Whose Wealth Are Banks Managing Anyway? - Vivek Kaul's Diary
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Whose Wealth Are Banks Managing Anyway?

Nov 14, 2018

Vivek Kaul

HDFC Bank is one of India's best managed banks. But that doesn't mean that everything that the bank does is for the good of its customers. (I am using HDFC Bank here to just illustrate what is basically a broader point valid across banks and financial institutions. If they chose to do the right thing all the time, the world would be a much better place than it is. But then that is another topic for another day).

In its annual report of 2017-2018, the bank states: "The Bank also distributes Life Insurance, General Insurance and Mutual Funds, often referred to as Third-Party Products. Income from this business grew by 51 percent from Rs 1,381 crore to Rs 2,091 crore and accounted for 18 per cent of total fee income in the year ended March 31, 2018 , compared with 16 per cent in the preceding year. This was primarily on account of distribution of mutual funds of the top asset management companies in the country. Mutual Fund industry saw an unprecedented flow of household savings into the mutual funds. In the system the assets under management of the individual investors grew by 36.8 per cent to about Rs 11.7 lakh crore as of March 31, 2018."

In simple English what this means is that the wealth management division of the company did very well, during the course of 2017-2018, by selling mutual funds to a large number of people.

It also tells us that retail investors get the timing of investing in stocks (through the indirect route of mutual funds in this case) all wrong.

Take a look at Figure 1, which plots the yearly price to earnings ratio of the Sensex stocks, over the last two decades.

Figure 1: Price to earnings ratio of Sensex stocks

The price to earnings ratio of Sensex stocks in 2017-2018 was at 23.79. This basically meant that investors were ready to pay Rs 23.79 for every one rupee of earnings of Sensex stocks.

The only other time when the price to earnings ratio was so high was in 2000-2001, which was the time of the dotcom bubble and the Ketan Parekh scam. The price to earnings ratio of 2007-2008 came in close at 22.61. This was before the financial crisis of September 2008 broke out and stock markets and the real estate markets all around the world, had been rallying.

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Now take a look at Figure 2, which basically plots the net investment in equity mutual funds over the years. Net investment is what remains after subtracting mutual fund redemptions from the fresh investments being made into the mutual funds.

Figure 2: Net investment in equity mutual funds

When an investor invests in an equity mutual fund, he is basically giving a mandate to the mutual fund to indirectly buying stocks, for him. In 2017-2018, when the price to earnings ratio of the BSE Sensex was at its peak, investors bought the maximum amount of equity mutual funds that they ever have during the course of any year, till date.

The net investment in these funds stood at Rs 1,56,753 crore.

In fact, nothing even comes close to it. In 2014-2015, the next biggest investment of Rs 68,121 crore had happened. In 2007-2008, the year where everything was going up, the investors had invested just Rs 40,782 crore in total.

Of course, this was also a function of the fact that mutual funds are much more popular now than they were a decade back. Among other reasons, the brilliant mutual fund sahi hai advertisements of the Association of Mutual Funds of India, is responsible for it.

All this takes us back to the first paragraph of this Letter. HDFC Bank sold a lot of mutual funds in 2017-2018. While other private sector banks do not say so clearly in their annual reports, there is no reason to believe that they didn't do equally well at selling mutual funds.

The question here is, when banks talk about wealth management, whose wealth are they talking about anyway. The wealth of their clients? Or is it more a case of using the wealth of their clients to generate income for the banks?

The wealth of the customers of the bank was used to generate other income for the bank, in terms of higher commissions received on mutual fund sales.

Clearly, the wealth of customers of banks has not been managed well. The question is why? The bank makes a commission by selling mutual funds. It does not lose money when the mutual fund that the customer has invested in does not do well. Basically, the bank and its wealth manager, have no skin the game.

Hence, the incentive of the wealth manager of the bank is to sell mutual funds at all points of time, irrespective of the state of the stock market and how expensively priced the stocks are.

