Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss:

• Banking updates from Q4 and potential fallouts from Russia – Ukraine conflict
• Commodity fallout from Ukraine-Russia invasion balloons
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 16,345.35 | +331.90 (+2.07%)
FII Net Sold: INR 4,816.71 crore

Sensex: 54,647.33 | +1,223.24 (2.29%)
DII Net Bought: INR 3,275.94 crore

Industry News

Banking updates from Q4 and potential fallouts from Russia – Ukraine conflict; What’s up and What do you need to know?

Disbursements

• Retail credit disbursements have reaccelerated and are now trending better than pre-Covid levels, after some early disruption in Jan’22 due to the third wave and holidays in Southern India
  • Mortgage (Housing Loans / Loans Against Property) remains a key growth driver, with improvements also recorded in higher ticket sizes
  • Personal Loans & New CC issuances have also multiplied in comparison
• Given overall strong demand environment, banks have been able to lend to customers without relaxing norms/processes, which is expected to result in stronger asset quality outcomes
• The latest RBI data suggests that vehicle financing growth in Jan’22 moderated to ~3% YoY / 1% MoM, mainly due to Covid-led disruptions, lower availability of cars / UVs and persistent weakened in 2Ws, tractors and CVs
• With Ukraine heavily involved in producing Noble gases, the semiconductor shortage is expected to continue going forward, which will likely impact supply in the interim

Collections

• NACH data suggests that EMI bounce rates (~23%) are trending around pre-Covid levels due to an improving business/job environment and restructuring of loans
• Underlying asset quality of restructured loans is likely to be visible once the moratorium expires (in the next 12-24 months), once RBI / GoI Covid-19 induced measures dissipate
• Collection agency data suggests that fresh delinquencies are trending down meaningfully, while collection efficiency in early mid buckets is improving and trending even better than Q3 (Source: Emkay Global)
• With the onset of easier movement, overall collection cost has inched up, partly reflected in higher opex, and is expected to remain so in the near term

Stocks (& the bloodbath🩸)

• Despite a strong Q3 performance (strong growth, limited delinquencies, reducing Covid-19 buffer capital), banking stocks have been slaughtered in the last 1 month (see image below)
• Stocks have been beaten, primarily on account of external factors including macroeconomic risk fears (inflation), Russia-Ukraine conflict, and frantic FII selling (they take up & down in equal proportions 🤷🏼)
• Q4 performance (highlighted above) will likely build on Q3 numbers, with improving growth/asset quality trends, across public & private players alike; current correction, has brought valuations down plentiful?
• FII selling has accentuated HDFC Bank’s weakness, primarily due to continued embargo on digital initiatives and margin/fee concerns, with the Bank currently trading at 2.4x FY24E ABV, which is attractive, given the Bank’s potential to overcome these issues in the medium-to-long run

Around the World 🌎

The conflicts don’t seem to end in the political or financial worlds; what happened and what’s next?

• TikTok has had to deal with a new kind of trouble this week; initially launched as a social-media application with videos featuring lip-syncing, dance moves and practical jokes, the world’s fastest-growing application has had to suspend new video uploads and live streaming from Russia and elsewhere; views on war memes and state propaganda, that’s heavily influencing global perspectives on the conflict in Ukraine have multiplied drastically. The company has already restricted access to some Russian State-controlled media accounts, including RT and Sputnik, in the EU
• In a new insider trading case that is making headlines, three individuals Barry Diller, Alexander von Furstenberg, and David Geffen are being investigated for unrealized gains of $60 million that they made on the Activision Blizzard – Microsoft acquisition. The traders appear to have spent around $108 million to acquire the right to buy 4.12 million Activision shares (options now valued at around $168m) and could surpass $100 million in profits if the deal closes at the stated price of $95 per share. The individuals maintain their stance of a lucky bet
• Alphabet Inc.(or Google) meanwhile closed its second-largest deal in history by buying cybersecurity company Mandiant Inc. for ~ $5.4 billion makings it arguably the most powerful company in the world when it comes to security. The street however does not believe it to be a good fit with shares of Mandiant falling about 2.5% in late morning trading Tuesday to $21.93. The deal is expected to close later this year

Commodity News

Commodity fallout from Ukraine-Russia invasion balloons; What’s up and What do you need to know?

