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

*Another Unwarranted Provision Reduction: Federal Bank’s (FB.IN) results were likely managed, as it posted FY 4Q21 bottom-line result of INR 4.8 bn – improving INR 737 mn (18.2%) linked quarter. One factor, which was simply ridiculous, given the state of Federal Bank’s balance sheet, drove the improvement – aggressively cutting loss provisions again; and*Reserve Cover Is Shallow: Net new problem loans increased INR 8.4 bn or 78.4% on an annualized basis – dangerously accelerating over FY 3Q21. We remain discouraged that management hasn’t taken the opportunity to more aggressively address the risk sitting pon balance sheet. In fact, we find that reserve cover is increasingly light by close to INR 84.5 bn (versus being short INR 50.0 bn just a quarter ago) – nearly 20 years of core operating performance.

*Another Unwarranted Provision Reduction: Federal Bank’s (FB.IN) results were likely managed, as it posted FY 4Q21 bottom-line result of INR 4.8 bn – improving INR 737 mn (18.2%) linked quarter. One factor, which was simply ridiculous, given the state of Federal Bank’s balance sheet, drove the improvement – aggressively cutting loss provisions again; and*Reserve Cover Is Shallow: Net new problem loans increased INR 8.4 bn or 78.4% on an annualized basis – dangerously accelerating over FY 3Q21. We remain discouraged that management hasn’t taken the opportunity to more aggressively address the risk sitting pon balance sheet. In fact, we find that reserve cover is increasingly light by close to INR 84.5 bn (versus being short INR 50.0 bn just a quarter ago) – nearly 20 years of core operating performance.    

Federal Bank – A Five Year Hole Has Developed

*Unbelievable: DBS Group Holdings (DBS.SP) [DBS] reported 1Q21 results of SGD 2.0 bn, increasing SGD 997 mn (98.5%) on a linked quarter basis. Results were driven primarily by two factors: a) loss provisions declined SGD 567 mn (98.3%) which is bizarre in light of its troubled Indian acquisition, Lakshmi Vilas Bank (LVB), risk is not controlled; and b) fee revenue growth of SGD 604 mn (52.8%) which includes an undisclosed level of non-operating gains;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. Net new NPLs continue to increase – up SGD 85 mn or increasing 5.6% on an annualized basis. Reserves should be shored up in the neighborhood of SGD 2.5bn to reflect this risk; and**Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

*Unbelievable: DBS Group Holdings (DBS.SP) [DBS] reported 1Q21 results of SGD 2.0 bn, increasing SGD 997 mn (98.5%) on a linked quarter basis. Results were driven primarily by two factors: a) loss provisions declined SGD 567 mn (98.3%) which is bizarre in light of its troubled Indian acquisition, Lakshmi Vilas Bank (LVB), risk is not controlled; and b) fee revenue growth of SGD 604 mn (52.8%) which includes an undisclosed level of non-operating gains;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. Net new NPLs continue to increase – up SGD 85 mn or increasing 5.6% on an annualized basis. Reserves should be shored up in the neighborhood of SGD 2.5bn to reflect this risk; and**Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

DBS Group Holdings – Not Sure Whether To Laugh Or Cry

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

We recommend staying underweight India until the 7-day moving average of Covid cases turns down (likely no sooner than mid-May). There would then be an excellent buying opportunity: we have lowered our forecast of real GDP growth in FY2020/21 to 12% (from 13.5%), but the vaccine roll-out (with 60% of all those above 45 likely to have been vaccinated by the end of this month) should wrestle the new Covid case numbers down from peaks by end-May. A current account surplus, liquid banks, and a reformed, privatization-driven policy framework should ensure that the rebound is delayed but not halted by this virulent Second Covid wave.  When the IMF was forecasting 8.8% real GDP growth for FY2021/22 and the consensus was 8-9%, we raised our forecast to 12.5% in December 2020 -- and to 13.5% at the beginning of February 2021 (post the reform-oriented Budget). Now that the IMF has caught up with our end-2020 forecast, we are lowering ours to 12%, acknowledging the huge uncertainties induced by this 2nd Covid wave. Given the low base in April-May 2020, YoY growth rates for production will barely budge, but private consumption will likely weaken during these months as retailers in key hotspots (including Delhi, Mumbai, Bengaluru) will stay shut during 2-week curfews/lockdowns. The current account surplus of 1.5% of GDP in 2021, and loan-deposit ratio of 72%, imply there is ample external and domestic liquidity to spur a strong economic recovery once lockdowns are lifted. At 145 million vaccinations, 17.7% of the adult population (18 &amp; over) or 57% of all those eligible (45 &amp; over) have had at least one vaccine dose. This is far from achieving herd immunity, but faster vaccinations from June should allow over a billion people to be vaccinated by end-2021. Lockdowns and curfews are proving effective in Maharashtra and Delhi (the worst hotspots), but will now roll through several other states. But the base effects will help the YoY growth rates in April-May. In March 2020 there was only a week's disruption, but exports were up 60% YoY (imports 53% YoY) in March 2021, steel output up a world-leading 23.9% YoY and car production up 79% YoY in March 2021. April and May 2020 were almost wiped out economically, so the YoY growth rates will still be spectacular in Apr-May 2021, given the strong underlying momentum.The disruptions to consumption (especially) and production should be made up in the next few months. The low corporate tax rate, reformed labour market and production-linked incentives should induce a powerful surge in investment, with privatization and asset-monetization providing an extra fillip as they are implemented during the course of the year. We do not expect the liquid banking system (L-D ratio 72%) to contribute to the rebound until early-2022, with early-recapitalization of state-owned banks helping a bit, but privatizations providing a bigger spur.

