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

*Credibility Gap Continues To Widen: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q22 bottom-line results of INR 2.5 bn, increasing INR 945 mn (61.6%) linked quarter. Results were simply odd, and driven by a loss provision cut of nearly INR 2.0 bn (23.4%) whilst problem loans continued to modestly tick higher. The oddness, in our view, came from now zero NCOs during FY 2Q22; and*Lack Of Clarity On Credit Delta: Despite the lack of NCOs, net new NPLs at LIC still increased 2.4% annualized versus 190.3% at FY 1Q21. By our calculation, LIC management ought to think about adding another INR 144 bn to the reserve.

*Credibility Gap Continues To Widen: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q22 bottom-line results of INR 2.5 bn, increasing INR 945 mn (61.6%) linked quarter. Results were simply odd, and driven by a loss provision cut of nearly INR 2.0 bn (23.4%) whilst problem loans continued to modestly tick higher. The oddness, in our view, came from now zero NCOs during FY 2Q22; and*Lack Of Clarity On Credit Delta: Despite the lack of NCOs, net new NPLs at LIC still increased 2.4% annualized versus 190.3% at FY 1Q21. By our calculation, LIC management ought to think about adding another INR 144 bn to the reserve.

LIC Housing Finance – No NCOs Whatsoever?

*Not Fooling Anyone: HDFC Bank (HDFCB.IN) [HDFCB] released a nonsensical set of FY 2Q22 earnings results, despite exhibiting that the bottom-line improved INR 11.0 bn (14.3%) linked quarter. On an operating basis, core results aggregated INR 81.6 bn, up INR 10.3 bn (14.5%) over the period. Puzzling is the INR 75.1 bn (28.5%) increase in problem loans, and the INR 9.1 bn (18.8%) decline in loss provisions during FY 2Q22; and *Credit Disaster Continues:We calculate that net new NPLs actually increased a whopping INR 114.1 bn or 43.2%. By our calculation, reserves are massively short by nearly INR 371.3 bn or over year (and growing) of core operating results – despite the massive under-providing against credit this quarter which suggests that the provision shortfall is closer to two years of results.

*Not Fooling Anyone: HDFC Bank (HDFCB.IN) [HDFCB] released a nonsensical set of FY 2Q22 earnings results, despite exhibiting that the bottom-line improved INR 11.0 bn (14.3%) linked quarter. On an operating basis, core results aggregated INR 81.6 bn, up INR 10.3 bn (14.5%) over the period. Puzzling is the INR 75.1 bn (28.5%) increase in problem loans, and the INR 9.1 bn (18.8%) decline in loss provisions during FY 2Q22; and *Credit Disaster Continues:We calculate that net new NPLs actually increased a whopping INR 114.1 bn or 43.2%. By our calculation, reserves are massively short by nearly INR 371.3 bn or over year (and growing) of core operating results – despite the massive under-providing against credit this quarter which suggests that the provision shortfall is closer to two years of results.  

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 2Q22 ahead of its officially scheduled October 16, 2021 earnings release. The highlights were solely related to growth of lending and deposits; and*See No Evil: Nothing was discussed regarding HDFCB’s abysmal credit quality metrics from FY 1Q22, which likely will remain a true headache. At FY 1Q22, net new NPLs actually increased 153% 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 316 bn or nearly a year of operating results.

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 2Q22 ahead of its officially scheduled October 16, 2021 earnings release. The highlights were solely related to growth of lending and deposits; and*See No Evil: Nothing was discussed regarding HDFCB’s abysmal credit quality metrics from FY 1Q22, which likely will remain a true headache. At FY 1Q22, net new NPLs actually increased 153% 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 316 bn or nearly a year of operating results. 

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOMATO IN)</a> will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. Zomato (ZOMATO IN) will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

Housing Development Finance Corporation / Equity Bottom-Up

Housing Development Finance Corporation (HDFC IN)

*ChallengesMount: HDFC Ltd (HDFC.IN) [HDFC] reported FY 1Q22 results of INR 30.0 bn, decreasing INR 1.8 bn (5.6%) on a linked quarter basis. However, core operating results came in at INR 24.7 bn, declining INR 2.7 bn (9.9%) over the same period – despite net interest income improving INR 819 mn  (2.0%) off of a 20 bp NIM improvement to 3.70% and managed loan growth of 0.2%; and*Credit Quality Worsens: Given the INR 5.0 bn in NCOs during FY 1Q22, net new NPLs accelerated to INR 19.0 bn and increased 65.5% on an annualized basis versus INR 3.6 bn or 14.2% on an annualized basis in FY 1Q21. We would have preferred that HDFC be even more vigilant given the continued growing uncertainty of COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 83 bn or over three quarters of core operating results.

*ChallengesMount: HDFC Ltd (HDFC.IN) [HDFC] reported FY 1Q22 results of INR 30.0 bn, decreasing INR 1.8 bn (5.6%) on a linked quarter basis. However, core operating results came in at INR 24.7 bn, declining INR 2.7 bn (9.9%) over the same period – despite net interest income improving INR 819 mn  (2.0%) off of a 20 bp NIM improvement to 3.70% and managed loan growth of 0.2%; and*Credit Quality Worsens: Given the INR 5.0 bn in NCOs during FY 1Q22, net new NPLs accelerated to INR 19.0 bn and increased 65.5% on an annualized basis versus INR 3.6 bn or 14.2% on an annualized basis in FY 1Q21. We would have preferred that HDFC be even more vigilant given the continued growing uncertainty of COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 83 bn or over three quarters of core operating results. 

India

Central Bank Of India is a full service commercial bank. The Bank's services include taking deposits, lending services, and investing. Central bank operates branches throughout India.

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Central Bank Of India (CBOI IN)

LIC Housing Finance – No NCOs Whatsoever?

LIC HOUSING: LIC reported a QOQ FY 2Q22 bottom-line increase of 61.6%, driven by a loss provision cut. Oddly, LIC had zero NCOs and negative loan...

Thomas J. Monaco

HDFC Bank – Extending & Pretending

HDFC BANK: HDFCB released a nonsensical set of FY 2Q22 operating basis, which exhibited improvement of 14.5% QOQ. Puzzling is the 28.5% increase in...

Thomas J. Monaco

HDFC Bank – No Credit

HDFC BANK: HDFCB provided a balance sheet growth update for FY 2Q22. Nothing was discussed regarding HDFCB’s challenged credit quality nor its low...

Thomas J. Monaco

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

Halfway through the review period, we take a look at stocks that could migrate across the large, mid and small cap segments. With over US$100bn of...

Brian Freitas

HDFC Ltd – Just Getting Worse

HDFC: HDFC reported FY 1Q22 QOQ core result decline of 9.9%. Net new NPLs increased 65.5% annualized basis; HDFC’s reserve needs shoring up INR 83...

Thomas J. Monaco

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