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

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

Shriram Transport Finance – Frightening Glory

*Better – But Not Good: Bank of Baroda (BOB.IN) [BOB] reported FY 2Q21 results of INR 16.8bn, quite a reversal of fortune from the losses of INR 8.6 bn in FY 1Q21. Several factors drove BOB’s outperformance: a) net interest income improvement of INR 7.5 bn (11.0%) linked quarter driven solely by NIM expansion of 31 bp to 2.86% while the loan book contracted 1.8%; b) fee revenue improvement of INR 2.6 bn (22.2%) on the back of higher loan processing fees as retail loan disbursements increased; and c) most importantly, an INR 26.3 bn (46.7%) reduction in loss provisions as annualized net new NPL creation dropped precipitously to just 2.0%;*Poor Reserve Cover: Excluding the September 2016 Supreme Court standstill on NPL classification, BOB’s NPLs still would have declined INR 19.9 bn (2.9%) and the NPL ratio would have been 9.30% - still improving 10 bp over the previous quarter. Anything over 8% suggest institutions are insolvent. By our calculation, however, BOB’s reserves still remain light by INR 245 bn or nearly ten quarters of pre-tax earnings – this prior to its merger with Vijaya and Dena Banks; and       *Capital Raise A Real Challenge: Merger-related challenges leading to growth slowdown, higher NPLs on portfolio alignment, and continued deterioration in the international business. Equity dilution is BOB’s single largest risk.

*Better – But Not Good: Bank of Baroda (BOB.IN) [BOB] reported FY 2Q21 results of INR 16.8bn, quite a reversal of fortune from the losses of INR 8.6 bn in FY 1Q21. Several factors drove BOB’s outperformance: a) net interest income improvement of INR 7.5 bn (11.0%) linked quarter driven solely by NIM expansion of 31 bp to 2.86% while the loan book contracted 1.8%; b) fee revenue improvement of INR 2.6 bn (22.2%) on the back of higher loan processing fees as retail loan disbursements increased; and c) most importantly, an INR 26.3 bn (46.7%) reduction in loss provisions as annualized net new NPL creation dropped precipitously to just 2.0%;*Poor Reserve Cover: Excluding the September 2016 Supreme Court standstill on NPL classification, BOB’s NPLs still would have declined INR 19.9 bn (2.9%) and the NPL ratio would have been 9.30% - still improving 10 bp over the previous quarter. Anything over 8% suggest institutions are insolvent. By our calculation, however, BOB’s reserves still remain light by INR 245 bn or nearly ten quarters of pre-tax earnings – this prior to its merger with Vijaya and Dena Banks; and       *Capital Raise A Real Challenge: Merger-related challenges leading to growth slowdown, higher NPLs on portfolio alignment, and continued deterioration in the international business. Equity dilution is BOB’s single largest risk.

*Solid Results In FY 2Q21: Kotak Mahindra Bank (KMB.IN) [Kotak] reported a fairly stellar FY 2Q21 earnings result of INR 21.8 bn – exceeding FY 1Q21 results by INR 9.3 bn or 75.5% - a high quality beat of consensus as well; and*Strong Credit Metrics Across The Board: Gross NPLs were flattish linked quarter, while net new NPLs increased just INR 1.1 bn or 7.6% on an annualized basis. Further, despite the loss provisioning decline of INR 5.9 bn (61.7%), loss reserves at KMB increased INR 2.8 bn (7.4%) as NCOs continue to decelerate.

*Solid Results In FY 2Q21: Kotak Mahindra Bank (KMB.IN) [Kotak] reported a fairly stellar FY 2Q21 earnings result of INR 21.8 bn – exceeding FY 1Q21 results by INR 9.3 bn or 75.5% - a high quality beat of consensus as well; and*Strong Credit Metrics Across The Board: Gross NPLs were flattish linked quarter, while net new NPLs increased just INR 1.1 bn or 7.6% on an annualized basis. Further, despite the loss provisioning decline of INR 5.9 bn (61.7%), loss reserves at KMB increased INR 2.8 bn (7.4%) as NCOs continue to decelerate. 

Kotak Mahindra Bank – Surprisingly Strong Performance

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter of core operating results.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter 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)

Shriram Transport Finance – Frightening Glory

SHRIRAM TRANSPORT FINANCE: Shriram Is Exhibiting Early Signs of Positive Credit Deltas, And Likely Exits This COVID Crisis Earlier Than Peer.

Thomas J. Monaco

Bank of Baroda – Scary On Halloween

BANK OF BARODA: Manufactured Profits Ahead Of Capital Raise. BOB Already Appears Insolvent With 9.3% NPLs and 10 Quarter Reserve Shortfall

Thomas J. Monaco

Kotak Mahindra Bank – Surprisingly Strong Performance

KOTAK MAHINDRA BANK: Surprise, Surprise, Surprise. Both Credit Metrics and Ne Interest Income Improves As Risk Substantially Declines

Thomas J. Monaco

Bajaj Finance – Removing The Lipstick

BAJAJ FINANCE: Results Would Suggest That Credit Portfolio Risk Has Significantly Deteriorated, and That Reserves Need Buttressing By Over Five...

Thomas J. Monaco

HDFC Bank – Not A Great Quarter

HDFC Bank: Improved Bottom-line Clouded By Supreme Court Ruling On Credit Quality Calculations. Reserve Cover Lower Than On/Off Balance Sheet Risk...

Thomas J. Monaco