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 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.   

*Pre-release Says Nothing About Capital And Credit: Bajaj Finance (BAF.IN) [Bajaj] released a FY 4Q21 balance sheet update, ahead of its scheduled earnings update. Key highlights were limited to: AUM growth; new customer acquisition; and deposit growth; and  *Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn during FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x - representing nearly three years of PBT and over 50% of shareholder’s equity.

*Pre-release Says Nothing About Capital And Credit: Bajaj Finance (BAF.IN) [Bajaj] released a FY 4Q21 balance sheet update, ahead of its scheduled earnings update. Key highlights were limited to: AUM growth; new customer acquisition; and deposit growth; and  *Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn during FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x - representing nearly three years of PBT and over 50% of shareholder’s equity.

*Positive Spin Still Off From Organizational Reality: HDFC Bank (HDFCB.IN) [HDFCB] released a FY 4Q21 balance sheet update, two weeks ahead of its scheduled financial results announcement on April 17, 2020. HDFCB tried to place a positive spin on its lending and deposit share gain update; and *Back to Reality: 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. 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. An update on credit would have been more helpful.

*Positive Spin Still Off From Organizational Reality: HDFC Bank (HDFCB.IN) [HDFCB] released a FY 4Q21 balance sheet update, two weeks ahead of its scheduled financial results announcement on April 17, 2020. HDFCB tried to place a positive spin on its lending and deposit share gain update; and *Back to Reality: 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. 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. An update on credit would have been more helpful.    

HDFC Bank – Update Does Little To Quell Fears

*AGM Leads To More Questions Than Answers: At its recent annual general meeting (AGM), DBS Group Holdings (DBS.SP) [DBS] highlighted several back to the future mainland China strategies and tried to justify its truly dumb acquisition in India. The management team didn’t do itself any favors; and *Another Fine Mess You’ve Gotten Us Into: CEO Gupta was completely put back on his heals and left defending its acquisition of Lakshmi Vilas Bank (LVB). Shareholders raised fundamental concerns over financial losses and LVB’s impact on DBS' bottom-line. In our view, without some form of ring-fencing of LVB’s challenged assets it is unclear how this transaction would NOT have a negative material impact on DBS’ earnings and capital ratios over the near-term.

*AGM Leads To More Questions Than Answers: At its recent annual general meeting (AGM), DBS Group Holdings (DBS.SP) [DBS] highlighted several back to the future mainland China strategies and tried to justify its truly dumb acquisition in India. The management team didn’t do itself any favors; and *Another Fine Mess You’ve Gotten Us Into: CEO Gupta was completely put back on his heals and left defending its acquisition of Lakshmi Vilas Bank (LVB). Shareholders raised fundamental concerns over financial losses and LVB’s impact on DBS' bottom-line. In our view, without some form of ring-fencing of LVB’s challenged assets it is unclear how this transaction would NOT have a negative material impact on DBS’ earnings and capital ratios over the near-term. 

DBS Group Holdings – Quickly Losing Credibility

Specialist in Indian Banking and Economic Research

Hemindra Hazari

In a major development, the Securities and the Exchange Board of India (SEBI) has finally instructed listed entities to <a href="https://www.sebi.gov.in/media/press-releases/mar-2021/sebi-board-meeting_49648.html" target="_blank" rel="noopener">disclose</a> the audio/video recording of the analyst/institutional investors’ meet and presentations made at such meetings before the next trading day or within 24 hours, whichever is earlier. Written transcripts of such meeting will have to be uploaded on the listed entities’ websites within 5 working days. This analyst had repeatedly argued (<a href="https://hemindrahazari.com/2020/04/03/did-kotak-mahindra-bank-release-price-sensitive-information-to-a-favoured-few-in-its-conference-call/" target="_blank" rel="noopener">here</a> and <a href="https://hemindrahazari.com/2020/04/11/hdfc-bank-makes-a-move-towards-greater-transparency-for-retail-investors/" target="_blank" rel="noopener">here</a>) for such an important disclosure and in a note dated April 11, 2020 had said, <blockquote>…SEBI must ensure that listed companies and sell-side firms which they regulate are mandated to upload the audio recordings/unedited transcript of such calls immediately after the call is completed, as it is unfair to shareholders, especially retail shareholders, to be denied such information. Such transparency to all shareholders would assist in price discovery for the entire market, and not just for the favoured few institutional investors/sell-side [brokers] analysts who typically get invited to such conference calls.</blockquote>The commendable but belated instruction by SEBI will disrupt the investor relations division of listed companies and put a thick spoke in the wheel of sell-side’s institutional business model.  Interactions between listed companies and with the buy (institutional investors)/sell side are for the latter to get an extra edge by acquiring a deeper insight into the company, with the possibility of some exclusive market sensitive information. In sell-side firms, corporate access is part of the Key Result Areas (KRA) for analysts whereby they have to regularly arrange meetings with the companies they cover for the buy-side. Companies are also eager to regularly interact with institutional analysts and asset managers in the hope that it will lead to additional share purchases boosting the share price, hence both sides benefit from this umbilical relationship.  As a consequence of the SEBI notification there will a sharp reduction in official interactions between companies with the buy- and sell-side, as both parties will not want their interactions to be in the public domain. Some buy-side firms, to maintain confidentiality, do not even permit sell-side analysts who had arranged meetings with the company to be present in their one-on-one interaction with the company. Henceforth companies will have to restrict their interactions to quarterly results calls. Till now, at sell-side conferences, not only would firms address gatherings of fund managers, but select high value clients were permitted one-on-one meetings. Now this too will reduce, as the recording of the meeting would have to be in the public domain.With the implementation of this notification, sell-side analysts can get back to their job of research, which, as corporate access gained prominence, had taken a back seat to arranging meetings with companies for institutional clients. Hopefully, in the stock market there will be a drastic drop in company visit notes, where sell-side analysts behaved like stenographers and dutifully regurgitated company management commentary to their clients. Sell-side analysts can focus on differentiated, thematic research and arranging value-added calls with industry experts instead of the commoditised company calls.A fallout may be that companies may increase their off-the-record one-on-one meetings, which are held outside the company/sell and buy side premises (coffee shops/conference rooms in hotels). Although this practice is widely prevalent, it is difficult to scale-up, and SEBI must ensure that off-the-record meetings by companies do not increase.SEBI’s decision is noteworthy in that it aims to reduce the asymmetry of information in the capital market. Hopefully, companies can focus their efforts on performance, and the sell and buy side can concentrate on analysis of public information for investment management.

