Max Financial Services Limited (MFSL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Max Financial Services Limited investor and analyst call to discuss the development around YES Bank. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mohit Talwar, Managing Director of Max Financial Services Limited. Thank you, and over to you, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us on this call. We've called this at very short notice, and this is based on the developments of YES Bank. I know that there could be some concerns around our exposure to YES Bank, and we thought that we would proactively address that over a call this morning. So I have with me our Managing Director of Max Life, Prashant Tripathy. We've got Mihir Vora, who is our CIO in Max Life; with Jatin Khanna, CFO of Max Financial Services; and Amrit, who heads up our strategy here. So what we'll do is that I would request Prashant to give a little bit of a background and an overview in terms of what our exposure is with YES Bank and also to address the questions and concerns, which you all might have. So with that, I'd like to just hand over to Prashant to take this forward. Prashant?

Thank you, Mohit. Good morning, ladies and gentlemen. Thank you for taking out time so early in the morning on such a short notice. There has been development at YES Bank, and a lot moved on last evening. And I also noticed that there are discussions going on around exposure of life insurance companies in YES Bank, more specifically, Max Life Insurance. And hence, we thought it would be appropriate for us to get all of you on board and communicate to you clearly what is our exposure, how do we see this and what are the risks and mitigants. So let me first tell you our total exposure. Our total exposure in YES Bank through bonds, and all of them are Tier 2 bonds. So we have no exposure through Tier 1 bonds or AT1 bonds. We have all exposure in Tier 2 bonds, close to about INR 2,000 crores. Of that, balance sheet exposure is INR 1,000 crores. The balance is through policyholders. So the total exposure is INR 2,000 crores. The balance sheet exposure is INR 1,000 crores. That's the first point. Now if you were to look at the Tier 2 bonds, the total Tier 2 bonds is close to about INR 14,000 crores, and it has all the marquee investors like LIC, which holds a large part of it; EPFO; it has exposure from SBI; it has exposure from India Post. So these are all very marquee investors, which are there in the Tier 2 category. We have been watching this space for quite a while. I have personally -- Me and Mihir have been involved to track progress as to which direction it is going. And we have met almost everybody in various regulatory/concerned authorities. And our understanding is that whatever restructuring that is being pursued, the Tier 2 bonds will continue to remain safe. That is our current understanding based with all the discussions. And I say this also with a lot of confidence because in the history of Indian banking, there have been a lot of merger and acquisition changes which have taken place. Never ever any Tier 2 bondholder has either seen a haircut or any changes. So we feel quite convinced about where we are. Also with the new set of investments being discussed, we have heard the names of SBI, LIC. They being the large Tier 2 bondholders, we believe that it will be a process throughout the state rather than having external investors coming and proposing any restructuring. So that also gives us comfort. We continue to maintain very strong relationships as things stand with the bank, and we will continue to track progress. But I just wanted to give you the comfort that this is where we stand. We have a cushion of AT1 bonds, which could or could not form any form of restructuring, but they kind of give us cushion. There's an equity of about INR 27,000 crores sitting above us. So if you look at the entire thing, we believe that the Tier 2 bonds that we hold are quite safe. Extremely confident of our position. And hence, I'd like to request that basically all the murmurs that you're hearing in the market and what's the messages that you've been receiving, just relax. We don't see any issue with our bonds. Talking about the other side, which is our business. As you know, we also have a business of bancassurance distribution with YES Bank. I would like to tell you that our yearly sales of -- on an APE basis that we receive from YES Bank is about 10% to 11%, which is reasonably significant in our overall scheme of things. But because of overall product mix and the margins that we write through them, the composition of VNB mix, which is value of new business, is only around 4%, a low single-digit number. The EV is also 3% to 4%, really low single-digit number. So overall impact with respect to business is really on top line. As far as profitability measures, EV measures are concerned, it's a very minor impact to us. And that -- with an assumption that whatever shape, form YES Bank continues or doesn't continue, we don't know at this point in time. I would like to reiterate one more time that our relationship with YES Bank has continued to remain really strong. We have performed really well through this year. Our growth was 29%. Life Insurance distribution, indeed, was the only business within our -- or one of the only businesses within YES Bank which was firing pretty okay. So we continue to remain confident. We have had discussions with respect to extension of the relationship, but we will have to watch out this space and see how the bank evolves in the new restructured program. So sum and substance and summary of what I'm trying to say is we remain confident about our exposure. It is in Tier 2 bond, which has always been safe. All the messages that we have received from regulatory authorities are comforting. The impact on business on top line is closer to 10% -- 10%, 11%, but the impact on VNB and EV is not material. So with that, I'm just going to take a pause, and I welcome any questions that you may have between me, Mihir, Mohit, Jatin and Amrit. We'll try to answer any questions that you may have. Over to you.

