did not include the payment of any cash to GFH.   There’s nothing like cash to settle an obligation.  Clear value is received.  Cash can be easily employed for acquisitions, funding development of one's existing lines of business, etc.

So what explains the absence of cash?

When one take assets in lieu of cash, one takes a residual risk that asset values may go down as well as a chance for upside appreciation.

There are two reasons for taking assets in a settlement. 

1. The payer doesn’t have sufficient cash and assets are the best the payee can do.  
2. Or the payee knows the assets are dramatically undervalued presenting an opportunity for an additional gain. 

AA suspects the first is the explanation.  The inclusion of GBC, Ensha, and the equity securities--all minor amounts--indicate that value was short and had to be topped up with some minor assets.  And in the case of GBC a troubled asset whose value is most likely based on a liquidation scenario.     

If the assets were dramatically undervalued, the payers would have sold some of them and thus been able to give less in value to GFH minimizing the decline in their own net worth.

These assets do not appear to generate substantial cash flow or profit, though there is insufficient information in the 2016 financials currently issued.  Perhaps the Pillar 3 disclosures for 2016 which are likely to be included in the “glossy” annual report will shed more light.

In light of this analysis of the “windfall”, what are we to make of GFH’s pronouncements about its performance, the success of its 2014 strategy, and prospects for the future?

When I read GFH executive management comments, I also see assertions that somehow receipt of illiquid hard-to-value assets somehow has dramatically improved GFH’s fortune, positioning GFH to “accelerate” its strategy. 

But how? 

GFH isn’t sitting on a cool half a billion in cash which it could use to fund acquisitions or to expand its lines of business.   The windfall doesn’t seem to generate stable cashflows that might fund such expenditures albeit at a lower level.   Nor are lenders likely to find these assets suitable collateral against which to advance loans in significant amounts.  Realization (sale) of these assets is likely to require time.

In addition GFH’s underlying business hasn’t been transformed as 2016’s results show.  And that’s even if one discounts the full amount of the impairment allowances taken.  To top it off the strategic talk sounds strangely similar to the pre-2014 strategy.

GFH: A New and Improved Strategy

Not Proof of a Successful Strategy, Hard Work, or Integrity

If you’ve read GFHFG’s press release regarding 2016 net income, you’ll see that GFH has declared success in implementing the strategy it announced in December 2014--a scant two years after announcing what was described as a "long-term" strategy--and the  need for a new strategy.

Let’s let GFH’s top management set the stage for this post.

Commenting on the results, Dr. Ahmed Al Mutawa, Chairman of GFH, said, “We are extremely pleased to have delivered great performance for 2016. These results are a testament to the success of the strategy that GFH has adopted since 2014, and the commitment and integrity of the Board and management team. Our results were supported by the significant recoveries that saw $460 million of assets restored back to the Group, a major benefit for shareholders and one that will allow us to deliver stronger results for the years to come.

Building on the successful achievement of our strategy for 2014-2016, GFH’s Board of Directors has also approved and recommended a new strategy for 2017-2019, which focuses on accelerating growth by way of acquiring financial institutions, infrastructure investments and strategic assets. The new strategy will be presented for shareholder approval at the next General Assembly Meeting and are subject to final regulatory approvals.

Mr. Hisham Alrayes, CEO of GFH, added, “2016 was a year of significant progress across the Group and we are proud of the transformation that has been accomplished as demonstrated by our results.  During the year, we have delivered on our promise to shareholders and the market with regard to recoveries, which will effectively return to the Group all past accumulated and written-off losses of the last eight years.

We have also set the group foundations for the future by further strengthening our Investment Banking, Real Estate and Commercial Banking activities, and have taken sufficient provisions to make the Group’s balance sheet more efficient for future value extraction.

As a prelude to my comments, a recap of GFH’s 2014 strategy.

1. stable and recurring income, profitability and cashflow 
2. reduce holdings in “land-based” business  (real estate) from 50% to 40% in the midterm and to around 30% in the long term
3. ensure greater stability from global financial issues

You’ll find an excellent analysis of GFH’s strategy in this earlier post.

Now to my comments.

