Monday, July 29, 2019

Topsy turvy economics

I was just reading about unfunded Social Security liabilities in the US exceeding $43 tn and going up at the rate of $25 billion daily!!

Largish numbers like this make my brain go oh-this-is-above-your-pay-grade and let the pundits do their job.

To simple ole me, things appear as follows:

1/ In ancient times you could only eat what is already caught, grown or cooked. Nature

2/ Next you could also eat what neigbhour caught today but wants to eat tomorrow, provided you replace before s/he wants tomorrow.  So basically get someone to produce AND postpone her consumption.  Communism (sort of)

3/ Next stage elongating the producers postponement with promise of "more" than borrowed now being returned at later date. Capitalism (sort of)

4/ Today Democracy.  Society has taken upon itself feeding and taking care of ever increasing needs of people which is simply impossible as there isn't enough produced to meet all needs and desire.  So now to meet todays consumption, we not only borrow from neighbours near and far but also borrow from tomorrow and the year after that and the decade after that. Basically hocking the lives of future generation to pay for our consumption.

"Developed" nations happily report debt exceeding 100% of GDP.  Essentially saying all that we as a nation consumed this year will be paid for in the future (wink wink not you, but your grand children).  [Nitpickers will argue that nations also have assets to counteract debt, but really the only big asset nations have is their gun and consequent ability to tax folks.]

"Emerging" economies are fools who have not cottoned on to this simple scheme of 'eat today; pay next year' as their financial markets are yet undeveloped.  But worry not under "globalisation" we will teach you this and take our share of the future labors of your future kids.

This model works fine as long  as we can instil the values of hard work, thrift and sacrifice in the societal lambs.

Implicit in this model is a human extinction event when all debt scores are reset and a new protein (?) can restart life.

As Herbert Hoover said, "Blessed are the young for it is they who will inherit the national debt" ... yup that while waiting for a hurtling rock to slam into earth.

PS - 

Thursday, September 28, 2017

So what are you afraid of Tech Titans?


FAMGA (Facebook, Apple, Microsoft, Google, Amazon) dominate vast swathes of the technology universe.  They literally touch the lives of billions of people around the globe all day long.  They are ferociously innovative and house some of the brightest minds on the planet across domains.  They are literally sitting on hundreds of billions of dollars of cash and generating truckloads more every passing day.  They have oodles of risk taking ability and yet…

… and yet they all seem to collectively shy away from the biggest and grandest prize of all – the big M – Money. From early history money has risen to replace barter and occupy a central position in nearly every transaction.  It is usually one half of every single trade/ investment/ commerce transaction entered between humans, machines and organizations.  It is the unit in which humanity measures its efforts, rewards, wealth and debt.  Institutions have arisen over hundreds of years which help citizens deal with money and trade.  Given the nature of money these institutions deal in trust and have been blessed by governments of the day via licenses, regulation, protection etc.

Money, given its very nature, has easily got digitized; technology permeates everything in finance – be it payments, lending, borrowing, savings, investments, ownerships, records – technology is king.  Many banks and institutions insist on being called “technology” companies as investors look favorably on those companies and as a reflection of the nature of money business.  Banks’ technology budgets now constitute a lion’s share of their spends - both opex and capex.  Still the technology capabilities of banks are distinctly limited compared to those of FAMGA like technology companies.  Their consumer facing applications, their UI/UX designs, websites, their AI and machine learning capabilities etc come across as clunky, dated, ponderous and slow creatures from a couple of generations earlier.  Consumers switching apps from say a Facebook/Amazon to a bank website prepare themselves for a slog back through time…

Internet and ecommerce has upended several industries in the past 3 decades e.g. books, music, hotels, travel, transportation to name just a few.  As a digital “native” and as one-half of all e-commerce transactions, one expected technology companies to play a much bigger role in the finance space either in payments or funneling funds from savers to borrowers or enabling business processes in between.  However, that has not come to pass.  Most technology companies end up providing some nature of products to banks eg. Operating systems, databases, messaging infrastructure, office productivity suites etc.   Technology companies seem to be keeping a distance from the core finance/ banking world.  All disruptive innovation is being carried by anonymous folks a la Satoshi or by small, (relatively) little funded startups. Almost as if there is something holding them back; almost afraid of something…

Banking/ finance business needs Capital, Capability, Credibility and Loyalty of customers.  Big technology companies have these in ample measures.  Arguably, the technology titans have more capital (sitting as liquid assets all over the world); technical, commercial and legal capabilities; credibility in the form of brand value and trust; and customer loyalty than many banks discredited over years of questionable management action and behavior.  


