I noticed this bank in India early 2012 - it was trading at around 5-6% dividend yield and decent asset quality trading at about a third below FY11 book value. It had a decent ROA of over 1%, ok with provisioning. So that's where the proceeds from the Vikas WSP sale went last year - I ended up selling when it approached FY13 book value early 2013 because I didn't like where the industry was overall. It seems like a good call - not just that the realized return was over 13% including dividends; it is now trading at around half the book value - thereby avoiding a close to 50% notional loss. Ever since I started investing in 1991 (which was in a bank), I have looked at banks in general as a reflection of the Indian economy - this hypothesis has proven right time and again. As long as the banking culture doesn't change drastically, the stocks in this industry seem like good picks at times of economic troubles. It helps to have a conservative regulator.
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Tuesday, October 01, 2013
Sunday, September 16, 2012
Earlier this year..
Foraging in the food and processed food industry brought me to Vikas WSP earlier in 2010. By my metrics, it was undervalued to begin with back then. The company was netting about a billion and trading at around two times that. I started buying at around 25, with fair value assessment of over 50. By December 2011, it dropped to 9.36 and I kept buying averaging at 13. By March 2012, it had moved to over 60 and it was time to close out the position.
The thesis was food to begin with - Vikas is into guar gum products - interestingly, the products are sold also to oil drillers. The gum is used to ease drilling process and prevent fluid loss. The market for product was good and kept getting better with more exploration activities.
The supply for the industry is almost limitless. The company is based in Rajasthan which has abundant guar - you see trees with guar on the road-sides. The manufacturing process was refined over the years. There is an active futures/forwards market as well for both guar and gum. The by products are also saleable.
The company was planning for organic guar production to reinvest the gains from the new business line. The strategy is brilliant in the long-term - Vikas bought land which wasn't returning anything during the organic conversion process. My thesis didn't hinge on it - but explained the low capital efficiency. The land was the downside protection for my investment. There were also some governance issues of the past that was mostly done away with.
Monday, October 03, 2011
Berkshire D(St)eal with Bank of America & Buyback
Bank of America Deal
"Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium.
In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash."
If you want to replicate the deal on Sep 30, you could buy 214.13 million preferred in the market with a coupon of 8.125% and trading at 23.35. You would get a higher dividend than Berkshire - about 135 Million higher. Hypothetically, you could buy the BAC-WTA at 2.71 per warrant to be exercised at $13.3 with this excess. You can buy about 50 Million warrants in a year.
To match, you will buy for 14 years to reach the 700 Million assuming the price remains the same throughout.
And, your break-even point is about $9 higher than Berkshire's - a difference of $6.3 Billion.
Now that's what I call a d(st)eal.
Buy Back of Shares
Long-time shareholders of Berkshire had to rub their eyes twice to convince themselves that they were not dreaming/in a nightmare when this news hit the wires. (http://www.berkshirehathaway.com/news/sep2611.pdf).
The two key criteria is:-
1.at prices no higher than a 10% premium over the then-current book value of the shares; and
2. repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion
Buffett's position outlined in the 1999 letter offers amazing clarity on the subject.
http://www.berkshirehathaway.com/letters/1999htm.html
"Share Repurchases
Recently, a number of shareholders have suggested to us that Berkshire repurchase its shares. Usually the requests were rationally based, but a few leaned on spurious logic.
There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise, insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down.
The business "needs" that I speak of are of two kinds: First, expenditures that a company must make to maintain its competitive position (e.g., the remodeling of stores at Helzberg's) and, second, optional outlays, aimed at business growth, that management expects will produce more than a dollar of value for each dollar spent (R. C. Willey's expansion into Idaho).
When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can buy new businesses or repurchase shares. If a company's stock is selling well below intrinsic value, repurchases usually make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued. Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a shareholder-oriented management.
That day is past. Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefitted by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.
Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and then only when we employ a range of values, rather than some pseudo-precise figure. Nevertheless, it appears to us that many companies now making repurchases are overpaying departing shareholders at the expense of those who stay. In defense of those companies, I would say that it is natural for CEOs to be optimistic about their own businesses. They also know a whole lot more about them than I do. However, I can't help but feel that too often today's repurchases are dictated by management's desire to "show confidence" or be in fashion rather than by a desire to enhance per-share value.
Sometimes, too, companies say they are repurchasing shares to offset the shares issued when stock options granted at much lower prices are exercised. This "buy high, sell low" strategy is one many unfortunate investors have employed -- but never intentionally! Managements, however, seem to follow this perverse activity very cheerfully.
