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

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount 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;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well.

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount 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;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well. 

*Results Down, Credibility Up: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q21 bottom-line of INR 7.9 bn, declining INR 266 mn (3.3%) on a linked period basis. LIC’s conservatism with respect to provisioning – especially relative to the rest of the Indian financial sector – is quite admirable;*Credit On The Mend: During the period, we note that Stage 3 NPLs declined INR 625 mn (1.1%) to INR 58.8 bn and represent 2.79% of total loans – down 4 bp linked quarter. In addition, we note that net new NPLs at LIC were negative as well – declining INR 586 mn for an annualized rate of NPL decline of 4.0%. Coupled with NCOs of just INR 39 mn  - which amount to just 1 bp of total loans on an annualized basis, we find that reserves improved INR 1.0 bn or 4.0% linked quarter. While we admire LIC’s conservatism relative to peer, we would still be comfortable with reserves being INR 3.3 bn (11.8%) higher. That said, at this pace, LIC should get there within three quarters; and        *Competition Intensifying: Increasing competition could impact profitability, however, with both housing lenders and private banks significantly cutting interest rates.

*Results Down, Credibility Up: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q21 bottom-line of INR 7.9 bn, declining INR 266 mn (3.3%) on a linked period basis. LIC’s conservatism with respect to provisioning – especially relative to the rest of the Indian financial sector – is quite admirable;*Credit On The Mend: During the period, we note that Stage 3 NPLs declined INR 625 mn (1.1%) to INR 58.8 bn and represent 2.79% of total loans – down 4 bp linked quarter. In addition, we note that net new NPLs at LIC were negative as well – declining INR 586 mn for an annualized rate of NPL decline of 4.0%. Coupled with NCOs of just INR 39 mn  - which amount to just 1 bp of total loans on an annualized basis, we find that reserves improved INR 1.0 bn or 4.0% linked quarter. While we admire LIC’s conservatism relative to peer, we would still be comfortable with reserves being INR 3.3 bn (11.8%) higher. That said, at this pace, LIC should get there within three quarters; and        *Competition Intensifying: Increasing competition could impact profitability, however, with both housing lenders and private banks significantly cutting interest rates.

LIC Housing Finance – Doing The Right Thing

Housing Development Finance Corporation / Equity Bottom-Up

Housing Development Finance Corporation (HDFC IN)

*All Good: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 2Q21 bottom-line results of INR 33.7 bn - increasing INR 3.8 bn (12.6%) linked quarter. From a core operating perspective, we note that HDFC came in at INR 32.0 bn, a whopping INR 15.5 bn (93.4%) increase over FY 1Q21.*Credit Risk Decelerating: The trend in annualized NCOs has declined, by our calculation, to 16 bp from 21 bp in the previous quarter. In addition, the level of net new NPLs has also decelerated to INR 3.6 bn or 14.2% on an annualized basis versus 46.6% in FY 1Q21. We would have preferred that HDFC remained 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 68 bn or just over two quarters of core operating results; and*Positive Operating Jaws: . Key to core operating result performance was: a) net interest income improvement of INR 2.8 bn (8.3%) led by both linked quarter loan growth of 2.0% and NIM improvement of 17 bp to 2.75%; b) an INT 306 mn (7.7%) decline in operating expenses which pushed HDFC’s C/I ratio even lower by 160 bp to 9.2%.

*All Good: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 2Q21 bottom-line results of INR 33.7 bn - increasing INR 3.8 bn (12.6%) linked quarter. From a core operating perspective, we note that HDFC came in at INR 32.0 bn, a whopping INR 15.5 bn (93.4%) increase over FY 1Q21.*Credit Risk Decelerating: The trend in annualized NCOs has declined, by our calculation, to 16 bp from 21 bp in the previous quarter. In addition, the level of net new NPLs has also decelerated to INR 3.6 bn or 14.2% on an annualized basis versus 46.6% in FY 1Q21. We would have preferred that HDFC remained 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 68 bn or just over two quarters of core operating results; and*Positive Operating Jaws: . Key to core operating result performance was: a) net interest income improvement of INR 2.8 bn (8.3%) led by both linked quarter loan growth of 2.0% and NIM improvement of 17 bp to 2.75%; b) an INT 306 mn (7.7%) decline in operating expenses which pushed HDFC’s C/I ratio even lower by 160 bp to 9.2%.

Housing Development Finance Corp. – “Great Quarter Guys”

*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.

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked quarter. Driving the results, we note positive operating jaws. Also aiding LIC’s results, we note an INR 85 mn (14.9%) decline in loss provisioning tracking the improvement in overall credit quality; and substantial tax rate decline from 54.8% to 19.7% linked quarter; and*Credit Risk Flat, But Reserves Light: Stage 3 loans at LIC declined INR 216 mn (0.4%) linked quarter to INR 59.4 bn, and remained flat relative to total loans at 2.83%.There is no doubt under our calculation that LIC’s provisions remain woefully inadequate. We believe reserves need to be buttressed in the neighborhood of INR 33 bn or an entire year on bottom-line performance.

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked quarter. Driving the results, we note positive operating jaws. Also aiding LIC’s results, we note an INR 85 mn (14.9%) decline in loss provisioning tracking the improvement in overall credit quality; and substantial tax rate decline from 54.8% to 19.7% linked quarter; and*Credit Risk Flat, But Reserves Light: Stage 3 loans at LIC declined INR 216 mn (0.4%) linked quarter to INR 59.4 bn, and remained flat relative to total loans at 2.83%.There is no doubt under our calculation that LIC’s provisions remain woefully inadequate. We believe reserves need to be buttressed in the neighborhood of INR 33 bn or an entire year on bottom-line performance. 

LIC Housing Finance - Positive Operating Deltas

India

Manappuram Finance Limited is an Indian non-banking financial company (NBFC) specializing primarily in gold loans. The company has diversified its portfolio to include microfinance, home loans, vehicle loans, and SME lending. It was founded in 1949 and is headquartered in Valapad, Thrissur, Kerala, India.

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Manappuram Finance (MGFL IN)

DBS Group Holdings – The LVB Cram Down

DBS GROUP HOLDINGS: The LVB Cram-down Raises Significant Questions Over Potential Cost For DBS, Raises Significant Concerns Over Audited Financial...

Thomas J. Monaco

LIC Housing Finance – Doing The Right Thing

LIC HOUSING FINANCE: Although Results Were Weaker Linked Quarter, They Were Driven By Higher Credit Costs. This Was Unnecessary Given Credit...

Thomas J. Monaco

Housing Development Finance Corp. – “Great Quarter Guys”

HOUSING DEVELOPMENT FINANCE CORP: Positive Operating Jaws Were Just An Outgrowth Of This Well Oiled Machine. Credit Risk Too Substantially...

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

LIC Housing Finance - Positive Operating Deltas

*Solid Numbers For Now: LIC Housing Financing (LICHF.IN) [LIC] reported FY 1Q21 earnings results of INR 8.2 bn, improving INR 4.0 bn (94.0%) linked...

Thomas J. Monaco

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