[Operator Instructions] The first question is from the line of Haresh Kapoor from IIFL AMC.

You spoke about growth, and you spoke about other aspects. But one real critical part from back book now because we don't know how the customers at YES Bank will behave. But the persistency risk on that book increases, which could have a material impact. They could be divergent in terms of channels from other -- people from other channels and this channel in particular. So how do you see that because that can be a material impact going ahead from the YES Bank channel.

Yes. That's a very, very relevant question. And this is not the first time we are facing this. We used to run a program with Amway, with a company called Amsure, which unfortunately had to wind down, and we have experience of managing the book. Typically, after year 1, customers tend to become proactive in terms of paying the renewals. So generally, there is a risk on 13th month persistency as we have witnessed because that's the responsibility, generally on the distributor to get the money. But after that, the routine becomes regular. There are various ways we manage that. So we get real proactive. We start to interact with the customers directly. We set up alternate mechanisms to pay. In the worst-case scenario, we have seen some fall in persistency. The persistency of the YES Bank 13th month is around 80%. So if that were to, say, fall by 3%, 4%, which is our previous experience under some similar situations, there's really immaterial impact to the embedded value. So at a business level, I remain quite confident that we'll be in good shape to manage, and I don't see any big impact on the book.

So assuming the worst-case scenario really are not able to build a book next year on the YES Bank channel, can you just talk about absolute value in terms of cost, fixed cost or something for YES Bank channel in your books, right? Let's say, the next year goes by and you're not able to build it but you have some cost already built up. So just an absolute value or as a percentage of expenses.

That's a very good question, actually, that you asked. I'm sure any restructuring program will run for a while. And we anticipate that in the worst-case situation, if the merger going to take place or something of that kind, the bank will continue to work with us for 6, 7 months or 8 months, whatever that number is. However, if YES Bank continues as a stand-alone entity being funded by a consortium, then maybe relationship will go on for a while. Under the worst-case situation that we end up working only with them for 6 to 7 months, of course, there will be a fall in sales, eventually will dwindle or might go there. As far as the expenses are concerned, it is a variable channel, really. So we have people -- feet on the street only. It is not a large fixed cost-oriented channel. We will have to -- we are growing organization. At the front end, we have attritions taking place, et cetera. It is not something which is going to be very difficult for us to manage. We will be able to absorb the people and restructure it very, very quickly. So is it something which will throw our financials out of whack? The answer is no. Actually, on the contrary, sans YES Bank our margins will improve.

And that is because of lower channel from -- lower margins from that channel?

That's correct.

And even after cost overruns, is the statement even for collar?

Yes. Yes, it will be.

Okay. And lastly, just coming back to the persistency part. Just thinking through now the scenario that we are in regarding YES Bank where depositors can just take INR 50,000. So let's say in the near term, in the next, let's say, 1 month, the payouts that were to happen to you, were they more or less auto debits given? How is that cash flow? And how does that impact if there are limitations in terms of the money that can be paid out? Because certainly, they will take it for their own expenses than paying you insurance premium looking at the limitations. Are there primary...

Yes. That's a very good question. We're working through it today and we will come up with an action plan. We will try and divert, but it might go to the YES Bank account. Worst-case situation, we'll have to approach RBI to take an approval for us to be able to take it out because this is not the money, this is really a flow account of policyholders that flows through YES Bank to us. So if required, we will approach RBI to take an approval to take this money and apply in the policyholder accounts.

So assuming 100% or most of it is auto debit, is that what it implies for YES Bank?

A large part is in the auto debit.

And in the current situation that we understand that's not possible. So the approval has to come through for this to kind of happen.

That's correct. But we are -- my team is still working on it. The message came out last night. So hopefully, by the end of the day we will have more clarity. But we'll work through to make sure that the interest of policyholders is protected, and we are able to receive money and apply in their accounts.

The next question is from the line of Udit Kariwala from AMBIT Capital.

My question is that as you pointed out about Tier 2 bonds, so in terms of a waterfall, yes, there is a cushion of equity and additional Tier 1 bonds before which -- I mean before that, you cannot touch Tier 2 bonds. But then with what's going around with deposits being -- now being you cannot withdraw deposits, there is a very high likelihood that the ratings would further go down. To that extent, what could be the impact? So let's not discuss about a default, but what happens if the rating further goes down? So to that extent, how could it impact you?