Chairman al Mutawa:

1. “Delivered great performance” -- According to my analysis GFH had an operating loss of some US$ 192 million for 2016.  The windfall earnings from litigation settlements do not reflect underlying performance or any fundamental change in GFH’s ability to generate income.  Operating earnings do.  And they evidence dismal performance and no substantial change. 
2. “Testament to the success of the strategy” -- Looking at the above key pillars, I don’t see that any of these were achieved.  Nor does the equivalent of buying a winning “lottery” ticket validate that strategy.  
3. “Commitment and integrity of the Board and management team” -- Frankly AA is puzzled how these two factors influenced the litigation settlement.    Since this was an out-of-court settlement, I suppose one could read this statement to mean that in conducting the negotiations GFH’s board and management team looked out for the interests of GFH and not the payees.  A strange comment to make. 
4. “Results supported by significant recoveries” – Excuse me.   The litigation settlement was the entire cause of the results.  As noted above without the settlement, GFH had a net loss from ongoing operations in 2016. 

CEO Al Rayes

1. “Proud of the transformation” -- What precisely has been transformed?  Certainly not the underlying business (see 2016 results from ongoing operations).   The windfall litigation settlement reflects nothing more than the successful conclusion of legal actions.  
2. “Laid the foundation”  -- One would expect a firm whose main business is real estate development to know that laying foundations and actually completing buildings are two different things.  Though I’m told GFH’s historic forte has been marketing.  There is I am told a lot of unfinished construction at the BFH – Villawhere as local wags have it.  Foundations laid buildings not completed.  Hardly a demonstration of anything except perhaps difficulties in persuading one’s lender to advance more funds. 
3. “Demonstrated by our results” – This is an even further stretch than “laid the foundation” as proving success of the earlier strategy. 
4. “Taken sufficient provisions to make the Group’s balance sheet more efficient for future value extraction” – Since impairment provisions are only to be taken to reflect the impairment of assets, this is indeed a puzzling statement.   Is Al Rayes admitting that GFH has overprovisioned in order to build up a “hidden reserve” to use to boost lower operating revenues in the future?  This could of course "demonstrate" the success of whatever strategy GFH claimed to be following at the time.  And as well the integrity and commitment of the Board.  Or is he admitting that GFH was severely underprovisioned?  

As regards the new strategy, mark AA as unconvinced. 

There seems to be nothing new here.   The touted potential acquisition of an Islamic bank in Bahrain and infrastructure development are fundamentally exposures to real estate. 

A glance at the Chairman’s report in GFHFG’s 2016 financials bears this out. 

Mentioned in quick succession are: 

1. Acquisition of a US-based  industrial real estate portfolio and discussion of existing US industrial real estate 
2. Jeddah Mall 
3. Villamar aka Villawhere? 
4. Harbour Row and Harbour Walk (also at BFH)
5. Tunis Financial Harbour
6. Gateway to Morocco
7. Mumbai Economic Development Zone

 A following post will take a look at the assets received in the litigation settlement. 

What is the quality of these earnings, a key issue for the Financial Group going forward.

GFH Windfall Settlement Masks Operating Loss of US$192 Million for 2016

GFH’s reported US$ 233 million net income is very impressive on its face.

What’s behind the 20-fold jump in reported earnings to US $233 million? 

US$ 465 million in litigation settlements.   The business equivalent of buying a winning lottery ticket.

Because this unlikely to be a recurring event, we need to look at results from ongoing operations to form a proper view of GFH’s 2016 performance, achievement of its strategy, and prospects for the future.

On that basis how did GFH perform? 

Definitely less well (euphemism of the post).  

As outlined below, an operating loss of US$ 192 million.

Follow along referring to the bank’s, excuse me, financial group’s 2016 audited financials here.  

Operating revenues—ignoring litigation gains—were some US$ 114 million versus US$ 88 million the year before.  A 30% gain or US$ 26 million driven by the sale of some investment and development property.

Operating expenses were at US$ 125 million versus US$ 62 million the year before. 

But I don’t think it is necessarily fair to subtract this full amount from 2016 revenues –which results in an operating loss of US$ 11 million before impairment allowances.

Why?  Some of the increase in these expenses is related to the costs of pursuing the legal settlement or as a result of the legal settlement, i.e., accrued staff bonuses

Let’s look a bit closer at the reasons for the increase in operating expenses.

Roughly US$ 26 million in additional staff expense (note 21) which appears to be increased bonuses for staff (see Other Liabilities note 14) and US$14 million in additional legal costs.   It seems fair to consider these as not part of ongoing operating expenses.  

That leaves an increase of US$23 million –US$ 10 million in undescribed “other expenses” (both in note 22) and $10 million for “investment advisory expenses” (income statement).  That would make 2016 adjusted operating expenses some US$ 85 million, leaving net operating profit before impairments at US $29 million.

