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

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: 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.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: 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.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Poor Result: Bank of Baroda (BOB.IN) [BOB] reported a FY 4Q21 loss of INR 10.5 bn, quite a reversal of fortune from the gains of INR 10.6 bn in FY 3Q21. Several factors drove BOB’s poor performance: a) net interest income declined INR 3.7 bn (5.0%) linked quarter driven by NIM expansion of 5 bp to 2.72% while the loan book only grew 0.2%; b) a loss provision increase of INR 1.5 bn (4.4%) despite further weakness in lending; an operating expense increase of INR 3.9 bn (7.3%) driven primarily by other costs which increased INR 3.1 bn (13.8%) – pushing BOB’s C/I ratio 3.2% higher to 63.2%; and the write-down of INR 33.1 bn in un-utilized DTAs; and*Poor Reserve Cover: Further, net new NPLs remain elevated at INR 13.5 bn or 11.2% annualized. Keep in mind, a bank with over 8% of NPLs is typically considered an insolvent institution. By our calculation, however, BOB’s reserves still remain light by INR 293 bn or nearly 12 quarters of pre-tax earnings.

*Poor Result: Bank of Baroda (BOB.IN) [BOB] reported a FY 4Q21 loss of INR 10.5 bn, quite a reversal of fortune from the gains of INR 10.6 bn in FY 3Q21. Several factors drove BOB’s poor performance: a) net interest income declined INR 3.7 bn (5.0%) linked quarter driven by NIM expansion of 5 bp to 2.72% while the loan book only grew 0.2%; b) a loss provision increase of INR 1.5 bn (4.4%) despite further weakness in lending; an operating expense increase of INR 3.9 bn (7.3%) driven primarily by other costs which increased INR 3.1 bn (13.8%) – pushing BOB’s C/I ratio 3.2% higher to 63.2%; and the write-down of INR 33.1 bn in un-utilized DTAs; and*Poor Reserve Cover: Further, net new NPLs remain elevated at INR 13.5 bn or 11.2% annualized. Keep in mind, a bank with over 8% of NPLs is typically considered an insolvent institution. By our calculation, however, BOB’s reserves still remain light by INR 293 bn or nearly 12 quarters of pre-tax earnings.

Bank of Baroda – No Light In This Tunnel

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

With manufacturing output growing 5.8% YoY in Jan-Mar 2021 (4Q-FY2020/21), we estimate that real GDP grew 4.5% YoY that quarter -- far above the consensus of +1.2% YoY -- thus ensuring a contraction of -6% for FY2020/21 (much better than the official estimate of -8%). April 2021 saw a spectacular year-on-year rebound in the economy, with exports up 196% YoY, imports up 167% and steel output up 153% YoY that month. Much of the economy was locked down in May, as the Covid 2nd Wave hammered India -- with new daily cases peaking at 414,434 on 6 May 2021, but receding to 173,882 new cases on 28 May 2021.
After the May pause, however, the economy should accelerate through the rest of FY2021/22, benefitting from last year's structural economic reforms -- particularly the liberalization of the labour market, cuts in corporate tax rates, and the introduction of production-linked incentives to boost manufacturing. This year's partial lockdowns largely exempted exports, and allowed public transportation to continue, thereby reducing the supply bottlenecks that plagued the economy in 2020. Consequently, CPI inflation will likely remain in the RBI's inflation-target range, and moderate to 4% YoY by August. Despite high oil-driven WPI inflation, we expect the RBI to cut its policy rate by 25bp each in the next two quarters, further spurring the economic recovery. 
India's vaccination drive too ran into supply bottlenecks in May, which are now easing -- with more than 3 million vaccine doses being administered daily in recent days. A total of 209 million vaccine doses have been administered, but the pace of vaccination is likely to accelerate over the next 2 months as more vaccine manufacturers are licensed and the US allows large-scale imports of vaccine ingredients to enable the ramp-up of vaccine production. India is not immune to a third wave, but will be better-prepared for one were it to occur. Manufacturing, agriculture and non-travel-intensive services are still likely to ensure 11% real GDP growth in FY2021/22 relative to the depressed levels of last year. April and June will make up partly for the losses of May, but the pace is likely to accelerate in the next two quarters. The strong economic recovery will make valuations look reasonable as earnings too rebound strongly. We would recommend staying invested in India.