In a major development, the Securities and the Exchange Board of India (SEBI) has finally instructed listed entities to disclose the audio/video recording of the analyst/institutional investors’ meet and presentations made at such meetings before the next trading day or within 24 hours, whichever is earlier. Written transcripts of such meeting will have to be uploaded on the listed entities’ websites within 5 working days. This analyst had repeatedly argued (here and here) for such an important disclosure and in a note dated April 11, 2020 had said, …SEBI must ensure that listed companies and sell-side firms which they regulate are mandated to upload the audio recordings/unedited transcript of such calls immediately after the call is completed, as it is unfair to shareholders, especially retail shareholders, to be denied such information. Such transparency to all shareholders would assist in price discovery for the entire market, and not just for the favoured few institutional investors/sell-side [brokers] analysts who typically get invited to such conference calls.The commendable but belated instruction by SEBI will disrupt the investor relations division of listed companies and put a thick spoke in the wheel of sell-side’s institutional business model.  Interactions between listed companies and with the buy (institutional investors)/sell side are for the latter to get an extra edge by acquiring a deeper insight into the company, with the possibility of some exclusive market sensitive information. In sell-side firms, corporate access is part of the Key Result Areas (KRA) for analysts whereby they have to regularly arrange meetings with the companies they cover for the buy-side. Companies are also eager to regularly interact with institutional analysts and asset managers in the hope that it will lead to additional share purchases boosting the share price, hence both sides benefit from this umbilical relationship.  As a consequence of the SEBI notification there will a sharp reduction in official interactions between companies with the buy- and sell-side, as both parties will not want their interactions to be in the public domain. Some buy-side firms, to maintain confidentiality, do not even permit sell-side analysts who had arranged meetings with the company to be present in their one-on-one interaction with the company. Henceforth companies will have to restrict their interactions to quarterly results calls. Till now, at sell-side conferences, not only would firms address gatherings of fund managers, but select high value clients were permitted one-on-one meetings. Now this too will reduce, as the recording of the meeting would have to be in the public domain.With the implementation of this notification, sell-side analysts can get back to their job of research, which, as corporate access gained prominence, had taken a back seat to arranging meetings with companies for institutional clients. Hopefully, in the stock market there will be a drastic drop in company visit notes, where sell-side analysts behaved like stenographers and dutifully regurgitated company management commentary to their clients. Sell-side analysts can focus on differentiated, thematic research and arranging value-added calls with industry experts instead of the commoditised company calls.A fallout may be that companies may increase their off-the-record one-on-one meetings, which are held outside the company/sell and buy side premises (coffee shops/conference rooms in hotels). Although this practice is widely prevalent, it is difficult to scale-up, and SEBI must ensure that off-the-record meetings by companies do not increase.SEBI’s decision is noteworthy in that it aims to reduce the asymmetry of information in the capital market. Hopefully, companies can focus their efforts on performance, and the sell and buy side can concentrate on analysis of public information for investment management. 

SEBI Disclosure Circular, a Blow Against the Exclusive Information Club

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)

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

Bajaj Finance – Who’s Kidding Whom?

BAJAJ FINANCE: Bajaj gave a FY 4Q21 update on AUM; customer acquisition; and deposit growth. No disclosure on how it will deal with India's worst...

Thomas J. Monaco

HDFC Bank – Update Does Little To Quell Fears

HDFC BANK: HDFCB released a FY 4Q21 balance sheet update. HDFCB tried to place a positive spin on its lending and deposit share gain update....

Thomas J. Monaco

DBS Group Holdings – Quickly Losing Credibility

DBS GROUP HOLDINGS: At its recent AGM, DBS highlighted several back to the future mainland China strategies and tried to justify its acquisition in...

Thomas J. Monaco

SEBI Disclosure Circular, a Blow Against the Exclusive Information Club

The commendable but belated instruction by SEBI will disrupt the investor relations division of listed companies and put a thick spoke in the wheel...

Hemindra Hazari