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

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

Federal Bank – Capital Preservation Mode

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 1Q22 ahead of its official scheduled July 17, 2021 earnings release. Many of the highlights related to growth of lending and deposits; and*Where Have All The Flowers Gone: Nothing was discussed regarding HDFCB’s abysmal credit quality nor its quite suspect insider transaction with HDFC ERGO General Insurance (ERGO). For FY 4Q21, net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome.  We would also be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 1Q22 ahead of its official scheduled July 17, 2021 earnings release. Many of the highlights related to growth of lending and deposits; and*Where Have All The Flowers Gone: Nothing was discussed regarding HDFCB’s abysmal credit quality nor its quite suspect insider transaction with HDFC ERGO General Insurance (ERGO). For FY 4Q21, net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome.  We would also be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results. 

*Results Down, Credibility Continues To Increase: LIC Housing Finance (LICHF.IN) [LIC] reported FY 4Q21 bottom-line results of 4.0 bn, declining INR 3.5 bn (45.0%) linked quarter. Results were weaker primarily due to a massive loss provision increase of INR 7.9 bn (4.2x) over the period reflecting an increase of 16% in Stage 3 loans; and*Negative Credit Delta: Despite recoveries of INR 400 mn, net new NPLs at LIC skyrocketed to INR 12.6 bn or increasing 62.0% on an annualized basis during the period – quite the change from annualized net new NPL decline of 3.2% in FY 3Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 22 bn to the reserve.

 *Results Down, Credibility Continues To Increase: LIC Housing Finance (LICHF.IN) [LIC] reported FY 4Q21 bottom-line results of 4.0 bn, declining INR 3.5 bn (45.0%) linked quarter. Results were weaker primarily due to a massive loss provision increase of INR 7.9 bn (4.2x) over the period reflecting an increase of 16% in Stage 3 loans; and*Negative Credit Delta: Despite recoveries of INR 400 mn, net new NPLs at LIC skyrocketed to INR 12.6 bn or increasing 62.0% on an annualized basis during the period – quite the change from annualized net new NPL decline of 3.2% in FY 3Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 22 bn to the reserve. 

*Another Awful Result: Punjab National Bank (PNB.IN) [PNB] reported FY 4Q21 net income of INR 5.9 bn, increasing INR 803 mn  (15.9%) linked quarter. Excluding the gains in the consecutive quarters, PNB’s core operating results would have been a negative INR 3.9 bn in FY 4Q21 and negative INR 7.4 bn in FY 3Q21. Not good, but operating losses did moderately decline – or did they? Bizarrely, as gross stated NPLs increased 10.5% linked quarter, PNB in its infinite wisdom decided to cut loss provisions INR 7.5 bn (13.7%) linked quarter which was substantially additive to what appears to be an overstated bottom-line; and*Accelerating Credit Risk Leads to Technical Insolvency: Inclusive of the INR 68 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 167 bn or 70.7% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that loss reserves are now light by at minimum of INR 1.1 bn  - or approximately 124% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions.

*Another Awful Result: Punjab National Bank (PNB.IN) [PNB] reported FY 4Q21 net income of INR 5.9 bn, increasing INR 803 mn  (15.9%) linked quarter. Excluding the gains in the consecutive quarters, PNB’s core operating results would have been a negative INR 3.9 bn in FY 4Q21 and negative INR 7.4 bn in FY 3Q21. Not good, but operating losses did moderately decline – or did they? Bizarrely, as gross stated NPLs increased 10.5% linked quarter, PNB in its infinite wisdom decided to cut loss provisions INR 7.5 bn (13.7%) linked quarter which was substantially additive to what appears to be an overstated bottom-line; and*Accelerating Credit Risk Leads to Technical Insolvency: Inclusive of the INR 68 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 167 bn or 70.7% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that loss reserves are now light by at minimum of INR 1.1 bn  - or approximately 124% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions.  

* Flummoxed: A competitor hosted a virtual conference with the management of the State Bank of India (SBIN.IN) [SBI]. To say the call was a disappointment would be an understatement. Nothing meaningful was stated on credit quality, and for some reason management is “comfortable” with capital; and *Reserve Challenges Should Lead To LARGE Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap.

* Flummoxed: A competitor hosted a virtual conference with the management of the State Bank of India (SBIN.IN) [SBI]. To say the call was a disappointment would be an understatement. Nothing meaningful was stated on credit quality, and for some reason management is “comfortable” with capital; and *Reserve Challenges Should Lead To LARGE Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – Lights On, No One Home

India

Bank of India, through its subsidiaries, provides corporate, commercial, personal banking, retail, rural, and development banking.  The Group specializes its services towards corporate and medium businesses, in addition to upmarket retail customers.

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Bank Of India (BOI IN)

Federal Bank – Capital Preservation Mode

FEDERAL BANK: Federal recently highlighted FY 1Q22 growth metrics in lending and deposits – both of which are contracting. In our view, it appears...

Thomas J. Monaco

HDFC Bank – Spigots Are Now Off

HDFC BANK: HDFCB provided an investor update for FY 1Q22 ahead of its official scheduled July 17, 2021 earnings release. Highlights related to...

Thomas J. Monaco

LIC Housing Finance – Hit With A Brick

LIC HOUSING FINANCE: LIC reported a poor FY 4Q21 bottom-line, declining 45.0% linked quarter due to a massive loss provision reflecting a 16%...

Thomas J. Monaco

Punjab National Bank – Cipher

PUNJAB NATIONAL BANK: PNB's operating results were a negative INR 3.9 bn in FY 4Q21. Bizarrely, as gross stated NPLs increased 10.5% linked...

Thomas J. Monaco

State Bank of India – Lights On, No One Home

STATE BANK OF INDIA: A competitor hosted a disappointing call with management. By our calculation, we find that SBI’s reserves are short INR 1.2 tn...

Thomas J. Monaco

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