Of course, both option grants and repurchases may make sense -- but if that's the case, it's not because the two activities are logically related. Rationally, a company's decision to repurchase shares or to issue them should stand on its own feet. Just because stock has been issued to satisfy options -- or for any other reason -- does not mean that stock should be repurchased at a price above intrinsic value. Correspondingly, a stock that sells well below intrinsic value should be repurchased whether or not stock has previously been issued (or may be because of outstanding options).
You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of Berkshire's value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities -- though Berkshire's trading volume at these points was too light for us to have done much buying, which means that the gain in our per-share value would have been minimal. (A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value produces only a ½% gain in that value at most -- and even less if the funds could alternatively have been deployed in value-building moves.)
Some of the letters we've received clearly imply that the writer is unconcerned about intrinsic value considerations but instead wants us to trumpet an intention to repurchase so that the stock will rise (or quit going down). If the writer wants to sell tomorrow, his thinking makes sense -- for him! -- but if he intends to hold, he should instead hope the stock falls and trades in enough volume for us to buy a lot of it. That's the only way a repurchase program can have any real benefit for a continuing shareholder.
We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders -- and potential shareholders -- the same valuation-related information we would wish to have if our positions were reversed.
Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange ("NYSE"). Instead, we will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the "third market" or on the NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not engage in transactions involving fewer than 10 shares of A or 50 shares of B.
Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire's price. Rather we will make them if and when we believe that they represent an attractive use of the Company's money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stock's intrinsic value."
"Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium.
In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash."
If you want to replicate the deal on Sep 30, you could buy 214.13 million preferred in the market with a coupon of 8.125% and trading at 23.35. You would get a higher dividend than Berkshire - about 135 Million higher. Hypothetically, you could buy the BAC-WTA at 2.71 per warrant to be exercised at $13.3 with this excess. You can buy about 50 Million warrants in a year.
To match, you will buy for 14 years to reach the 700 Million assuming the price remains the same throughout.
And, your break-even point is about $9 higher than Berkshire's - a difference of $6.3 Billion.
Now that's what I call a d(st)eal.
Buy Back of Shares
Long-time shareholders of Berkshire had to rub their eyes twice to convince themselves that they were not dreaming/in a nightmare when this news hit the wires. (http://www.berkshirehathaway.com/news/sep2611.pdf).
The two key criteria is:-
1.at prices no higher than a 10% premium over the then-current book value of the shares; and
2. repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion
Buffett's position outlined in the 1999 letter offers amazing clarity on the subject.
http://www.berkshirehathaway.com/letters/1999htm.html
"Share Repurchases
Recently, a number of shareholders have suggested to us that Berkshire repurchase its shares. Usually the requests were rationally based, but a few leaned on spurious logic.
There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise, insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down.
The business "needs" that I speak of are of two kinds: First, expenditures that a company must make to maintain its competitive position (e.g., the remodeling of stores at Helzberg's) and, second, optional outlays, aimed at business growth, that management expects will produce more than a dollar of value for each dollar spent (R. C. Willey's expansion into Idaho).
When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can buy new businesses or repurchase shares. If a company's stock is selling well below intrinsic value, repurchases usually make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued. Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a shareholder-oriented management.
That day is past. Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefitted by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.
Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and then only when we employ a range of values, rather than some pseudo-precise figure. Nevertheless, it appears to us that many companies now making repurchases are overpaying departing shareholders at the expense of those who stay. In defense of those companies, I would say that it is natural for CEOs to be optimistic about their own businesses. They also know a whole lot more about them than I do. However, I can't help but feel that too often today's repurchases are dictated by management's desire to "show confidence" or be in fashion rather than by a desire to enhance per-share value.
Sometimes, too, companies say they are repurchasing shares to offset the shares issued when stock options granted at much lower prices are exercised. This "buy high, sell low" strategy is one many unfortunate investors have employed -- but never intentionally! Managements, however, seem to follow this perverse activity very cheerfully.
Of course, both option grants and repurchases may make sense -- but if that's the case, it's not because the two activities are logically related. Rationally, a company's decision to repurchase shares or to issue them should stand on its own feet. Just because stock has been issued to satisfy options -- or for any other reason -- does not mean that stock should be repurchased at a price above intrinsic value. Correspondingly, a stock that sells well below intrinsic value should be repurchased whether or not stock has previously been issued (or may be because of outstanding options).
