Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

Shriram Transport Finance – Frightening Glory

*Better – But Not Good: Bank of Baroda (BOB.IN) [BOB] reported FY 2Q21 results of INR 16.8bn, quite a reversal of fortune from the losses of INR 8.6 bn in FY 1Q21. Several factors drove BOB’s outperformance: a) net interest income improvement of INR 7.5 bn (11.0%) linked quarter driven solely by NIM expansion of 31 bp to 2.86% while the loan book contracted 1.8%; b) fee revenue improvement of INR 2.6 bn (22.2%) on the back of higher loan processing fees as retail loan disbursements increased; and c) most importantly, an INR 26.3 bn (46.7%) reduction in loss provisions as annualized net new NPL creation dropped precipitously to just 2.0%;*Poor Reserve Cover: Excluding the September 2016 Supreme Court standstill on NPL classification, BOB’s NPLs still would have declined INR 19.9 bn (2.9%) and the NPL ratio would have been 9.30% - still improving 10 bp over the previous quarter. Anything over 8% suggest institutions are insolvent. By our calculation, however, BOB’s reserves still remain light by INR 245 bn or nearly ten quarters of pre-tax earnings – this prior to its merger with Vijaya and Dena Banks; and       *Capital Raise A Real Challenge: Merger-related challenges leading to growth slowdown, higher NPLs on portfolio alignment, and continued deterioration in the international business. Equity dilution is BOB’s single largest risk.

*Better – But Not Good: Bank of Baroda (BOB.IN) [BOB] reported FY 2Q21 results of INR 16.8bn, quite a reversal of fortune from the losses of INR 8.6 bn in FY 1Q21. Several factors drove BOB’s outperformance: a) net interest income improvement of INR 7.5 bn (11.0%) linked quarter driven solely by NIM expansion of 31 bp to 2.86% while the loan book contracted 1.8%; b) fee revenue improvement of INR 2.6 bn (22.2%) on the back of higher loan processing fees as retail loan disbursements increased; and c) most importantly, an INR 26.3 bn (46.7%) reduction in loss provisions as annualized net new NPL creation dropped precipitously to just 2.0%;*Poor Reserve Cover: Excluding the September 2016 Supreme Court standstill on NPL classification, BOB’s NPLs still would have declined INR 19.9 bn (2.9%) and the NPL ratio would have been 9.30% - still improving 10 bp over the previous quarter. Anything over 8% suggest institutions are insolvent. By our calculation, however, BOB’s reserves still remain light by INR 245 bn or nearly ten quarters of pre-tax earnings – this prior to its merger with Vijaya and Dena Banks; and       *Capital Raise A Real Challenge: Merger-related challenges leading to growth slowdown, higher NPLs on portfolio alignment, and continued deterioration in the international business. Equity dilution is BOB’s single largest risk.

*Better Stated Results Not All What Cracked Up To Be: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 1Q21 results of INR 3.2 bn, improving INR 973 mn (43.6%) over FY 4Q20. Results can be characterized by three factors: a) an INR 641 mn (5.7%) decline in loss provisions despite overall credit quality continuing to weaken; b) an INR 1.6 bn (29.4%) improvement in operating expenses reflecting the economic slowdown pushing the cost/income ratio lower by 5.5% to 20.4% QOQ; and c) a 9% reduction in Shriram’s tax rate to 26% which was bottom-line additive by INR 400 mn; and*Credit Risks Persist: By our calculation, net new NPLs still increased INR 5.6 bn for an annualized growth rate of 30.2% - this despite a large uptick in NPLs in FY4Q20. While Shriram states that it remains focused on ramping up coverage ratios, it certainly has a lot of wood to chop given the weak NPL cover and increasing trends in restructuring. By our calculation, reserves at Shriram remain light in the neighborhood of INR 67 bn or 20x the latest quarterly profit result.

