Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Equity Bottom-Up

<ul>
<li>Our profitability and credit quality screens were generally, in terms of credit quality metrics to end-December 2021, more constructive than the prior quarter, whilst core profitability signals improved slightly</li>
<li>The threat of worsening credit quality in the coming quarters is still real, in our view, with the financial difficulties of Future Retail indicating potential corporate credit quality deterioration</li>
<li>We like quality play HDFC Bank, turn constructive on State Bank of India and we remain negative on Canara Bank and Bandhan Bank; neutral on Kotak Mahindra and ICICI Bank</li>
</ul>


Our profitability and credit quality screens were generally, in terms of credit quality metrics to end-December 2021, more constructive than the prior quarter, whilst core profitability signals improved slightly
The threat of worsening credit quality in the coming quarters is still real, in our view, with the financial difficulties of Future Retail indicating potential corporate credit quality deterioration
We like quality play HDFC Bank, turn constructive on State Bank of India and we remain negative on Canara Bank and Bandhan Bank; neutral on Kotak Mahindra and ICICI Bank


Indian Banks; Further Question Marks on Credit Quality

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

SBI (State Bank of India) / Equity Bottom-Up

<ul>
<li>SBI results were highly managed in FY 2Q22, and going forward it’s difficult for anyone to take both these results and this bank very seriously; </li>
<li>SBI reported FY 3Q22 results of INR 84.3 bn, improving INR 8.1 bn (10.6%) linked quarter. Volatility between loss provisions and operating expenses continued; and </li>
<li>Net new NPLs accelerated 18.5% annualized, and SBI’s reserves are short INR 568 tn – over five quarters of pre-tax results. </li>
</ul>


SBI results were highly managed in FY 2Q22, and going forward it’s difficult for anyone to take both these results and this bank very seriously; 
SBI reported FY 3Q22 results of INR 84.3 bn, improving INR 8.1 bn (10.6%) linked quarter. Volatility between loss provisions and operating expenses continued; and 
Net new NPLs accelerated 18.5% annualized, and SBI’s reserves are short INR 568 tn – over five quarters of pre-tax results. 


State Bank of India – Rules Don’t Apply

Thematic (Sector/Industry)

<ul>
<li>Our core profitability and credit quality screens send out mixed signals; generally, credit quality metrics to end-September 2021 were constructive, in our view, whilst core profitability signals were underwhelming </li>
<li>We expect credit quality to worsen in the coming quarters, leading to higher credit costs going forward and, combined with core profitability softness, an erosion of returns</li>
<li>We like HDFC Bank, turn cautious on State Bank of India &amp; Axis Bank and are negative on Canara Bank &amp; Bandhan Bank; neutral on Kotak Mahindra &amp; ICICI Bank</li>
</ul>


Our core profitability and credit quality screens send out mixed signals; generally, credit quality metrics to end-September 2021 were constructive, in our view, whilst core profitability signals were underwhelming 
We expect credit quality to worsen in the coming quarters, leading to higher credit costs going forward and, combined with core profitability softness, an erosion of returns
We like HDFC Bank, turn cautious on State Bank of India &amp; Axis Bank and are negative on Canara Bank &amp; Bandhan Bank; neutral on Kotak Mahindra &amp; ICICI Bank


Indian Banks; A Time for Increased Caution

*Mixed Bottom-line: State Bank of India (SBIN.IN) [SBI] reported FY 2Q22 results of INR 76.3 bn, improving INR 11.2 bn (17.3%) linked quarter. In fairness, this was a strange quarter, as the provision cut of INR 98.6 bn (98.1%) was unjustified – and not aligned with reality, enabling results to appear far better than they actually were. Effectively cutting loss provisions to zero when NPL coverage is abysmal in order to offset frontloaded pension costs is far from a prudent banking practice; and*Reserve Challenge Should Lead To Capital Raise: Surprisingly, we found that net new NPLs increased just INR 41.7 bn or 10.8% on an annualized basis, which is a far cry from the INR 193.2 bn or 65.9% annualized posted at FY 4Q21. Given the capital and remaining credit challenges, SBI must be better prepared to take additional losses. By our calculation, we find that SBI’s reserves are short INR 841 tn – over two years of pre-tax results or nearly 18% of SBI’s market-cap.