In 2016 impairment allowances jumped to US$221 million in 2016 versus US$ 17 million the year before (see note 23). 

Deducting the full amount, GFH’s net income from operations before the windfall gain is a loss of US$ 192 million. 

You can also see a very similar though larger figure in note 32 page 56, i.e. US$ 206 million.   GFH--less generous or perhaps rigorous than AA--did not allocate the US$14 million in legal expenses to the unallocated segment to “match” the litigation settlement revenues.  However, it did allocate the US$25 million bonus accrual to this "segment".

Side Note:  Proving to GFH’s Reported Results:  When the additional $40 million in litigation related expenses is netted from the US$ 465 in litigation “gains” and added to the US$ 192 million operating loss, the result is net income of US$233 million which “foots” to the net income figure in GFH’s income statement.

Let’s look in depth at impairment allowances.  

1. Financing Assets (note 5) were US$ 38 million.  I’m inclined based on my   earlier posts on KHCB’s credit quality, particularly this one on 2015 past due loans to see that as probably a justified “catch-up”.
2. Other Assets (note 11) US$72—US$45 million in Other Receivables and $26.5 million in Financing Projects.
3. Investment Securities (note 6) US$61 million.
4. Equity Accounted Investees (note 9) US$36 million.

The question is whether there is anything that suggests that these impairment allowances are overstated or should be adjusted for any other reason to determine GFH’s net income from operations – that is, excluding the windfall gains from the litigation settlement.

I don’t think there is but let’s start by examining three possible explanations for these provisions and their dramatic increase.

1. Formerly perfectly good assets that were carried at proper values in GFH’s prior year’s financials deteriorated sometime during 2016.  Thus, the provisions relate to the ongoing business and are a proper deduction from 2016 revenues, justifying the assumption of a US$ 192 million net loss on operations.  Under this scenario, it’s just a “remarkable coincidence” and nothing more that so many different types of assets declined so significantly during a single year. 
2. GFH is “taking a bath”, that is, writing down good assets below their realizable value to decrease 2016 net income (perhaps to moderate payment of dividends) and more importantly build up a “reserve” to artificially improve future years’ earnings through timely reversals of provisions.  In other words provisions are overstated to create a "reserve" to be used to manage future earnings.
3. In previous accounting periods the bank did not recognize impairments so it could artificially minimize or avoid losses in these prior periods. In this scenario, the windfall 2016 litigation settlement gave GFH the opportunity to clean its books.  As you may well expect from my 2010 posts on GFH’s financials and my recent analysis of GFH and KHCB financials as well as the “remarkable coincidence” mentioned above, I think there is a strong case to be made for this scenario playing a major role in 2016 allowances for impairment.  That is not to discount the likelihood that the other two scenarios also played roles. 

Note that Scenario #1 above is the only legitimate reason for provisions under generally accepted accounting principles. 

Simple Math Stumps US Corporations - SEC Rides to the Rescue

Our Corporations Isn't Learning

As you'll recall, Section 953b of the Dodd Frank Act requires corporations listed in the USA to publish a ratio of the total compensation of the CEO to the median compensation of all other employees (excluding the CEO).

Self-proclaimed "captains of industry" objected to the onerous requirement of providing this ratio, but their pleas were ignored --though implementation was delayed till 2017.

Now with a kindler gentler administration in the White House and control of both the House and Senate in the hands of the GOP, they are getting a second hearing.

February 6 Acting SEC Commissioner Michael Piwowar:

The Commission adopted the pay ratio disclosure rule in August 2015 to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.

Based on comments received during the rulemaking process, the Commission delayed compliance for companies until their first fiscal year beginning on or after January 1, 2017. Issuers are now actively engaged in the implementation and testing of systems and controls designed to collect and process the information necessary for compliance. However, it is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.

I encourage commenters and the staff to expedite their review in light of these unique circumstances.

Boldface above courtesy of AA.

Yes, this is indeed an almost insurmountable task. 