Yes. Okay. That's a good question. And I'd like to give some answers, and then I'll let Mihir also to chip in. Really strictly speaking, unless it becomes a default rating, and I'm assuming that there's no default here because YES Bank has been paying all the coupons. The next coupon is due in the month of June. So we are okay. So I wouldn't expect any impairment to take place, and please remember that these are bonds. Also these are extraordinary situations. And the reason why payments have been blocked is not because the bank has gone belly up. It is -- it has happened because the government wants to block it so that there is no run for money. So really, there is no issue with respect to liquidity at the bank level. And everybody understands that there's a 1-month time line, which has been given for this restructuring program to be developed and executed and communicated to everybody so that the depositors, bondholders, everybody is comfortable. So that's really our position. I'm not expecting a big write-off on our impairment on our books. But I'm going to hand it over to Mihir to add to add to what I said.

So just -- sorry, just chipping in. So I mean I agree with you that the money won't go away. It won't be a default. But does -- if I have -- if I can rephrase my question. What I mean to ask is let's assume if there is a 1- or 2-notch downgrade in terms of rating, how much impact would it have on your book?

Nothing, actually, because these are held-to-maturity so they don't run through the credit rating. These are held-to-maturity bonds. And the impairment happens only if there's something wrong with it.

The next question is from the line of Adarsh P. from Nomura.

My questions are answered.

The next question is from the line of Venkat M. from Kotak Securities.

Thanks for the clarification on Tier 2 bonds that you've given. Just wondering, in what case could there be a default or a markdown of the bonds? I mean these are clearly extraordinary circumstances. So maybe in case of a force takeover, et cetera, according to the document -- bond documents, under what scenario could there be a write-down of the Tier 2 bonds? Have you considered that?

Yes. Yes, we have taken legal opinions, and there is element with respect to what is written in the contract and there is element with respect to what is the reality and the precedent. And considering that there's a big regulator in this case. So we have taken a practical view. On paper, of course, RBI has sweeping powers to do whatever. But on a practical level, considering these are moneys -- there are moneys involved, and you have heard the regulator talks about protecting the interest of depositors, our investment is closer to depositors because these are policyholders' money. So we are going to approach, and we have been in touch with all the regulators. So I will request Mihir to just chip in and talk a little bit about how we see this. Mihir?

So as Prashant mentioned in the earlier question, these bonds are HTM as far as the policyholder bonds and the balance sheet funds are concerned. So we don't need to take a markdown unless the management really believes that there is a significant risk of a haircut or a -- not a default, but a significant risk of capital cut in any proposed scheme, et cetera, then we have the discretion of taking a write-down. But as Prashant mentioned, we don't see that situation even as a remote possibility at this point in time. So it's pretty much our judgment till the time that a new scheme comes and if that scheme has a provision for haircut, then it's a different matter. But as Prashant again mentioned earlier, some of the names that are being talked about in the scheme of amalgamation or restructuring are names which are already significant holders in those bonds. So that gives us immense comfort in the fact that Tier 2 bonds which have never been touched in the history of Indian banking M&A or restructuring or with that situation, I don't think there is any need as of now. Given the capital comfort that we mentioned for equity and AT1 bonds, in any case, that our bonds are at risk. So I think we are reasonably comfortable there. Technically, RBI can propose any cut only if they declare a point of no viability for a bank as far as the legal issues concerned, and that they have not done. And since the moratorium is only for a month, I don't think there is any reason to believe that the bank -- RBI is going to declare a PONV for the bank.

The next question is from the line of Nidhesh Jain from Investec.

Sir, can you break the exposure in terms of shareholders, non-PAR, PAR and ULIP?

Yes. As mentioned to you, Nidhesh, that the INR 2,000 crores broadly is broken into 3 parts: ULIP of INR 500 crores, participating of INR 500 crores and the shareholder is INR 1,000 crores.

The next question is from the line of [ Keyur Asher ] from Reliance Nippon.

My question is answered.

[Operator Instructions] The next question is from the line of [ Chirag Madia ] from [ SAB Corporation ].

Yes. I was a little bit late. Can you give me some -- what kind of exposure in Tier 2 bonds are there? INR 2,000 crores is the only exposure from the Max Financial, sir?

Yes. We had just explained before you arrived that the INR 2,000 crores is broken into INR 1,000 crores policyholders, INR 1,000 crores shareholders. They are all Tier 2. They're all Tier 2 bonds.

Okay. So only INR 2,000 crores exposure to the YES Bank Tier 2 bonds, sir?

That's it.