*Mixed Bottom-line: State Bank of India (SBIN.IN) [SBI] reported FY 2Q22 results of INR 76.3 bn, improving INR 11.2 bn (17.3%) linked quarter. In fairness, this was a strange quarter, as the provision cut of INR 98.6 bn (98.1%) was unjustified – and not aligned with reality, enabling results to appear far better than they actually were. Effectively cutting loss provisions to zero when NPL coverage is abysmal in order to offset frontloaded pension costs is far from a prudent banking practice; and*Reserve Challenge Should Lead To Capital Raise: Surprisingly, we found that net new NPLs increased just INR 41.7 bn or 10.8% on an annualized basis, which is a far cry from the INR 193.2 bn or 65.9% annualized posted at FY 4Q21. Given the capital and remaining credit challenges, SBI must be better prepared to take additional losses. By our calculation, we find that SBI’s reserves are short INR 841 tn – over two years of pre-tax results or nearly 18% of SBI’s market-cap.

State Bank of India – Not A Prudent Move

*Ignoring Credit Deterioration, Results Improve: HDFC Ltd (HDFC.IN) [HDFC] reported FY 2Q22 results of INR 37.3 bn, increasing INR 9.8 bn (35.5%) linked quarter basis. HDFC witnessed positive operating jaws; a massive linked quarter increase in dividends; robust loan growth; a drop in loss provisions; and a lower tax rate. Nothing like pulling on every earnings lever to achieve the result you want; and*Credit Quality Worsens: Given the INR 3.8 bn in net recovery during FY 2Q22, net new NPLs accelerated to INR 22.1 bn and increased 51.1% on an annualized basis. We also find that HDFC’s reserve still needs shoring up by another INR 200 bn or over a year of PBT.

*Ignoring Credit Deterioration, Results Improve: HDFC Ltd (HDFC.IN) [HDFC] reported FY 2Q22 results of INR 37.3 bn, increasing INR 9.8 bn (35.5%) linked quarter basis. HDFC witnessed positive operating jaws; a massive linked quarter increase in dividends; robust loan growth; a drop in loss provisions; and a lower tax rate. Nothing like pulling on every earnings lever to achieve the result you want; and*Credit Quality Worsens: Given the INR 3.8 bn in net recovery during FY 2Q22, net new NPLs accelerated to INR 22.1 bn and increased 51.1% on an annualized basis. We also find that HDFC’s reserve still needs shoring up by another INR 200 bn or over a year of PBT.  

India

Canara Bank Ltd. provides a full range of banking services throughout India. The Group's activities include retail banking, commercial and personal banking, investment management, treasury & NRI services, cash management and assorted ATM facilities.

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Canara Bank (CBK IN)

Indian Banks; Further Question Marks on Credit Quality

We still have NPL concerns on Indian banks; yet we like quality play HDFC Bank, turn positive on State Bank of India & we stay negative on Canara &...

Victor Galliano

State Bank of India – Rules Don’t Apply

SBI: It’s difficult for anyone to take this bank very seriously. SBI reported a QOQ FY 3Q22 results increase of 10.6%, as volatility between loss...

Thomas J. Monaco

Indian Banks; A Time for Increased Caution

Credit quality is likely to worsen, leading to higher credit costs going forward and eroded returns; We like HDFC Bank, turn cautious on SBI &...

Victor Galliano

State Bank of India – Not A Prudent Move

SBI: SBI reported a QOQ FY 2Q22 results increase of 17.3%. A provision cut of 98% was unjustified, only serving to offset frontloaded pension...

Thomas J. Monaco

HDFC Ltd. – In the Land of The Blind

HDFC: HDFC reported a QOQ FY 2Q22 results increase of 35.5%, as management pulled on every earnings lever. Net new NPLs increased 51.1% annualized,...

Thomas J. Monaco

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