With manufacturing output growing 5.8% YoY in Jan-Mar 2021 (4Q-FY2020/21), we estimate that real GDP grew 4.5% YoY that quarter -- far above the consensus of +1.2% YoY -- thus ensuring a contraction of -6% for FY2020/21 (much better than the official estimate of -8%). April 2021 saw a spectacular year-on-year rebound in the economy, with exports up 196% YoY, imports up 167% and steel output up 153% YoY that month. Much of the economy was locked down in May, as the Covid 2nd Wave hammered India -- with new daily cases peaking at 414,434 on 6 May 2021, but receding to 173,882 new cases on 28 May 2021.
After the May pause, however, the economy should accelerate through the rest of FY2021/22, benefitting from last year's structural economic reforms -- particularly the liberalization of the labour market, cuts in corporate tax rates, and the introduction of production-linked incentives to boost manufacturing. This year's partial lockdowns largely exempted exports, and allowed public transportation to continue, thereby reducing the supply bottlenecks that plagued the economy in 2020. Consequently, CPI inflation will likely remain in the RBI's inflation-target range, and moderate to 4% YoY by August. Despite high oil-driven WPI inflation, we expect the RBI to cut its policy rate by 25bp each in the next two quarters, further spurring the economic recovery. 
India's vaccination drive too ran into supply bottlenecks in May, which are now easing -- with more than 3 million vaccine doses being administered daily in recent days. A total of 209 million vaccine doses have been administered, but the pace of vaccination is likely to accelerate over the next 2 months as more vaccine manufacturers are licensed and the US allows large-scale imports of vaccine ingredients to enable the ramp-up of vaccine production. India is not immune to a third wave, but will be better-prepared for one were it to occur. Manufacturing, agriculture and non-travel-intensive services are still likely to ensure 11% real GDP growth in FY2021/22 relative to the depressed levels of last year. April and June will make up partly for the losses of May, but the pace is likely to accelerate in the next two quarters. The strong economic recovery will make valuations look reasonable as earnings too rebound strongly. We would recommend staying invested in India.  

Receding 2nd Wave Will Allow Economic Acceleration, Spurred by Rate Cuts to Come

Consumer Analyst / Channel Surveillance Specialist, Trudence Capital Advisors

Pranav Bhavsar

Consumer Analyst / Channel Surveillance Specialist

Trudence Capital Advisors

Trudence Capital Advisors Private Limited is a SEBI-registered Research Analyst, holding SEBI registration number INH000015747. Our firm is dedicated to providing independent and unbiased research on Indian mid to large-cap companies. Trudence Capital is known for its counter-consensus views, with a focus on forensic research and on-ground primary investigations. Our research approach is thorough, involving detailed analysis of accounting practices and governance, alongside extensive channel checks.