*Better Stated Results Not All What Cracked Up To Be: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 1Q21 results of INR 3.2 bn, improving INR 973 mn (43.6%) over FY 4Q20. Results can be characterized by three factors: a) an INR 641 mn (5.7%) decline in loss provisions despite overall credit quality continuing to weaken; b) an INR 1.6 bn (29.4%) improvement in operating expenses reflecting the economic slowdown pushing the cost/income ratio lower by 5.5% to 20.4% QOQ; and c) a 9% reduction in Shriram’s tax rate to 26% which was bottom-line additive by INR 400 mn; and*Credit Risks Persist: By our calculation, net new NPLs still increased INR 5.6 bn for an annualized growth rate of 30.2% - this despite a large uptick in NPLs in FY4Q20. While Shriram states that it remains focused on ramping up coverage ratios, it certainly has a lot of wood to chop given the weak NPL cover and increasing trends in restructuring. By our calculation, reserves at Shriram remain light in the neighborhood of INR 67 bn or 20x the latest quarterly profit result. 

Shriram Transport Finance – Significant Reserve Shortfall

Lakshmi Iyer, CFA

Credit

The key highlight of <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Holdings (IIFL IN)</a> 1Q FY ’21 result was the improvement in liquidity and the reduction in the percentage of its loans under moratorium. The company has also resumed lending in certain segments. We raise our recommendation to hold based on its performance as well as the fact that as the company’s bonds are trading in line with Asian single-B names.<div class="content-highlight">Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.</div>

The key highlight of IIFL Holdings (IIFL IN) 1Q FY ’21 result was the improvement in liquidity and the reduction in the percentage of its loans under moratorium. The company has also resumed lending in certain segments. We raise our recommendation to hold based on its performance as well as the fact that as the company’s bonds are trading in line with Asian single-B names.Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

IIFL Finance - Turned the Liquidity Corner

<a href="https://www.smartkarma.com/entities/shriram-transport-finance" target="_blank" data-smartkarma-citation="entities:253:1" rel="noopener">Shriram Transport Finance (SHTF IN)</a>is bolstering capital by means of a rights issue. The rights issue is positive; but it is not a game changer. While collections have improved, the fact remains that 50% of its loan book remains under moratorium. We assign a "Hold" receommendation to the company's bonds at present levels. <div class="content-highlight">Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.</div>This Insight is labeled "Bullish" because the company is bolstering its capital position. Although it still faces challenges, it is moving in the right direction.

Shriram Transport Finance (SHTF IN)is bolstering capital by means of a rights issue. The rights issue is positive; but it is not a game changer. While collections have improved, the fact remains that 50% of its loan book remains under moratorium. We assign a "Hold" receommendation to the company's bonds at present levels. Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.This Insight is labeled "Bullish" because the company is bolstering its capital position. Although it still faces challenges, it is moving in the right direction.

Shriram Transport Finance - On the Right(S) Track

India

Shriram Finance Limited provides consumer finance services. The Company offers automobile, commercial vehicle, business, and gold loan services. Shriram Finance serves customers in India.

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Shriram Finance (SHFL IN)

Shriram Transport Finance – Frightening Glory

SHRIRAM TRANSPORT FINANCE: Shriram Is Exhibiting Early Signs of Positive Credit Deltas, And Likely Exits This COVID Crisis Earlier Than Peer.

Thomas J. Monaco

Bank of Baroda – Scary On Halloween

BANK OF BARODA: Manufactured Profits Ahead Of Capital Raise. BOB Already Appears Insolvent With 9.3% NPLs and 10 Quarter Reserve Shortfall

Thomas J. Monaco

Shriram Transport Finance – Significant Reserve Shortfall

*Better Stated Results Not All What Cracked Up To Be: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 1Q21 results of INR 3.2 bn,...

Thomas J. Monaco

IIFL Finance - Turned the Liquidity Corner

The key highlight of IIFL Holdings (IIFL IN) 1Q FY ’21 result was the improvement in liquidity and the reduction in the percentage of its loans...

Lakshmi Iyer, CFA

Shriram Transport Finance - On the Right(S) Track

Shriram Transport Finance (SHTF IN)is bolstering capital by means of a rights issue. The rights issue is positive; but it is not a game changer....

Lakshmi Iyer, CFA

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