Surprisingly, Chinese technology majors seem to be straddling their industries and finance more easily than their western counterparts.  Will one of the western technology titans make a move towards this sector or will they watch the fintech revolution swirling all around us from the side-lines?  It would be interesting to understand the dilemma/complexities facing technology executives as they debate a foray into the financial world. 

Saturday, August 19, 2017

Cognizant + Infosys = CogniSys?

Infy saga. One possible (though unlikely) path ahead.  Cognizant + Infosys = CogniSys

Infy made a serious strategic design mistake right at inception when IT outsourcing was born

In the early days Global players IBM, ACN, EDS made 4-8% margin on sales as most of their cost was onshore

TCS and Infy reinvented the business by picking work onshore and sending it to India to be done cheaper

The price they charged for Indian work gave them fat margins (North of 50-60%) which cross subsidized discounted work onshore

And SGA spends. They still returned over 30-35% to shareholders

That was a mistake. All was well in Gung ho years as more corporates built an India tech strategy and sent work out

The Indian services got commoditized and margins of over 35% were obviously not going to last both from demand and supply sides

With benefit of hindsight it seems @cognizant got its strategy right

They promised and delivered 18-20% margins to shareholders while following the TCS Infy playbook

Excess margin reinvested to grow the business. This worked as they overtook everyone other than TCS from Indian competition

When cloud hit demand side of equation and commoditization hit pricing, margins suffered for the IT services industry

Companies like TCS and Infy had to dip from Investors surplus which obviously markets don't like. Reduced sales growth + reduced margins = bad news for stocks

Cognizant (under pressure from activist shareholder), traveled the other direction. It cut internal discretionary investment and increased margin guidance

Slower growth + better margins in an industry with declining margins = good news for stock price

So we are now here with CTSH near 52 week highs and Infy near 52 week lows about $40bn and $30 bn mcap respectively.

 The board room drama is playing out in this back drop and the poor actors are hardly to blame for where they find themselves now. It's a reflection of the bigger story unfolding in the background.

So where does Infy go from here?  I believe it is in a tough spot.

They are unlikely to find quality leadership for a company their size in current company context

They will thus make a compromise with a not top notch leader. That will be a slow-death option, a continuation of the bad last few years

The only salvation is for Nandan to return  and steer the Titanic to safer waters. His credibility is beyond doubt and abilities even more so

Other leadership options internal and external are likely to be sub optimal

An industry with demand side problems and margin side problem is ripe for consolidation

In this scenario, an interesting experiment would be to seek an amalgamation /merger

I suggest that a merger of equals between Cognizant and Infosys would be beneficial to both set of shareholders

Infy's leadership problems require a person like Nandan to solve them.

In his absence that of someone like Frank who will obviously not leave cognizant to take up Infosys

However the two are top notch, highly respected, proven companies enjoying considerable client and investor respect.

Cognizant could make an offer to buy Infosys using its shares. Both are solid companies with amazing complementary skillsets in consulting, front end and back end

Their combined size would permit a load of duplicate cost take outs and service line enhancements leading to topline synergies.

The two would combine to a topline of about $25 bn and margins of about $6 bn with net cash of over $5 bn and an annual cash generating capability of over $6 bn and mcap north of sum of parts $70 bn

Infys declining and Cognizants increasing margin trajectory could potentially settle around a healthy 21-24% region for a combined entity.

The two also have a long list of common shareholders who believe in the industry story as also individual company stories

They can compete aggressively with TCS IBM ACN Cap Gemini and set agenda for the entire industry

Obviously the integration risks of such a large transaction  are high but both companies have leadership depth and common culture to pull it off

It needs ambition/ risk taking at Cognizant and pragmatism at Infosys to see the merits of a potential combination

I believe it would be worth while for the two companies to sit down and study this in some detail.

