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

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.   

HDFC Bank – Story Appears Different From Reality

Edelweiss Financial Services / Equity Bottom-Up

*Negative Operating Performance: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported yet another consolidated loss of INR 630.0 mn (post minority interest) for FY 3Q21 – declining INR 69.0 mn (12.3%) linked quarter. Excluding the gain on sale of securities, Edelweiss’ core operating results were actually frightening at a loss of INR 4.9 bn – down a further INR 106 mn (2.2%) over the same period. Nothing appears to be going right for Edelweiss, with management now beginning to discuss liquidity metrics; and *Wheels Falling Off The Bus: We are significantly troubled by the enormity of the breakdown in credit, as net new NPLs, by our calculation, increased INR 2.7 bn linked quarter for an annualized rate of growth of 106% - far and away the worst showing of any Indian financial under our coverage. Given the net new NPL increase, we find that loss reserves are light to tune of INR 15.7 bn or 2.3x stated equity of INR 6.9 bn at FY 3Q21.  Negative operating losses coupled with potentially challenged liquidity, and the poor credit cushion could invite regulatory intervention.

*Negative Operating Performance: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported yet another consolidated loss of INR 630.0 mn (post minority interest) for FY 3Q21 – declining INR 69.0 mn (12.3%) linked quarter. Excluding the gain on sale of securities, Edelweiss’ core operating results were actually frightening at a loss of INR 4.9 bn – down a further INR 106 mn (2.2%) over the same period. Nothing appears to be going right for Edelweiss, with management now beginning to discuss liquidity metrics; and *Wheels Falling Off The Bus: We are significantly troubled by the enormity of the breakdown in credit, as net new NPLs, by our calculation, increased INR 2.7 bn linked quarter for an annualized rate of growth of 106% - far and away the worst showing of any Indian financial under our coverage. Given the net new NPL increase, we find that loss reserves are light to tune of INR 15.7 bn or 2.3x stated equity of INR 6.9 bn at FY 3Q21.  Negative operating losses coupled with potentially challenged liquidity, and the poor credit cushion could invite regulatory intervention. 

Edelweiss Financial Services – The Whole Package

*Positive Operating Jaws Return: Muthoot Finance (MUTH.IN) [Muthoot] reported FY 3Q21 bottom-line results of INR 9.8 bn, increasing INR 716 mn (7.8%) linked quarter. Results were even better when we exclude gains on the gold mark-up, as Muthoot’s core operating result improved INR 969 mn or 11.3%. Results were driven by positive operating jaws, despite the INR 478 mn or 469% linked quarter increase loss provisions which tracked the break in credit; and*Gold Pricing Could Impact Credit: While robustness gold prices augur well for Muthoot, we are concerned about a reversal in gold pricing which could hinder loan growth and credit quality. We note that net new NPLs amounted to INR 661mn during the quarter, which intimates that the annualized growth rate for Stage 3 loans remains elevated at 44.7% - in line with most of the Indian financial sector. While we agree that the backing of the gold loans has likely amongst the strongest collateral, losses will mount during this international risk-on period or when gold prices reverse. It is for these reasons that we believe reserve cover has fallen short to the tune of INR 2.8 bn – about 25% of FY 3Q21 PBT which isn’t bad relatively speaking.

*Positive Operating Jaws Return: Muthoot Finance (MUTH.IN) [Muthoot] reported FY 3Q21 bottom-line results of INR 9.8 bn, increasing INR 716 mn (7.8%) linked quarter. Results were even better when we exclude gains on the gold mark-up, as Muthoot’s core operating result improved INR 969 mn or 11.3%. Results were driven by positive operating jaws, despite the INR 478 mn or 469% linked quarter increase loss provisions which tracked the break in credit; and*Gold Pricing Could Impact Credit: While robustness gold prices augur well for Muthoot, we are concerned about a reversal in gold pricing which could hinder loan growth and credit quality. We note that net new NPLs amounted to INR 661mn during the quarter, which intimates that the annualized growth rate for Stage 3 loans remains elevated at 44.7% - in line with most of the Indian financial sector. While we agree that the backing of the gold loans has likely amongst the strongest collateral, losses will mount during this international risk-on period or when gold prices reverse. It is for these reasons that we believe reserve cover has fallen short to the tune of INR 2.8 bn – about 25% of FY 3Q21 PBT which isn’t bad relatively speaking.  

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune 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.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking.

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune 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.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking. 

DBS Group Holdings – COVID & India Not A Good Combo

* It Just Keeps Getting Worse: Punjab National Bank (PNB.IN) [PNB] reported net income of INR 5.1 bn, declining INR 1.1 bn (18.5%) linked quarter. Three factors drove the poor result: a) net interest income declined INR 627 mn (0.8%) despite loan growth of 1.2%, as the NIM declined 9 bp to 2.93%; b) a loss provision increase of INR 5.8 bn (14.0%). Despite the increase, provisioins still fell short given the acerating level of credit risk; and c) a 10.6% linked quarter increase in PNB’s tax rate to 47.2%, which detracted INR 1.0 bn from the bottom-line; and*Credit Risk Leads to Capital Shortfall: Inclusive of the INR 9.6 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 82.6 bn or 33.3% 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 at a minimum loss reserves are light by at least INR 730 mn  - or approximately 100% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions to be complete in FY 1H21.

* It Just Keeps Getting Worse: Punjab National Bank (PNB.IN) [PNB] reported net income of INR 5.1 bn, declining INR 1.1 bn (18.5%) linked quarter. Three factors drove the poor result: a) net interest income declined INR 627 mn (0.8%) despite loan growth of 1.2%, as the NIM declined 9 bp to 2.93%; b) a loss provision increase of INR 5.8 bn (14.0%). Despite the increase, provisioins still fell short given the acerating level of credit risk; and c) a 10.6% linked quarter increase in PNB’s tax rate to 47.2%, which detracted INR 1.0 bn from the bottom-line; and*Credit Risk Leads to Capital Shortfall: Inclusive of the INR 9.6 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 82.6 bn or 33.3% 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 at a minimum loss reserves are light by at least INR 730 mn  - or approximately 100% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions to be complete in FY 1H21.  

India

HDFC Bank Ltd. offers a wide range of services to the global corporate sector. The Bank provides corporate banking and custodial services and is active in the treasury and capital markets. HDFC also markets project advisory services and capital market products such as Global Deposit Receipts, Euro currency loans, and Euro currency bonds.

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HDFC Bank (ADR) (HDB US)

HDFC Bank – Story Appears Different From Reality

HDFC BANK: HDFCB recently put a positive spin on nearly every aspect of its business. However, credit quality and provision realities are far...

Thomas J. Monaco

Edelweiss Financial Services – The Whole Package

EDELWEISS FINANCIAL SERVICES: Edelweiss reported another loss. We are troubled by the enormity of the breakdown in credit, light loss reserves at...

Thomas J. Monaco

Muthoot Finance – Relatively Good

MUTHOOT FINANCE: Muthoot reported a FY 3Q21 7.8% linked quarter results increase. Results were driven by positive operating jaws although...

Thomas J. Monaco

DBS Group Holdings – COVID & India Not A Good Combo

DBS GROUP HOLDINGS: DBS reported a 4Q20 results decline of 22.0% linked quarter. Results remain troubling across the board. India deal poses...

Thomas J. Monaco

Punjab National Bank – Match Is Lit

PUNJAB NATIONAL BANK: PNB reported a net income decline of 18.5% linked quarter. Despite the increase, provisions still fell short to the tune of...

Thomas J. Monaco

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