Also, if the wealth manager does not missell during the boom, he loses out on his bonus, which can be a substantial amount these days. It can also impact his promotion. Further, he is not going to get any credit for ensuring that the bank's customer does not lose money.

The point being the incentives that a wealth manager has, are totally skewed against anyone investing in a mutual fund through a bank. (Now that does not mean that other mutual fund agents are better. But that is again, another topic for another day).


Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

PS: Over the weekend, I will be a part of two discussions at the Tata Literature Live: The Mumbai Litfest 2018.

The first session is titled Jobs at Hand. Regular readers would know that I have written extensively on this topic. Here are the details.It's scheduled at the St. Paul's auditorium in Bandra, which is located above the Title Waves Bookstore and right opposite the Duruelo Convent High School.

The second session is titled Cash Counter: How Safe is Your Money. It is scheduled at the NCPA-Tata Theatre in Nariman Point. Here are the details.

Entry is free, but on a first come first serve basis. You can register here.

PPS: Now you can follow Vivek Kaul on Social Media and get Vivek's updates on the critical issues affecting the economy and your wallet... as they happen. Follow Vivek on FacebookTwitter, and Google+.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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4 Responses to "Whose Wealth Are Banks Managing Anyway?"

B L Goel

Nov 23, 2018

The question ''whose wealth banks are managing anyway''.......is a very funny and tricky question. Funny, in the sense, most of the people are having money just for their needs and about 73% of wealth is concentrated in the hands of just 1% people. So, it is this 1% whose wealth is managed by banks to run their businesses. HDFC is having the highest retail lending and therefore, its profits are higher than other banks. A retail customer who needs loan for vehicles, personal purpose, home loans, credit cards etc is the most loser because of his need to take that loan. Banks cover up most of their interest charges in the initial years only than proportional covering. Credit cards is another fooling industry of banking system. They give some free days and levy heavy interest charges once due date passes. They charge an interest of 17-42% depending on type of customers, besides GST on finance charges, late fees etc. Why RBI does not simplify the system, so that the customer can understand it. Interest at a flat rate can be charged right from day 1 of purchase till the payment date. Heavy charges are levied as processing fees. When a customer does the business with bank, why it should be charged except for non-customer, in case of no txn with bank. The corporate sector is given loans at lowest rates and then also, they default, causing the whole banking system to a threshold limits. I presume that banking system manages the wealth of big billionaires by investing at higher rates in retail lending. After demonetisation, all cash money is deposited in banks, which was one of the objectives of the scheme to bring back the hidden unproductive money into productive channels. I can't understand why the linking of bank accounts with AADHAR was disapproved otherwise it would have become clear whose money is deposited in banks, There are shell accounts in all banks in which the wealth is managed by banking officials.


Sanjeev Kumar Singh

Nov 15, 2018

I consider most of the private banks employee as morally corrupt and customer services is not at all their agenda. I will give an example of HDFC bank. I approached one of the branch for opening bank account for my aged father, since I already have a bank account with them. Immediately the branch manager as well as RM took my appointment and came for selling a Pension Product for my father. I was disinterested as the returns were not great and my father didn't had money to park and wait for 5 years to get pension as he is already 80 years of age. Once they gauged that neither me nor my father is interested in the product they never turned up for opening savings account . The gist of the story is that if banks like HDFC is going to be main bank in our country we can forget universal banking . They will ensure that majority of Indian cannot afford banking facility. These banks only lend to marquee clients only and do want to expose to others. Hence in my personal opinion whatever industrialisation , expansion of the credit and business has happened , it is only because of public sector banks. Despite all its inefficiency they are the main back bone for the economy . With banks like HDFC you can only dream to make India great. They are only rich people bank.



Nov 14, 2018

Illustrative article.Good.



Nov 14, 2018

Sir, AS a citizen of Hindusthan it is my earnest request to advice about HDFC Bank Ltd.As most of the Investor like to Invest HDFC Bank Ltd. stock. Is it is the right time to invest in HDFC Bank Ltd. Awaiting for your favourable response.

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