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

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion; LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well.

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion; LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well. 

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.  

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.      

DBS Group Holdings – Not Trending The Right Way Yet

*Weak Great Eastern Returns: Great Eastern Life (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers.

*Weak Great Eastern Returns: Great Eastern Life (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. Earnings were materially weaker than what consensus has built in for Overseas Chinese Banking Corp. (OCBC.SP) (earnings release date November 5, 2020) – and pose a modest consensus miss for OCBC. Higher volatility in reported Great Eastern earnings decreases confidence in forecasts; and*Better Readacross to Regional Insurers: MTM gains would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers. 

Oversea Chinese Banking Corp – Still Not A Great Eastern

Indonesia

PT Bank OCBC NISP Tbk is an Indonesian publicly listed banking and financial services company that provides a comprehensive suite of services including consumer and business banking, treasury, and sharia banking. It offers various products such as savings accounts, loans, credit cards, wealth management, and digital banking solutions. The company was founded in 1941 in Bandung, Indonesia, and is headquartered in South Jakarta, Indonesia.

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Bank OCBC NISP (NISP IJ)

DBS Group Holdings – The LVB Cram Down

DBS GROUP HOLDINGS: The LVB Cram-down Raises Significant Questions Over Potential Cost For DBS, Raises Significant Concerns Over Audited Financial...

Thomas J. Monaco

DBS Group Holdings – Dumb India Deal

DBS GROUP HOLDINGS: Transaction For Lakshmi Vilas Bank In India At INR 25 BN Is Way Too Pricey For Risk DBS Is Taking On. Price Will Ultimately Be...

Thomas J. Monaco

Oversea Chinese Banking Corp. – Solid

OVERSEA CHINESE BANKING CORP.: Credit Showing Signs Of Recovery With Negative NPL Growth - Offsetting Weakness In NIMs and Insurance.

Thomas J. Monaco

Oversea Chinese Banking Corp – Still Not A Great Eastern

OVERSEA CHINESE BANKING CORP: Great Eastern Life Posts Another Weak Quarter; Margins Were Weaker and EPS Reliant On Gains. OCBC Consensus Appear...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

DBS Group Holdings – The LVB Cram Down

DBS GROUP HOLDINGS: The LVB Cram-down Raises Significant Questions Over Potential Cost For DBS, Raises Significant Concerns Over Audited Financial...

Thomas J. Monaco

DBS Group Holdings – Dumb India Deal

DBS GROUP HOLDINGS: Transaction For Lakshmi Vilas Bank In India At INR 25 BN Is Way Too Pricey For Risk DBS Is Taking On. Price Will Ultimately Be...

Thomas J. Monaco

Oversea Chinese Banking Corp. – Solid

OVERSEA CHINESE BANKING CORP.: Credit Showing Signs Of Recovery With Negative NPL Growth - Offsetting Weakness In NIMs and Insurance.

Thomas J. Monaco

DBS Group Holdings – Not Trending The Right Way Yet

DBS GROUP HOLDINGS: Trends Are Poor. Costs Higher, Revenues Lower, and Provision Trend Likely To Be Reversed As We Head Into 2021.

Thomas J. Monaco

Oversea Chinese Banking Corp – Still Not A Great Eastern

OVERSEA CHINESE BANKING CORP: Great Eastern Life Posts Another Weak Quarter; Margins Were Weaker and EPS Reliant On Gains. OCBC Consensus Appear...

Thomas J. Monaco