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

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released another disappointing set of results, as its FY 1Q22 bottom-line result declined another INR 4.6 bn (5.6%) to INR 77.3 bn on a linked quarter basis. The earnings disappointment came from a net interest income decline, a loss provision increase, and fee revenue weakness; and*Credit Challenged Still: We calculate that net new NPLs actually increased a whopping INR 57.6 bn or 152.8% on an annualized basis – accelerating from the INR 49.2 bn or 130.4% increase posted in FY 4Q20. By our calculation, reserves are massively short by nearly INR 316 bn or nearly an entire year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released another disappointing set of results, as its FY 1Q22 bottom-line result declined another INR 4.6 bn (5.6%) to INR 77.3 bn on a linked quarter basis. The earnings disappointment came from a net interest income decline, a loss provision increase, and fee revenue weakness; and*Credit Challenged Still: We calculate that net new NPLs actually increased a whopping INR 57.6 bn or 152.8% on an annualized basis – accelerating from the INR 49.2 bn or 130.4% increase posted in FY 4Q20. By our calculation, reserves are massively short by nearly INR 316 bn or nearly an entire year of core operating results. 

HDFC Bank – Is This Really India’s Best Bank?

*Tax Loss Carryforwards Drive Bottom Line: Bank of America (BAC.US) [BAC] reported 2Q21 bottom-line results of USD 9.0 bn, increasing USD 1.4 bn (18.6%) linked quarter. The USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 bottom-line exceeded that of 1Q21. If BAC were taxed at the 1Q21 rate, the bottom-line result would have been closer to USD 7.1 bn or USD 500 mn (6.6%) lower on a linked quarter basis; and*BAC’s Credit Quality Best Of Money Centers: We note that net new NPLs decelerated to USD 184 mn or 13.9% on an annualized basis – far better than the USD 957 mn or 74.8% posted in 1Q21. To put this result into perspective, JPM and Citigroup each reported large increases net new NPLs on a linked quarter basis of 177% and 48%, respectively. BAC would appear to have a very comfortable reserve cushion given the run rate in net new NPLs.

*Tax Loss Carryforwards Drive Bottom Line: Bank of America (BAC.US) [BAC] reported 2Q21 bottom-line results of USD 9.0 bn, increasing USD 1.4 bn (18.6%) linked quarter. The USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 bottom-line exceeded that of 1Q21. If BAC were taxed at the 1Q21 rate, the bottom-line result would have been closer to USD 7.1 bn or USD 500 mn (6.6%) lower on a linked quarter basis; and*BAC’s Credit Quality Best Of Money Centers: We note that net new NPLs decelerated to USD 184 mn or 13.9% on an annualized basis – far better than the USD 957 mn or 74.8% posted in 1Q21. To put this result into perspective, JPM and Citigroup each reported large increases net new NPLs on a linked quarter basis of 177% and 48%, respectively. BAC would appear to have a very comfortable reserve cushion given the run rate in net new NPLs.  

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

Federal Bank – Capital Preservation Mode

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.   

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

HSBC Holdings Plc – Head Still Buried In The Sand

United Kingdom

HSBC Holdings plc is a British universal bank and financial services group that provides banking and financial products and services worldwide. It offers retail, commercial and institutional banking, global banking and markets, wealth management, and private banking. The company was founded in 1865 and is headquartered in London, United Kingdom.

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HSBC (HSBC US)

HDFC Bank – Is This Really India’s Best Bank?

HDFC Bank: HDFCB QOQ results declined 5.6% due to a net interest income and fee revenue along with a loss provision increase. Reserves appear...

Thomas J. Monaco

Bank of America - Brian’s Song

Bank of America: USD 1.2 bn usage of tax loss carryforwards was the sole reason BAC’s 2Q21 results exceeded 1Q21. Net new NPLs decelerated from...

Thomas J. Monaco

Federal Bank – Capital Preservation Mode

FEDERAL BANK: Federal recently highlighted FY 1Q22 growth metrics in lending and deposits – both of which are contracting. In our view, it appears...

Thomas J. Monaco

HSBC Holdings Plc – Banana Peal

HSBC HOLDINGS: HSBC announced the disposal of French retail bank at a loss of USD 2.3 bn. The HSBC France sale suggests HSBC US disposal could...

Thomas J. Monaco

HSBC Holdings Plc – Head Still Buried In The Sand

HSBC HOLDINGS: A competitor call with management centered on benign Hong Kong/Asia. The Group aim is a CET1 of 14-14.5%. No mention HSBC North...

Thomas J. Monaco

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