1. One has to figure out the total compensation of the CEO.  Oh, wait.  That's already done for the annual Proxy Statement. 
2. Then one has to figure out the median salary.  That's even more tricky because it involves two really "hard" steps.  
3. Big corporations have operations all over the world and pay their employees in a myriad of currencies.  How possibly could they figure out the US equivalent of Paris-based Jacques' salary or Frankfurt-based Heinrich's?  Oh, wait.  Corporations routinely convert local currency transactions into US dollars for their annual financial reports, including salaries paid to foreign workers.  Corporations also routinely keep detailed employee by employee payroll records for tax, pension, and other purposes so no new records have to be created.  What probably would be required is to add a column to figure out the US dollar equivalent salary for each employee.  
4. But, as no doubt many a beleaguered corporation will point out, then they have to figure out the median salary.  What's a median? An extremely challenging task.  One lists all salaries and then picks out the one that is smack in the middle.  This is the sort of things that computers were made to do.  Microsoft's Excel has a preprogrammed "median" function so this is definitely not rocket science.
5. So the corporation would have to consolidate US dollar-equivalent lists of salaries prepared by various operating units (foreign and domestic) and then sort them by amount and pick out the median.  Another automated process.

On its face, it sure looks like this objection is motivated by a desire to avoid providing this information because it's likely to raise uncomfortable questions about CEO compensation.

But, let's accept the manifest absurdity of this argument and assume for a moment the objection is true.  After all, we have a new Treasury Secretary who swears he can't fill out government ethics forms and other members of the Administration see things that never happened (3.5 million people at the Mall for the Inauguration, 3.5 million illegal voters, etc). 

On that score Mr. Piwowar "understands" that some corporations are having a problem.  It's not clear if there have been many complaints from companies, whether he is seeing things, heard about it from KellyAnne, or read about it on Breitbart.

Rule 953b was finalized 5 August 2015. 

That means that some US listed corporations have been unable to establish a system to calculate this ratio in the 17 months since then and believe that they will be unable to complete it in the additional 11 months remaining during this year (assuming most corporations have a December fiscal year end).

If this is the case, then 3 troubling questions.

1. In an era where complex calculations are at the base of product development and production, should a consumer purchase a product from a company that acknowledges its inability to do simple maths?
2. In an era where proper pricing of products, operations and risk management depend on the ability to perform complex calculations, should an investor buy the stock or bonds of a company that admits that simple mathematical procedures exceed its competence?
3. Should the average citizen and our government be worried that our self-proclaimed math-challenged corporations are clearly not equipped to compete with foreign corporations?

The SEC is taking comments on implementation of this rule.  Let your voice be heard.

The Bowling Green Massacre - Never Forget & Contribute Now

Regular readers of this blog know that our primary focus is financial, but there are times when other issues assume such paramount importance that silence is impossible.   Such is the case with the Bowling Green Massacre.

The Cowardly Bomb Attack

It wasn't that long ago that the idyllic atmosphere of Bowling Green, Kentucky was shattered (quite literally) by a cowardly bombing by terrorists.

But the damage wasn't only to property.  

An Anguished Cry.  Why?  

And yet in this time of anguish, a simple but powerful memorial to the untold number of victims.  And I'd note one conducted by the residents of blue state New York City for the fallen in red state Kentucky--a typical American response to threats.

Citizens across the nation express their solidarity. 

AA is Bowling Green and sincerely hopes you are too.

Americans are known for their charitable instincts.  And it didn't take long before a fund was established.  Below is a link to their website.

We all still carry the vivid memories of what horrors occurred at Bowling Green, but some still relive those moments everyday as they work to rebuild a community torn apart.

ذكرى فاطمة ابراهيم البلطجي -- لست أنساكي

رجعوني صوتك لأيامي اللي راحوا
علموني أندم على الماضي وجراحه
اللي سمعته قبل ما تسمعك اذنيه 
عمر ضايع يحسبوه إزاي عليّ
انت عمري اللي ابتدي بنورك صباحه
قد ايه من عمري قبلك راح وعدّى
يا حبيبي قد ايه من عمري راح
ولا شاف القلب قبلك فرحة واحدة

Wall Street Titan "Trips Up Again" or Did He?

Abu Arqala Reports, But You Decide

According to The Columbus Dispatch:

President Donald Trump's nominee for U.S. treasury secretary was untruthful with the Senate during the confirmation process, documents uncovered by The Dispatch show.  Steve Mnuchin, former chairman and chief executive officer of OneWest Bank, known for its aggressive foreclosure practices, flatly denied in testimony before the Senate Finance Committee that OneWest used "robo-signing" on mortgage documents.  But records show the bank utilized the questionable practice in Ohio.

"Untruthful" presumes that Secretary Mnuchin deliberately misled the Senate.   

