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.

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

<ul>
<li>We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward</li>
<li>We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios</li>
<li>We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs</li>
<li>We highlight <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a> as a restructuring and earnings recovery story, and <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a> for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank Of India (SBIN IN)</a> as an attractive value play, despite its lighter core capital ratio</li>
<li>We are cautious on <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank (CBK IN)</a>, seeing it as a potential value trap; at first look, <a href="https://www.smartkarma.com/entities/bandhan-bank-ltd" target="_blank" data-smartkarma-citation="entities:26705:1" rel="noopener">Bandhan Bank Ltd (BANDHAN IN)</a> looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios</li>
<li>Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns</li>
</ul>


We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward
We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios
We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs
We highlight Axis Bank Ltd (AXSB IN) as a restructuring and earnings recovery story, and HDFC Bank (HDFCB IN) for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see State Bank Of India (SBIN IN) as an attractive value play, despite its lighter core capital ratio
We are cautious on Canara Bank (CBK IN), seeing it as a potential value trap; at first look, Bandhan Bank Ltd (BANDHAN IN) looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios
Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns


Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

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

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

India Financials

Saumya Agarwal

The Monetary Policy Committee (MPC) of the RBI, in its June meeting, has kept the policy rates unchanged and decided to continue with the accommodative monetary stance, till the time needed. It has also expanded the scope of the Resolution 2.0 framework for the MSME and individual borrowers impacted by the Covid. Both these decisions are favorable and should help mitigate the stress of the small borrowers

The Monetary Policy Committee (MPC) of the RBI, in its June meeting, has kept the policy rates unchanged and decided to continue with the accommodative monetary stance, till the time needed. It has also expanded the scope of the Resolution 2.0 framework for the MSME and individual borrowers impacted by the Covid. Both these decisions are favorable and should help mitigate the stress of the small borrowers

The RBI Radar: Soft Borrowing Costs + Widened Scope of Resolution, to Boost Recovery

A year into the pandemic, Indian Banks have emerged with better-than- expected Gross NPA levels and huge Covid buffers at end  FY21.  With India's vaccination coverage at ~200 million or ~15% of total population and a sustained decline in daily count of fresh infections, many of the uncertainties are  receding. A downward bias on credit costs is now increasingly likely, and should augur well for Banks.

A year into the pandemic, Indian Banks have emerged with better-than- expected Gross NPA levels and huge Covid buffers at end  FY21.  With India's vaccination coverage at ~200 million or ~15% of total population and a sustained decline in daily count of fresh infections, many of the uncertainties are  receding. A downward bias on credit costs is now increasingly likely, and should augur well for Banks.

Indian Banks- Downward Bias on Credit Costs, as Uncertainties Recede

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; 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

Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

Screening for ideas, we are positive on Axis Bank and HDFC Bank, and State Bank of India too; due to credit quality concerns, we are cautious on...

Victor Galliano

India Financials – Plop Plop Fizz Fizz

INDIA FINANCIALS: ECLGS was launched in May 2020 to offset poor economic conditions. ECGLS has again been expanded from INR 3 tn to INR 4.5 tn....

Thomas J. Monaco

The RBI Radar: Soft Borrowing Costs + Widened Scope of Resolution, to Boost Recovery

The RBI decision to continue with the accommodative monetary stance and expanding the scope of Resolution, for MSME and individual borrowers,...

Saumya Agarwal

Indian Banks- Downward Bias on Credit Costs, as Uncertainties Recede

Indian Banks have braved the first wave well and built huge Covid related provisions. With many of the uncertainties receding, there is a downward...

Saumya Agarwal

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