We recommend staying underweight India until the 7-day moving average of Covid cases turns down (likely no sooner than mid-May). There would then be an excellent buying opportunity: we have lowered our forecast of real GDP growth in FY2020/21 to 12% (from 13.5%), but the vaccine roll-out (with 60% of all those above 45 likely to have been vaccinated by the end of this month) should wrestle the new Covid case numbers down from peaks by end-May. A current account surplus, liquid banks, and a reformed, privatization-driven policy framework should ensure that the rebound is delayed but not halted by this virulent Second Covid wave.  When the IMF was forecasting 8.8% real GDP growth for FY2021/22 and the consensus was 8-9%, we raised our forecast to 12.5% in December 2020 -- and to 13.5% at the beginning of February 2021 (post the reform-oriented Budget). Now that the IMF has caught up with our end-2020 forecast, we are lowering ours to 12%, acknowledging the huge uncertainties induced by this 2nd Covid wave. Given the low base in April-May 2020, YoY growth rates for production will barely budge, but private consumption will likely weaken during these months as retailers in key hotspots (including Delhi, Mumbai, Bengaluru) will stay shut during 2-week curfews/lockdowns. The current account surplus of 1.5% of GDP in 2021, and loan-deposit ratio of 72%, imply there is ample external and domestic liquidity to spur a strong economic recovery once lockdowns are lifted. At 145 million vaccinations, 17.7% of the adult population (18 &amp; over) or 57% of all those eligible (45 &amp; over) have had at least one vaccine dose. This is far from achieving herd immunity, but faster vaccinations from June should allow over a billion people to be vaccinated by end-2021. Lockdowns and curfews are proving effective in Maharashtra and Delhi (the worst hotspots), but will now roll through several other states. But the base effects will help the YoY growth rates in April-May. In March 2020 there was only a week's disruption, but exports were up 60% YoY (imports 53% YoY) in March 2021, steel output up a world-leading 23.9% YoY and car production up 79% YoY in March 2021. April and May 2020 were almost wiped out economically, so the YoY growth rates will still be spectacular in Apr-May 2021, given the strong underlying momentum.The disruptions to consumption (especially) and production should be made up in the next few months. The low corporate tax rate, reformed labour market and production-linked incentives should induce a powerful surge in investment, with privatization and asset-monetization providing an extra fillip as they are implemented during the course of the year. We do not expect the liquid banking system (L-D ratio 72%) to contribute to the rebound until early-2022, with early-recapitalization of state-owned banks helping a bit, but privatizations providing a bigger spur.   

India: 2nd Covid Wave Will Delay (Not Halt) The Strength of the Economic Rebound

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, we calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which  is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, we calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which  is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.   

India

iShares MSCI India Index ETF is an exchange-traded fund registered in Singapore. The Fund seeks to provide investment results that, before expenses, closely correspond to the performance of the MSCI India Index. The Fund invests all or substantially all of its assets in shares comprising the MSCI India Index in substantially the same weightings as constituted in the underlying index.

iShares MSCI India Index ETF (INDIA SP)

Federal Bank – A Five Year Hole Has Developed

FEDERAL BANK: FB's FY 4Q21 bottom-line QOQ result improved 18.2% due to an unwarranted provision cut. Net new NPLs accelerated 78.4% QOQ, while ...

Thomas J. Monaco

DBS Group Holdings – Not Sure Whether To Laugh Or Cry

DBS GROUP HOLDINGS: DBS reported a 98.5% QOQ 1Q21 results increase due to lower provision and non-operating gains. Given all of these...

Thomas J. Monaco

India: 2nd Covid Wave Will Delay (Not Halt) The Strength of the Economic Rebound

Underweight India near-term amid Covid uncertainty. But real GDP still to grow 12% in FY2021/22, with output growth aided by ultralow base in Apr...

Prasenjit K. Basu

ICICI Bank – Much Better

ICICI BANK: ICICI reported a 6.5% linked quarter improvement in FY 4Q21 operating results. Credit weakness is still there, but the breakdown in net...

Thomas J. Monaco

HDFC Bank – Big Credit Disappointment

HDFC BANK: HDFCB released a disappointing FY 4Q21 bottom-line, declining 6.5% QOQ, due higher provisions and costs. Net new NPLs increased 130.4%...

Thomas J. Monaco