Wednesday, July 12, 2017

Tweet 2 Blog via tiny subversion.com - 2

Apologies folks. About to unleash a series of tweets on below topic. Pls feel free to ignore next many tweets (livemint.com/Industry/yVIiJ…)
Capital Scarcity
State Owned Banks (SOBs) are capital starved 1/n
Non Performing Assets is gnawing away at their internals 2/n
Succor is far away via combination of performance, settlement, write-downs 3/n
SOBs’ owner, GoI, is capital scarce with alternate competing uses. SOBs recap requirement estimated ~ INR 90,000 crores 4/n
SOBs are sitting on vast prime real estate in premium localities across India and globally 5/n
These real estate assets are under-valued. True costs of these are not attributed to banks in an easy example of capital mis-allocation 6/n private/foreign banks fled down-town to suburbs years ago,SOBs still occupy down-town from inertia/absence of commercial pressure 7/n
Over last few decades there has been a strong growth of long-term investment market via insurers, pension funds, provident funds etc 8/n
These long term investors seek safe, steady assets to match longer term annuity and pay-out obligations they have contracted 9/n
Currently such assets are in short supply; principally provided by GoI long dated securities alone 10/n
In mature mkts real estate rentals (commercial, retail) constitute a big market/share of asset allocation of these long investors 11/n
India this is evolving due to insufficient quality paper available.REITs are now beginning to be listed, avlbl to wider investors 12/n
Private players like Blackstone are investing funds in snapping up prime commercial spaces for their rental yields 13/n
GoI could capitalize on under-valued, non-core real estate assets of banks in the form of corporate,regional,zonal,branch, other prop. 14/n
Can be done via revaluation of real estate portfolio to reflect current values. 15/n
Such portfolio could be transferred to a “Land Bank of India” (LBI) under a Sale and Lease back 16/n
LBI cud be capitalized by GoI for this purpose with say Rs.10,000 crore corpus.LBI can purchase land asset worth this amt from SOBs 17/n
SOBs can be charged market or slightly discounted rentals to promote market aware behavior from banks 18/n
The rentals could be securitized and sold to investors. These long dated papers are likely to be attractive to long term investors 19/n
Estimation of under-valued real estate with SOBs requires details, it cud easily run into tens of thousands of crores in metro cities 20/n
A large part of the re-capitalisation drag of ~ Rs.90,000 crores could be funded in this off-balance sheet fashion by GoI 21/n
It will also lead to more market aware behavior from SOBs; release of prime assets leading to softening rates via asset reallocation 22/n

Tweet 2 Blog via tiny subversion.com - 1

Increasing call to rechristen crypto-currencies as crypto assets. Makes sense since tokens are essentially gate-passes to participate in respective environment/blockchain/network. so value of crypto-assets a reflection of investors bet (right/wrong) on value of the network thought experiment. India Stack elements are "public good". could we tokenise access to the stack? as use cases proliferate, value of tokens permitting access to the stack should rise. 

to bootstrap, we could distribute tokens amongst citizens via Aadhaar accounts
Would that be "free money"? Or would rating agencies add IndiaStackTokens to Fiscal Deficit like an IOU or Debt or Currency? Of course it's centralized. Of course there is no crypto. Still, access to the stack would be valuable for many usecases

Sunday, July 9, 2017

Bank Nationalisation – Time to Bid Adieu to PSU Banks


Indira Gandhi nationalized banks in two rounds in 1969 and 1980.   Ostensible objectives for nationalization was to achieve systematic and planned economic development of the country.  Other objectives included social welfare, controlling private monopolies, expansion of banking, reducing regional imbalance, priority sector lending, developing banking habits etc.

Over the past few decades, nationalized banks rose to great heights – from about 7000 odd branches to over 57,000 branches, over 8lac employees, over 11,000% jump in deposits and 9,000% jump in lending (in the 40-50 years since nationalization), with over 70% market share in deposits/lending.

Over just a 4 year period 2012-13 to 2015-16 the government invested Rs.53,457 crores into the equity of banks and has plans to infuse an additional Rs.70,000 crores in the next 3-4 years.  Its current equity value in most banks is largely red in color with massive capital needs to keep the gasping banks on ventilator. Viral Acharya in a paper in June 2015 estimated the PSU bank capitalization requirement at between Rs.5.12 lac crores and Rs.9.97 lac crores based on then prevailing NPA loan problem (which has only ballooned higher in the two years since then to over Rs.10 lac crores) and certain growth/Basel Capital requirement assumptions. This is clearly a huge drag on the financial capability of the GOI.

RBI’s Financial Stability Report of June 2017 highlights the fragility in the PSU Banking space with its large and increasing non-performing loans issue and falling capital cover forcing RBI to put many banks under Preventive Corrective Action basically to stop them from further lending.

In terms of objectives from nationalization, most are in tatters and many can be met without the state necessarily owning large chunks of the banking industry.