Independent & Unbiased Research

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<h2>Channel Interactions </h2>
<a href="https://www.smartkarma.com/entities/bandhan-bank-ltd" target="_blank" data-smartkarma-citation="entities:26705:1" rel="noopener">Bandhan Bank Ltd (BANDHAN IN)</a>: DSC managers in Bihar, Maharashtra and Karnataka indicate stress likely to remain for a longer period as COVID spreads in the hinterland. 
<a href="https://www.smartkarma.com/entities/hero-motocorp-ltd" target="_blank" data-smartkarma-citation="entities:2391:1" rel="noopener">Hero Motocorp (HMCL IN)</a>: Dealer health continues to deteriorate. With widespread lockdowns, interest costs for dealers are mounting up. 
<a href="https://www.smartkarma.com/entities/bata-india-ltd" target="_blank" data-smartkarma-citation="entities:3051:1" rel="noopener">Bata India Ltd (BATA IN)</a> : Early expectations of re-opening remain muted. Normalisation still two quarters away. 
<a href="https://www.smartkarma.com/entities/nestle-india-ltd" target="_blank" data-smartkarma-citation="entities:13101:1" rel="noopener">Nestle India (NEST IN)</a>: NEST's rural plans may be in trouble. COVID and its impact on premium products could be felt more putting NEST's ambitious plan to expand in rural India. Underperformance unless a major risk-off is likely to continue. 
<h2>About India Channel Insight</h2>
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Our objective with India Channel Insight is to share snippets from our channel interactions that are part of our research process. These snippets can potentially be signals for larger themes/ideas emerging out of these interactions.  
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Channel Interactions 
Bandhan Bank Ltd (BANDHAN IN): DSC managers in Bihar, Maharashtra and Karnataka indicate stress likely to remain for a longer period as COVID spreads in the hinterland. 
Hero Motocorp (HMCL IN): Dealer health continues to deteriorate. With widespread lockdowns, interest costs for dealers are mounting up. 
Bata India Ltd (BATA IN) : Early expectations of re-opening remain muted. Normalisation still two quarters away. 
Nestle India (NEST IN): NEST's rural plans may be in trouble. COVID and its impact on premium products could be felt more putting NEST's ambitious plan to expand in rural India. Underperformance unless a major risk-off is likely to continue. 
About India Channel Insight


Our objective with India Channel Insight is to share snippets from our channel interactions that are part of our research process. These snippets can potentially be signals for larger themes/ideas emerging out of these interactions.  


India Channel Insight | Bandhan, Hero, Bata, Nestle

SBI (State Bank of India) / Equity Bottom-Up

*Bottom-line Overstated And Of Poor Quality: State Bank of India (SBIN.IN) [SBI] reported FY 4Q21 results of INR 61.3 bn, declining INR 0.5 bn (0.8%) linked quarter. Despite the loss provision increase of INR 7.2 bn (6.7%); this is not nearly enough given the continued credit stress. SBI’s fee revenues grew INR 61.6 bn (10.5%) linked quarter, likely attributed to non-core gains which should not be repeatable going forward; and*Reserve Challenge Should Lead To Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap.

*Bottom-line Overstated And Of Poor Quality: State Bank of India (SBIN.IN) [SBI] reported FY 4Q21 results of INR 61.3 bn, declining INR 0.5 bn (0.8%) linked quarter. Despite the loss provision increase of INR 7.2 bn (6.7%); this is not nearly enough given the continued credit stress. SBI’s fee revenues grew INR 61.6 bn (10.5%) linked quarter, likely attributed to non-core gains which should not be repeatable going forward; and*Reserve Challenge Should Lead To Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – No Let Up On Credit

India

iShares MSCI India ETF is an exchange-traded fund incorporated in the USA. The ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI India Index.

iShares MSCI India ETF (INDA US)

HDFC Bank – Rose Colored Glasses

HDFC BANK: A competitor hosted a recent conference call with HDFCB. It chose to focus on numerous items not having to do with credit. The longer...

Thomas J. Monaco

Bank of Baroda – No Light In This Tunnel

BANK OF BARODA: BOB reported a FY 4Q21 loss of INR 10.5 bn. Net new NPLs remain elevated at 11.2% annualized. BOB’s reserves still remain light by...

Thomas J. Monaco

Receding 2nd Wave Will Allow Economic Acceleration, Spurred by Rate Cuts to Come

Strong harvest to curb food inflation, allowing 50bp rate but by Oct21. The soaring March-April economy will re-accelerate with vaccine rollout...

Prasenjit K. Basu

India Channel Insight | Bandhan, Hero, Bata, Nestle

As always channel checks are an important part of our research. In this insight, we bring you primary insight from channels of Bandhan, Hero, Bata,...

Pranav Bhavsar

State Bank of India – No Let Up On Credit

STATE BANK OF INDIA: SBI reported a QOQ FY 4Q21 results decline of 0.8% - supported by gains. Net new NPLs accelerated to 65.9% from 41.6%. SBI...

Thomas J. Monaco