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 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

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap.

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap. 

Housing Development Finance Corporation / Equity Bottom-Up

Housing Development Finance Corporation (HDFC IN)

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 60 bn or just over two quarters of core operating results.

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 60 bn or just over two quarters of core operating results.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

ICICI Bank – Lower Provision Despite Increasing Credit Risk

India

Indian Overseas Bank is a major public sector bank that provides a comprehensive range of banking products and services, including various deposit accounts, loan products like home, vehicle, and agricultural loans, as well as debit and credit cards, and internet and mobile banking. It also offers NRI accounts, mutual funds, insurance products, and merchant banking services. The bank was founded in 1937 and is headquartered in Chennai, India.

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Indian Overseas Bank (IOB IN)

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

State Bank of India – Bad Credit

STATE BANK OF INDIA: SBI reported FY 3Q21 result increase of 22.1%) linked quarter led by a completely unwarranted 58.1% decline in provisions and...

Thomas J. Monaco

HDFC – Credit Turn

HOUSING DEVELOPMENT FINANCE CORP: HDFC reported FY 3Q21 core results decline of 6.1%. Net new NPLs accelerated 32.5%, and reserves light by over...

Thomas J. Monaco

ICICI Bank – Lower Provision Despite Increasing Credit Risk

ICICI BANK: ICICI had a linked quarter FY 3Q21 poor quality earnings increase of 16.2%. Net new NPLs increased 43.7% on an annualized basis, and a...

Thomas J. Monaco

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