You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of Berkshire's value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities -- though Berkshire's trading volume at these points was too light for us to have done much buying, which means that the gain in our per-share value would have been minimal. (A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value produces only a ½% gain in that value at most -- and even less if the funds could alternatively have been deployed in value-building moves.)
Some of the letters we've received clearly imply that the writer is unconcerned about intrinsic value considerations but instead wants us to trumpet an intention to repurchase so that the stock will rise (or quit going down). If the writer wants to sell tomorrow, his thinking makes sense -- for him! -- but if he intends to hold, he should instead hope the stock falls and trades in enough volume for us to buy a lot of it. That's the only way a repurchase program can have any real benefit for a continuing shareholder.
We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders -- and potential shareholders -- the same valuation-related information we would wish to have if our positions were reversed.
Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange ("NYSE"). Instead, we will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the "third market" or on the NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not engage in transactions involving fewer than 10 shares of A or 50 shares of B.
Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire's price. Rather we will make them if and when we believe that they represent an attractive use of the Company's money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stock's intrinsic value."
Saturday, August 13, 2011
Great Analysis
I read a couple of great works of analysis the last month.
1. Alex Dalmady's writings on Allen Stanford's bank from 2009. Here are a few links:-
Alex Dalmady's Blog
Latin American Herald Tribune reproducing the write-up
The Devil's Excrement summarizing the writing
Scribd Download of Veneconomy Article. (Link is down-loadable and very moody)
2. Prof. Sanjay Bakshi's detailed write-up on how to analyse an investment.
1. Alex Dalmady's writings on Allen Stanford's bank from 2009. Here are a few links:-
Alex Dalmady's Blog
Latin American Herald Tribune reproducing the write-up
The Devil's Excrement summarizing the writing
Scribd Download of Veneconomy Article. (Link is down-loadable and very moody)
2. Prof. Sanjay Bakshi's detailed write-up on how to analyse an investment.
8 Points of View For Evaluating a Stock
Tuesday, July 19, 2011
The Abominable No Man bows out
Alongside the Berkshire meeting, Wesco Financials' meetings are a treat for the hardcore addicts. This year was the last of the Wesco meetings where you can see the Abominable No Man Charlie Munger dishing it out for the value investors without abandon. Due to the pending merger between Berkshire and Wesco, this year was the last such meeting. Though, Mr. Munger continues to be the Vice Chairman of Berkshire Hathaway - it will not be the same.
I didn't make it to the meeting. However, there was good coverage - paid and unpaid.
Notes from Innoculated Investor
Pat Dorsey's Notes
I didn't make it to the meeting. However, there was good coverage - paid and unpaid.
Notes from Innoculated Investor
Pat Dorsey's Notes
Saturday, April 09, 2011
US Dollar, Indian Rupee and Gold
You would have come across an article or two saying everything is wrong with US Dollars, unless you were hiding in a cave. I am trying to look at what could be wrong, fundamentally.
Indian Rupee
Indian Rupee
Reserve Bank of India has in circulation Rs.8,420,409,791,000 worth of notes (8.420 trillion or 8.420 Lakh Crores). There is Rs. 485,772,152,000 (0.485 Trillion or 485 Thousand Crore) worth of gold against it. That is about 5% of Rupee in circulation is backed by gold and all of the gold is held in India.
1. It means that about 95% of the currency backing is foreign securities. So, if you are holding a Rs. 1000 note in your hand - Rs.50 worth of that is in gold and Rs.950 is in foreign securities.
2. It also means that notes in circulation is about Rs.8,000 per Indian vs. per capita income of about Rs. 44,000. Considering that Rupee doesn't move much outside the border, it gives you a rough idea of how fast the currency changes hands.
Now let us talk about the 950 of the 1000. RBI is permitted to hold such securities in the currency of any IMF member country or in securities issued by IMF, World Bank or BIS. Here's the key condition - the maturity of these cannot be beyond a period of 10 years. Also, the Gold in the 50 of the 1000 - 85% of that should be held in India.
Now, here's another factoid. About 60+% of world currency reserves are held in USD. So if we assume that 2/3rds of the Rupee is USD since it is backed by foreign securities, we have about Rs. 670 of that Rs. 1,000 is USD. So, when you are holding that Rs.1,000 note, you are actually holding about USD 15 plus about 1/40th of a gram of Gold and the rest in others. (That should be enough to pause before you spend, to think of what you are exchanging really.)
