Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">India Bank Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a> for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies.

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank (YES IN) to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in India Bank Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies. 

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

Approximately one-year ago, India-headquartered <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

Approximately one-year ago, India-headquartered Yes Bank (YES IN) began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

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

Edelweiss Financial Services / Equity Bottom-Up

*Dreadful Bottom-line Continues: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported a consolidated loss of INR 2.6 bn (post minority interest) for FY 1Q21. While still loss making, losses were reduced INR 20.2 bn (88.4%) linked quarter reflecting several factors: a) impairment charges declined INR 22.9 bn (89.8%) as no COVID-19 related provisions were taken during FY 1Q21; b) expense declines of INR 1.8 bn (16.8%) pushing Edelweiss to be just modestly operationally profitable as its C/I ratio was reduced from 133.2% to 98.0%; and c) an INR 1.1 bn (13.2%) improvement in net revenues driven by lower interest costs, possibly due to a reduction in overall debt and lower cost of funds; *Restructure Continues: Edelweiss continues to take various steps to restructure its overall business: a) de-leveraging the  credit entities; , b) debt repayment; and c) asset/stake disposals; and *Awful Disclosure: Edelweiss is still required under the law to provide adequate quarterly financial disclosures. This must be improved  - especially if the Company is actually a going concern.

*Dreadful Bottom-line Continues: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported a consolidated loss of INR 2.6 bn (post minority interest) for FY 1Q21. While still loss making, losses were reduced INR 20.2 bn (88.4%) linked quarter reflecting several factors: a) impairment charges declined INR 22.9 bn (89.8%) as no COVID-19 related provisions were taken during FY 1Q21; b) expense declines of INR 1.8 bn (16.8%) pushing Edelweiss to be just modestly operationally profitable as its C/I ratio was reduced from 133.2% to 98.0%; and c) an INR 1.1 bn (13.2%) improvement in net revenues driven by lower interest costs, possibly due to a reduction in overall debt and lower cost of funds; *Restructure Continues: Edelweiss continues to take various steps to restructure its overall business: a) de-leveraging the  credit entities; , b) debt repayment; and c) asset/stake disposals; and *Awful Disclosure: Edelweiss is still required under the law to provide adequate quarterly financial disclosures. This must be improved  - especially if the Company is actually a going concern.   

Edelweiss Financial Services – Better, But Still Bad

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked quarter. Driving the results, we note positive operating jaws. Also aiding LIC’s results, we note an INR 85 mn (14.9%) decline in loss provisioning tracking the improvement in overall credit quality; and substantial tax rate decline from 54.8% to 19.7% linked quarter; and*Credit Risk Flat, But Reserves Light: Stage 3 loans at LIC declined INR 216 mn (0.4%) linked quarter to INR 59.4 bn, and remained flat relative to total loans at 2.83%.There is no doubt under our calculation that LIC’s provisions remain woefully inadequate. We believe reserves need to be buttressed in the neighborhood of INR 33 bn or an entire year on bottom-line performance.

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked quarter. Driving the results, we note positive operating jaws. Also aiding LIC’s results, we note an INR 85 mn (14.9%) decline in loss provisioning tracking the improvement in overall credit quality; and substantial tax rate decline from 54.8% to 19.7% linked quarter; and*Credit Risk Flat, But Reserves Light: Stage 3 loans at LIC declined INR 216 mn (0.4%) linked quarter to INR 59.4 bn, and remained flat relative to total loans at 2.83%.There is no doubt under our calculation that LIC’s provisions remain woefully inadequate. We believe reserves need to be buttressed in the neighborhood of INR 33 bn or an entire year on bottom-line performance. 

LIC Housing Finance - Positive Operating Deltas

*Better Stated Results Not All What Cracked Up To Be: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 1Q21 results of INR 3.2 bn, improving INR 973 mn (43.6%) over FY 4Q20. Results can be characterized by three factors: a) an INR 641 mn (5.7%) decline in loss provisions despite overall credit quality continuing to weaken; b) an INR 1.6 bn (29.4%) improvement in operating expenses reflecting the economic slowdown pushing the cost/income ratio lower by 5.5% to 20.4% QOQ; and c) a 9% reduction in Shriram’s tax rate to 26% which was bottom-line additive by INR 400 mn; and*Credit Risks Persist: By our calculation, net new NPLs still increased INR 5.6 bn for an annualized growth rate of 30.2% - this despite a large uptick in NPLs in FY4Q20. While Shriram states that it remains focused on ramping up coverage ratios, it certainly has a lot of wood to chop given the weak NPL cover and increasing trends in restructuring. By our calculation, reserves at Shriram remain light in the neighborhood of INR 67 bn or 20x the latest quarterly profit result.

*Better Stated Results Not All What Cracked Up To Be: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 1Q21 results of INR 3.2 bn, improving INR 973 mn (43.6%) over FY 4Q20. Results can be characterized by three factors: a) an INR 641 mn (5.7%) decline in loss provisions despite overall credit quality continuing to weaken; b) an INR 1.6 bn (29.4%) improvement in operating expenses reflecting the economic slowdown pushing the cost/income ratio lower by 5.5% to 20.4% QOQ; and c) a 9% reduction in Shriram’s tax rate to 26% which was bottom-line additive by INR 400 mn; and*Credit Risks Persist: By our calculation, net new NPLs still increased INR 5.6 bn for an annualized growth rate of 30.2% - this despite a large uptick in NPLs in FY4Q20. While Shriram states that it remains focused on ramping up coverage ratios, it certainly has a lot of wood to chop given the weak NPL cover and increasing trends in restructuring. By our calculation, reserves at Shriram remain light in the neighborhood of INR 67 bn or 20x the latest quarterly profit result. 

Shriram Transport Finance – Significant Reserve Shortfall

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)

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

In this 2'nd insight in our Yes Bank Deposit Run Anniversary Series, we apply Yes Bank deposit flight rates to derive “Yes-Stressed” LCRs at India...

Hank Calenti, CFA

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary,...

Hank Calenti, CFA

Edelweiss Financial Services – Better, But Still Bad

*Dreadful Bottom-line Continues: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported a consolidated loss of INR 2.6 bn (post minority...

Thomas J. Monaco

LIC Housing Finance - Positive Operating Deltas

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked...

Thomas J. Monaco

Shriram Transport Finance – Significant Reserve Shortfall

*Better Stated Results Not All What Cracked Up To Be: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 1Q21 results of INR 3.2 bn,...

Thomas J. Monaco

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