·      Planned all-round economic development – Nope – Central planning and hubris surrounding it has been quietly buried
·      Financial inclusion – Nope.  Despite bank network growth, the citizens most in need for financial inclusion never got access to it
·      Social welfare and justice – Nope. 
·      Controlling private monopolies – Yes – done by introducing state monopolies with all its attendant ills – incompetence, inefficiency, crony capitalism, political interference etc.
·      Expansion of banking – Branch network increased by fiat but many branches are unviable and looked upon as punishment posting.  Private banks and MFIs managed much better reach via BC network
·      Reducing regional imbalance – Nope – East and North continue to trail West and South of India which was true at the time of nationalization as well
·      Priority Sector lending – Can be achieved without government having to own the sector
·      Developing banking habits – Country is developing banking habits thanks to spread of technology and no thanks to the PSUs who famously fought to keep computers out to “protect jobs”
·      Fraud prevention – Nope.  Crony capitalism via banking sector is alive and kicking leading to massive NPA problem that threatens to destabilize PSU banks
·      Competitive services – Nope.  All banks hunkered down to the lowest acceptable service level
·      Financial innovation – Nope.  Most banks waited for either an RBI or SBI to mandate a new product or service.

So what have we achieved over the years?  Over the years we have managed to use the nationalized banking system to promote crony capitalism, to promote aggressive bank trade unions (thankfully defanged in the last decade), promote loan melas and assorted bad behavior to promote political ends, meaningless expansion into unviable rural areas (which have hardly made a dent into the lives of locals), perpetuate the formal/informal economy divide by denying most of the informal economy (over 70% by many estimates) access to the formal financial system.

As a counter example, private sector banks, NBFCs, and other private financial entities continued to come up, offer services, prosper or die as per their merit.  These entities showed that there is nothing exclusive to what the government does in the Public sector banking system that cannot be provided as well or as badly as the PSUs by private entities.  Also their success or failure have not led to any massive destabilization of the system. 

For an economy growing in nominal terms at around 10% there is a continuing need for financial support which the dominant public sector has woefully failed to provide.  Bank licenses sparingly and reluctantly handed out by RBI have been gleefully lapped up by the private sector entrepreneurs, private capital of all types (IFC, sovereign funds, Private equity, VCs, public and private investors) and are stock market darlings across the range of financial services – mono-line NBFCs, private sector banks, MFIs, new age lenders etc.  Financial services stock have been the toast of capital markets except if there is a Govt of India ownership/management tag attached to it.

The problems are well known and well documented.  Umpteen committees have sat and prescribed common sense solutions to the current woes.  Political compulsions have led the powers-that-be to brush it under the carpet, drip feed capital to the sickest of banks, urge mergers and other non-solutions to wish that a broader tide in the economy will lift all boats.  If the capital infused in public sector banks over the last few years (amounting to over Rs.50,000 crores) was spent on acquiring minority say 5/10% stake in banks like HDFC Bank, Yes Bank, Kotak Mahindra Bank or RBL by the government, it would have been in much better situation to meet some of its burgeoning financial needs to serve social purposes rather than see it vanish in another round of NPA recognition.

In this context, it is refreshing to hear former RBI Governor YV Reddy suggest that trying to fix-and-sell banks may be a sub-optimal solution; it may be better to sell and let the buyers fix the mess.  It is for the first time that someone of such standing has called out the obvious.  In this day where the privatization/sale of Air India is being boldly championed, it is indeed refreshing that a call for debate on selling off the public sector banks on an as-is-where-is basis is being made by such an illustrious person.

19 July 1969 was the first round of nationalization.  With its 48th anniversary falling in a few days time, now is as good a time as any to look at the whole bank nationalization program and declare it a failure and consequently a time to cut losses and move on.  If we wish to sugar coat our words, lets agree that Nationalisation has served its purposes and we can now exit from it and let government come out of the industry except to regulate the service providers.  Lets learn what history taught us in terms of human behavior and the inability of lofty idealism to rein in base human instincts.  Government ownership in most spheres (barring a rare ISRO or two) has been exploited by politicians, managers, workers and customers to their own needs and away from their stated objectives.

Except for a handful of banks like SBI and a few of the better managed banks, the rest should forthright be put on sale given the large private demand for bank licenses.  Fear of selling at the bottom should not be an excuse for delaying action and adding to our cost of bailing them.  Government can retain minority stake to ride possible growth and anyway Government is a partner via taxation of all businesses and their successes.  The current philosophy of privatization-by-stealth of the banking industry can be replaced with overt privatization at a lower cost to the exchequer.  The more we pussy-foot around the matter, the more disservice we do to the socially weak and to the future generations. 



10 July 2017