The next question is from the line of [ Amit Thawani ] from [indiscernible]

I was just wondering if these Tier 2 bonds are listed somewhere and if there are any mark-to-market losses that we may have to incur?

Yes. Of course, these bonds -- Mihir, do you -- will you like to answer the question?

Yes. These are listed, and they are thinly traded. They're not -- because most of the exposures are bad institutions, so the trading is not very frequent. And as Prashant mentioned, as far as the balance sheet exposure and the bottom exposure is concerned, these are HTM. So we don't really need to mark-to-market in the P&L unless -- as I explained earlier, unless we believe that there is an impairment required, which we don't in this case.

What kind of cues or what kind of -- what is -- what are you looking at from RBI as far as more clarity goes? What kind of questions are you looking from RBI?

So I mean of course, RBI is going to anchor the entire clarification with respect to the restructuring and the scheme of amalgamation. They will be the ones approving it. But the messaging from RBI is quite encouraging. There are reports that I saw, at least, I think, JPMorgan, some analysts publishing saying there is no risk to the bondholders, and this is -- RBI will definitely look at protecting the bondholders. So all those messaging are quite comforting to us.

And what will be -- what do you think will be the best-case scenario here for YES Bank? As a partner of YES Bank, what is the kind of scenario you would like to see? Would you like to see...

I mean we can only speak on behalf of ourselves. Really, it will be hard for me to speak on behalf of YES Bank. But as a partner, we'd like to see YES Bank as a stand-alone entity, a bank being protected and doing well and having strong relationship with us where our bond is protected.

Right. Because it's not -- because if this gets merged with a PSU, then our banca -- future banca is also at risk, isn't it?

I spoke about that. I don't know if you heard, and I gave clarifications around the numbers also.

The next question is from the line of Mayank Gulgulia from SUD Life.

I just wanted to check INR 2,000 crores exposure. In that, INR 500 crores in ULIP. So there also will markdown -- and INR 500 crores -- there also markdown will not be required?

No. That is required and we always mark down. So we have been marking it down.

Okay. So INR 1,000 crores marking down will be required and shareholder fund, there won't be a requirement of marking down?

No, no, no. There is INR 500 crores in ULIP, which is marked as for the bonds -- are valuation metrics. The ULIP is INR 500 crores.

Kind of INR 1,500 crores, including PAR, that's not be required to mark down?

Correct.

[Operator Instructions] The next question is from the line of Manoj Bahety from Carnelian Capital.

Just wanted to understand, like, is there some policies that work like in terms of maximum exposure to a particular entity? Is there some internal guidelines which we follow in terms of because -- I see like INR 1,000 crores out of shareholders' fund and INR 1,000 cores out of insurance funds. So how do you see this exposure in terms of your internal limits?

Yes. The internal limits, we are all adhered to. Generally, in our context, shareholder fund is a part of controlled fund. And the controlled fund is, in our company now, is close to about INR 45,000 crores, even more perhaps. So as a percentage, it just passed the test. And all the -- there are, of course, limits, which one has to adhere to with respect to the issuer. Those issuer limits were adhered to while making the decision.

Okay. And in terms of shareholders' funds, is there any...

So like I mentioned to you, shareholder fund is a part of controlled fund. There's nothing called shareholder fund. So controlled fund could be broken into shareholder, and the policyholder funds of PAR and non-PAR. So it is all put together as 1 fund.

The next question is from the line of [ Chirag Madia ] from [ SAB Corporation ].

Sir, just wanted to understand, on the mark-to-market, you said about the ULIPs of INR 500 crores. So what's the mark-to-market yield in the INR 500 crores?

That's sort of the valuation effect. So even as we speak, the bonds are already been marked with proper valuation, which is A-.

Okay. Okay. So 20%, 30%, what is the number basically?

20% what?

20% total markdown is the question.

20% is not the total markdown.

How much, sir?

It's A- bond, and the rest is [indiscernible]

So there's bond valuation methodology, which is followed depending on the credit rating, and we follow that. And the markdown, with respect to where the cost was and where the new credit rating is, has been marked down appropriately as to that formula.

The current MTM would be about 8% to 10%.

Okay. 8% to 10%. Okay. Okay.

On the cost, yes.

The next question is from the line of Nidhesh Jain from Investec.

Sir, at what credit rating you will have to mark down your PAR and shareholders' exposure?

So basically, as long as we continue to remain -- if it is not default rating and we continue to receive the coupons, then we don't have to mark down. That's our internal policy. IRDAI doesn't have any -- no prescribed policy with respect to markdown. But the Investment Committee actually has adopted a policy that RBI recommends. So that's their policy. So unless there's default, we don't have to mark down.