That's a rather damning indictment of Mr. Mnuchin who the "World's Greatest Deliberative Body"--at least according to their own assessment--recently confirmed as Secretary of Treasury after what was no-doubt grueling examination of his qualifications, behavior, and ethics.

But are there other explanations? 

Of course there are! 

1. Mr. Mnuchin was not familiar with the term "robo signing" and believe it referred to robots. So he answered sincerely that not a single robot signed a document.  An admirable stance for a member of an Administration that has pledged to create jobs for Americans. 
2. "Robo-signing" by humans did occur, but even though he was Chairman and CEO, Mr. Mnuchin was so out of touch that he really didn't know what was going on at One West.  Luckily, a firm grasp of reality is not a prerequisite for a cabinet post in the current Administration.  
3. According to The Columbus Dispatch's "facts" robo-signing did take place, but according to Mr. Mnuchin's "facts", it did not.  In such a case, the simple answer is teach our children both sets of "facts" and let them make up their own minds.  

India: Moody’s and ICRA See “Subdued” Prospects for India’s Banks

Sometimes Even When You See Something Clearly, You Think It Wise to be Indirect

Just when I was recovering from The National Bank of Ukraine’s festival of euphemisms about PrivatBank, along come Moody’s and its Indian affiliate ICRA to once again remind AA that his attempts are easily upstaged. 

In a report released on 9 January, Moody’s and ICRA summarize their conclusions about the country’s banking sector with the phrase “see subdued prospects for India's banks“.

Why is AA “skeptical” and inclined to a stronger term than “subdued”?  Perhaps “dismal”?

Three factors.

First, Indian banks—particularly public sector banks or PSBs—have a reputation for under-reporting NPAs.    Favorite techniques were refusal to recognize NPAs, disguising bad loans via restructuring and/or making new loans to pay interest on past due loans.   Former RBI Governor Raghuram Rajan launched a “crackdown” in 2015 to curb under-reporting of NPAs. 

Performance suffered.  The decline was chiefly due to increased provisioning in 2016 and the related impact on net interest margin.   According to RBI’s Report on Trends and Progress of Banking in India,  Operations and Performance of Scheduled Commercial Banks Table 2.1, banking sector return on assets for 2015/2016  was 31 bp and ROE 3.59% compared to 2014/2015’s ROA of 81 bp and ROE of 10.42%.   Public Sector Banks—some 70% of banking assets--fared even worse with negative ROA and ROE in 2015/2016.  

Second, Indian banks have also traditionally under-reserved their declared NPAs with provisions averaging roughly 40% of total NPAs.   According to RBI Handbook of Statistics of the Indian Economy Table 65, 2015 reserving levels were at 46%.   Unreserved NPAs were some 20% of 2015 capital (Table 64). 

It’s hard to tell what happened in 2016.  Much higher provisions were taken, but more loans were recognized as NPAs and restructured loans are now to be included in that figure.  What’s the net effect?   

Sadly, RBI data on NPAs is available with a roughly 12 month lag.   See Table 65 in the RBI’s “Handbook of Statistics”.  Latest figures are from September 2016.  Other RBI reporting has detailed bank-by-bank analysis but the latest data appears to be March 2016. 

Without RBI statistics on both NPAs and provisions, it’s not possible to determine if the provision coverage has increased because both NPAs and provisions have increased.  

Third, low provisioning levels are particularly important because NPA recovery is traditionally very low in India.  According to RBI’s Report on Trends and Progress of Banking in India,  Operations and Performance of Scheduled Commercial Banks, Table 2.2,  in 2016 Indian banks recovered roughly 10% of NPAs versus 12% for the previous year.  

What this means is that recoveries are unlikely to make up provisioning shortfalls to any meaningful extent.   Provisions then are more critical than in jurisdictions where average recoveries are in the 40 to 50% range. 

It’s hard for AA to imagine that during 2016 Indian banks cured decades of bad practice and bad underwriting.  Trump Tower like Rome wasn’t built in a day, though it is by some Twitter accounts better.  And banking sector cleanups generally take more than a single year. 

Moody’s/ ICRA seem to agree. In their press release, they project single digit ROE for 2017 and 2018 and note large capital needs particularly among PSBs. 

A case of JPMorgan “Jakarta” fever?  Or euphemism?  

And finally a tip of AA’s enormous tarbush to ICRA SVP Karthik Srinivasan for combining “dent” with “profitability matrices”.  See link to Moody’s / ICRA press release. Shabash!