I admit that the reserves are actively managed by RBI by people who think about this risk and nothing else. Still, if want to achieve just a 50% cover in Gold, it would mean about 10,000 years of 200 tonne lot of Gold buying or Gold price appreciating that many times. Both look like wishful thinking. US Dollar, therefore, is a cause for concern to us even if we are earning and investing in India. So, if USD is worthless, around 70% of INR is worthless.
(Source for data: Reserve Bank of India)
US Dollars
Compare this scenario against US Dollars (Feb 2011) -
Currency - 928.7 Billion
Reserve Assets - 134.7 Billion.
Value of reserve Assets hide a very important picture - Gold stock valued at 11 Billion is valued at $42.22 per Troy Ounce. The value of gold in the market per troy ounce in Feb. was between $1,340 and $1,440. Revaluing gold would add another 350 Billion to the reserves. Still we have 485 Billion Vs 929 Billion of currency issued. To achieve parity, Gold would have to go up double from this (no, I am not making a prediction).
(Source for data: Federal Reserve and Kitco for gold prices)
Look at it this way, every time USD loses value, INR loses about 70% of that in relation. Now, this is only a comparison of two currencies - against their reserves. Now, if you take into account interest rate parity adjusted for inflation, growth trajectory of two economies and keeping in mind everything in the forex market moves relative to one another, you can draw your own conclusions on where we are headed.
How is it all relevant? At the end of the day, when you invest in India everything is denominated in Rupees and settled in Rupees. This is an attempt to get to the bottom of that Rupee.
Tuesday, November 23, 2010
Efficient Markets?!!!!
Company A: -
Prior Year Net Rs.3.5 Billion.
Current 9 Months Net: Rs. 0.5 Billion.
Networth - Rs. 24 Billion
Market Cap at BSE: Rs. 206 Billion.
Are markets efficient? You tell me.
In this context, I think two quotes are appropriate:-
"Price is what you pay, value is what you get" - Buffett
"The lin I draw in the sand is that if an asset has cashflow or the likelihood of cashflow in the near term and is not purely dependent on what a future buyer might pay, then it's an investment. If an asset's value is totally dependent on the amount a future buyer might pay, then its purchase is speculation." - Seth Klarman at the CFA Institute Annual Conference 2010.
Prior Year Net Rs.3.5 Billion.
Current 9 Months Net: Rs. 0.5 Billion.
Networth - Rs. 24 Billion
Market Cap at BSE: Rs. 206 Billion.
Are markets efficient? You tell me.
In this context, I think two quotes are appropriate:-
"Price is what you pay, value is what you get" - Buffett
"The lin I draw in the sand is that if an asset has cashflow or the likelihood of cashflow in the near term and is not purely dependent on what a future buyer might pay, then it's an investment. If an asset's value is totally dependent on the amount a future buyer might pay, then its purchase is speculation." - Seth Klarman at the CFA Institute Annual Conference 2010.
Friday, October 15, 2010
Power of Incentives
We got a call from a banker who works for one of the "Supermarket" banks. The point of his call was to find out if we needed any "products" they could offer. We talked about our needs - pension for old age being one of them. I told him we planned to settle in India for our retirement and asked him to quote something appropriate to cover our baseline expenses then. He said we would need to start a relationship with him by opening an offshore account (forget that the reason for his call was that we HAD a relationship onshore, if you can call India that) before he can talk further about his products. It was a fair request - considering the account was a no minimum balance dollar account. So far good.
This all happened middle of June, we opened the account and the bank mailed us their paperwork. We were scheduled to go on a long planned travel the last week of June and had started our leave of absence. Now, we started getting more frequent calls to update the form, follow-up and what not. Fine, we have a wonderful banker who cares for our needs and wants to close fast or so we thought. Then he started insisting that we start the pension plan relationship right away, send the forms. He was very forthcoming about it - it would be counted towards his June quarter's quota. We got repeated calls right till the afternoon of the day we were leaving even after telling him that we don't want to rush to the product and would take our time deciding.
A couple of weeks later, after returning from the trip, I studied the proposal at my leisure. Here were a few things that stood out:-
1. The bank had nothing to do with the product. It was just a middle man. The application said it was from an insurer we were talking to for other products. Since I am in the habit of reading smallest print first, it said that the Supermarket bank was only a distributor for the product.