Okay. So unless the credit rating is downgraded to B, you may not to mark down?

Correct.

The next question is from the line of Ajox Henry from B&K Securities.

Sir, what is the impact on solvency because of this? And -- yes, that's the question.

So unless we are doing a markdown, there is no impact. And like I mentioned to you, we continue to remain positive and watch the space. We believe these are Tier 2 bonds. So we don't have to really take any markdown on the solvency unless it becomes a default.

Got it. And if that happens, that 14 -- sorry, INR 14,000 crores, so that is the impact quantum, right?

Yes. I mean I think we are all painting the worst-case scenario where all of it will go away, et cetera. I'm sure with companies like SBI coming on board, with LIC coming on board, RBI interjecting, there's a lot of thought that goes behind protecting the interest of bondholders. You must know that close to about 2 lakh crores of Tier 2 bonds have been issued to banks. And if bondholders were to get punished through this process, the entire confidence in this space will get shaken. So we have to be practical and more pragmatic about where we stand. And please keep in mind that there is INR 36,000 crores of cushion available in form of equity and Tier 1 bonds before Tier 2 bonds are touched.

And also Prashant mentioned in his initial comments that, SBI and LIC themselves have a significant exposure of this Tier 2 bonds.

Yes.

The next question is from the line of Nilanjan Karfa from Jefferies.

This is Harshit from Jefferies. Wanted to understand that at what time were these exposures taken? So these investments are made within the last 1, 1.5, 2 years or are they investments of an earlier time?

No, not really. We made those investments when YES Bank was one of the top bank with super credit rating, doing very well about 3 years ago -- 3 to 4 years ago, I think.

Okay. So none of the exposures which we have currently are of the last 1.5, 2 years?

Absolutely none.

[Operator Instructions] The next question is from the line of Vinod Rajamani from HSBC.

Sorry, I missed the initial part of the conversation. But what happens to the relationship with YES Bank in terms of the bancassurance partnership?

Vinod, I actually explained, but let me do that one more time for you. We have to see the way the bank evolves. There are several possibilities. If a consortium comes and the bank continues to operate, then the relationship continues. If there is a merger situation, then we have to see how it plays out. In either of the circumstances, it will take a while before anything of that kind of way to evolve. And I did mention that our sales of 10% to 11% might slow down depending on either of the situation if it were to emerge. However, on a VNB basis, they're not large contributors. They had a single-digit, smaller number of VNB contribution. So that, we believe we'll be able to cover up internally through elements of higher sales and product mix.

[Operator Instructions] The next question is from the line of Piyush Shukla from Cogencis.

Sir, I just wanted to know if Max Financial has signed any coordination of loan pact with YES Bank? And also if any securitization deal has been done?

No. I don't think we can do that business.

The next question is from the line of Kajal Gandhi from ICICIdirect.

I joined late on the call. Just one thing, on the restructuring thing which we have done on the share side a couple of days back, so is it that the Axis Bank who is going to acquire the stake, is it going to be on the Max Financial Services level or Max Life Insurance level?

Jatin, can you take that question?

Yes, sure. So the -- like we have discussed previously that the transaction is happening at the Max Life level because the long-term partnership is being emphasized with Max Life. So to that extent, whatever transaction will happen will pretty much involve only Max Life shares and not Max Financial shares.

Okay. Sir, will we need to do further restructuring in that thing?

Ma'am, right now, let's focus our discussions around YES Bank. We could always discuss about the Axis. Right now, please appreciate that we are under confidentiality and exclusivity arrangement. So we will not be in a position to divulge too many details around that transaction. I hope you'll understand.

The next question is from the line of Ravi Mehta from Deep Financial.

Yes. Most of the questions are answered. Just one thing, what is the maturity time line of these bonds?

10 years. 10 years.

So probably another 7, 8 years pending?

Yes. About 6 to 7 years.

[Operator Instructions] There are no further questions. I now hand the conference over to the management for their closing comments.

Okay. With that, I think -- I hope we've addressed all your concern and queries. Events will obviously unfold as days go along. It is early days right now to even try and figure out what's going to be happening. But I'm sure that good sense will prevail. And as far as the bank is concerned, indications seem to suggest that there's a bail-out package which is happening. So thank you for joining us, and we're happy to kind of bilaterally engage with any participant if they so choose to reach out to us. With that, thank you, and have a good day.

Thank you.

Thank you. Ladies and gentlemen, on behalf of Max Financial Services Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.