INDIA BUSINESS WORLD - MAY 2006
THE MONTH THAT WAS...

SECURITISATION OF ASSETS HITS BANKS

   THE RBI guidelines on securitisation of standard assets issued earlier this year have hit the market, affecting active players such as Citibank, Standard Chartered Bank and ICICI Bank, among others. The guidelines prohibit banks to book profits upfront on the sale of assets through securitisation.

“The new guidelines have completely stopped activity in the securitisation market in the country. We understand the regulator's concerns and we hope that the guidelines are reviewed so that securitisation resumes,” Citigroup CEO (India) told Sanjay Nayar.

The guidelines were issued because banks had started securitising assets with the intention to get it off their books to meet capital adequacy requirements. Banks sold assets to a special purpose vehicle (SPV) in return for immediate cash payment. At the following stage, the security interests representing claims on incoming cash flows from the SPV is sold to the third party investors.

Banks such as ICICI Bank and HDFC Bank were securitising their assets to foreign banks. By offloading their portfolio, they were in a position to do more business. For foreign banks such as Standard Chartered Bank, this was an opportunity to diversify their portfolio.

Typically, banks securitise retail loans under portfolios such as housing, personal and auto loans. This frees up their capital for further business.

ICICI Bank which has 40% of the market, is competing with players such as HDFC Bank, Citibank and NBFCs. The securitisation market in the US is a staggering size of $800 billion, and the Indian market is $6 billion, less than 1% of the market.
“In mature markets, in addition to meeting liquidity demands, securitisation also helps in improving capital efficiency and better risk management. India has a long way to go,” Standard Chartered Bank general manager (south-east & south Asia) Jaspal S Bindra said. The Oriental Bank of Commerce had purchased standard assets worth Rs 400 crore from ICICI Bank and Rs 200 crore from HDFC Bank in December 2005 to meet priority sector lending.

Public sector banks were not major sellers in the market since they do not have as large a retail portfolio as private banks.

IN another indication that Indian equity markets are following in the footsteps of developed markets, the current bull run on the stock exchanges is far more property-driven compared to earlier episodes. In the 90s, stock markets in Hong Kong, Singapore and Japan displayed similar trends when growth in their equities markets was led mainly by a property boom, resulting in a re-rating of stocks based on the value of their properties.

A similar trend is now unfolding in India. Companies in diverse sectors such as textiles, pharmaceuticals, engineering, paper, telecom and others, have seen a recent run-up on the Bombay Stock Exchange mainly because of their land bank. Investors are buying into such shares on the premise that the company would probably “unlock” entirely or partly the value of its land holding.

State-run MTNL is a recent example. In the past three months, shares of MTNL have surged amid expectations that the company, which offers telecom services in the cities of New Delhi and Mumbai, would probably sell part of its land bank in the two metropolitan cities. The expectations were fuelled after MTNL, in a recent statement, said it plans to make use of its surplus land or real estate.

While specific details of its real estate are not available, MTNL owns prime property in central Mumbai and New Delhi, which could be used to boost its profitability. MTNL has said that it has plans to form a new entity to manage its real estate assets.

 Shares of MTNL have risen 44% on the BSE since January, ending last Friday at Rs 204.50 a share. In comparison, the BSE's sensex has climbed 31% in the same period.

 “This is a justification that market participants give to explain the high value of any stock,” said Networth Stock chairman S P Jain. “Earlier the market had the replacement theory that tried to justify the high value of a share...today it's the company's real estate value that is driving it.” Replacement theory, made popular by former trader Harshad Mehta, tries to estimate value by estimating the cost of building an established company.

Another example is that of textile major Bombay Dyeing & Manufacturing Co, which has large real estate holdings across Mumbai. Shares of Bombay Dyeing have more than doubled on the BSE in the period since March, 2006, ending at Rs 783.45 a share.

Shares of auto component companies are again seeing a revival based on their land banks. Kirloskar Electric, which owns large land holdings, has seen a run-up on expectations that it could use its properties. Kirloskar Electric shares have surged 40% since March 2006, on unconfirmed reports that the company is selling its land near Bangalore.

Unitech is another company that has seen a surge since March. The construction company has grown 430% from March.