2. The product was in US Dollars. My future requirement is in Indian Rupees. In addition to the credit risk of the underwriter, I am being asked to take on a currency risk here for a product that is supposed to protect me at a time of my need.
Now, the banker I met is a fine person. The Supermarket bank is an excellent bank and has one of the best customer service in India. What is wrong with the above story?
Look at it from the banker's point of view - admittedly he was chasing his quarterly quota. He probably has higher incentive for making a number or disincentive for not making it. This incentive turns a Relationship Manager to a pesky Telemarketer. Even if you put a very intelligent person at this job, his incentives put him in a difficult spot.
The Bank - Its traditional business of borrowing deposits and lending it out has lost its strategic reasone de etre. It became a supermarket offering its "space" selling wares of others. Nothing wrong with it - just that managing a banking relationship and retailing business are two different ball games. I am wondering about how banks measure the impact of chasing fees on their ability to operate as traditional banks. Does anyone do that?
Besides, here's something unique about the financial product retailing - when a retail product turns out to be poorly manufactured or just plain poor fit, you can return it and get 100% of your money back. Not so for most of your insurance policies, pension plans or mutual fund products. The other distinction is akin to buying a voltage stabilizer. When there's a power surge or a voltage drop, it is there to protect your precious TV and refrigerator from long term damage. If a voltage stabilizer doesn't work, you lost two products at one go and you may have a claim on the stabilizer manufacturer for the two.
Look at it from the management of a the bank - you keep on piling up commissions and fees from cross selling the product until something goes wrong. Either the management may have retired or fled the ship, or then blame the underwriter or asset management company for the defective product and rinse and repeat.
This sets up incentives for the Supermarket bank to sell potentially defective products. In my view, the bank is lending out its good name (whatever is left of it, that is) at a very cheap price for some short term profit boost.
This all happened middle of June, we opened the account and the bank mailed us their paperwork. We were scheduled to go on a long planned travel the last week of June and had started our leave of absence. Now, we started getting more frequent calls to update the form, follow-up and what not. Fine, we have a wonderful banker who cares for our needs and wants to close fast or so we thought. Then he started insisting that we start the pension plan relationship right away, send the forms. He was very forthcoming about it - it would be counted towards his June quarter's quota. We got repeated calls right till the afternoon of the day we were leaving even after telling him that we don't want to rush to the product and would take our time deciding.
A couple of weeks later, after returning from the trip, I studied the proposal at my leisure. Here were a few things that stood out:-
1. The bank had nothing to do with the product. It was just a middle man. The application said it was from an insurer we were talking to for other products. Since I am in the habit of reading smallest print first, it said that the Supermarket bank was only a distributor for the product.
2. The product was in US Dollars. My future requirement is in Indian Rupees. In addition to the credit risk of the underwriter, I am being asked to take on a currency risk here for a product that is supposed to protect me at a time of my need.
Now, the banker I met is a fine person. The Supermarket bank is an excellent bank and has one of the best customer service in India. What is wrong with the above story?
Look at it from the banker's point of view - admittedly he was chasing his quarterly quota. He probably has higher incentive for making a number or disincentive for not making it. This incentive turns a Relationship Manager to a pesky Telemarketer. Even if you put a very intelligent person at this job, his incentives put him in a difficult spot.
The Bank - Its traditional business of borrowing deposits and lending it out has lost its strategic reasone de etre. It became a supermarket offering its "space" selling wares of others. Nothing wrong with it - just that managing a banking relationship and retailing business are two different ball games. I am wondering about how banks measure the impact of chasing fees on their ability to operate as traditional banks. Does anyone do that?
Besides, here's something unique about the financial product retailing - when a retail product turns out to be poorly manufactured or just plain poor fit, you can return it and get 100% of your money back. Not so for most of your insurance policies, pension plans or mutual fund products. The other distinction is akin to buying a voltage stabilizer. When there's a power surge or a voltage drop, it is there to protect your precious TV and refrigerator from long term damage. If a voltage stabilizer doesn't work, you lost two products at one go and you may have a claim on the stabilizer manufacturer for the two.
Look at it from the management of a the bank - you keep on piling up commissions and fees from cross selling the product until something goes wrong. Either the management may have retired or fled the ship, or then blame the underwriter or asset management company for the defective product and rinse and repeat.
This sets up incentives for the Supermarket bank to sell potentially defective products. In my view, the bank is lending out its good name (whatever is left of it, that is) at a very cheap price for some short term profit boost.
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