Nickel surged 90% in one day 😳

• On Monday, Nickel traded on the London Metal Exchange with a 90% jump (that went as high as $55,000 a metric ton) before closing at $48,078
• But that was just the beginning as on Tuesday it rose as high as $100,000 (nearly quadruple the price last Friday)
• The main reason is cited to be the ongoing geopolitical tensions which look far from over and an increasing number of sanctions being imposed that could disrupt supply majorly
• About three-quarters of the world’s nickel is mixed with chromium to make stainless steel and the resulting products are mostly discretionary
• Russia accounts for ~10% of the world’s nickel supply, but a third of the Class 1 type of the metal – one of the major reasons behind this soar

So who was affected? (Short squeeze 🕹)

• Tsingshan Holding Group a China-based nickel heavyweight drew up losses on paper of $8bn before trading was suspended in the commodity
• They had used future contracts to lock in prices, and were looking to close sour positions and buyback contracts when prices soared but couldn’t find anyone to sell them to
• LME copper surged 3.6% (to $10,648 a tonne), aluminum gained 3.1% (to $3,847), lead jumped 6.4% (to $2,605), zinc rose 11.3% (to $4,55) and tin was 7.7% higher (at $50,310.)
• EV companies are also feeling the pinch, with precious metals including Nickel, Titanium, and Palladium all soaring in prices, impacting manufacturers like BMW, Boeing, etc

And what about other commodities? (Get to oil / natural gas please 🤦🏻♂️)

• Crude Oil prices soared to USD 139 per barrel this week (up ~USD 30 per barrel since the conflict started), and has finally stabilised around USD 127 per barrel
• US President passed an order to sanction Russian exports of Oil & Natural Gas (which was eventually denied by the German state, who’re heavily dependent)
• As a consequence, Russian state media quoted officials as claiming Oil would touch USD 300 per barrel, if the order was followed; that being said, the EU has indicated it plans to wean itself off Russian dependence by end of this year (sure 🤷🏼)
• Of consequence is the US taking over responsibility of supplying oil & natural gas, initially by increasing production in its own field, and further by re-starting relations with Venezuela (a Russian all), which has the world’s largest oil reserves
• The OPEC+ members (which includes Russia) declined to increase production of oil last week (as an attempt to control prices), so much so that two of the world’s largest producers, UAE and Saudi Arabia have ducked calls from Uncle Joe on these issues (possibly allying with Russia)

What else caught our eye?👀

LIC IPO coming soon?

• The SEBI has officially approved the IPO of LIC in just 22 days after they filed a 650-page prospectus of raising Rs. 65000-80,000 crore from selling 5%
• The date is yet to be finalized after the original timeline of mid-March was pushed owing to geopolitical tensions causing jitters in the equity market
• IPOs worth Rs. 77000 Cr have been put on hold and the situation is likely to persist until the end of the fiscal first quarter unless Putin takes a major step back

Gold is coming through in these times

• Inflationary monetary and fiscal policies, and elevated global oil and commodity prices could cause a further spike in domestic inflation with many investors turning to gold for support
• Even the Indian rupee could see a downward pressure due to a widening current account and trade deficit and tightening global financial condition
• But not everyone is happy with many postponing weddings and canceling orders to wait for gold to cool off (Rs 53,000 per 10 gm atm)

Educational Topic of the day

Implied Volatility (IV)

Implied volatility (IV) uses the price of an option to calculate what the market is saying about the future volatility of the option’s underlying stock. IV is one of six factors used in options pricing models; however, it can’t be calculated unless the remaining five factors are already known.