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

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

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap.

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap. 

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even 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 60 bn or just over two quarters of core operating results.

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even 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 60 bn or just over two quarters of core operating results.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

ICICI Bank – Lower Provision Despite Increasing Credit Risk

*Results Down, Credibility Continues To Increase: We applaud for LIC Housing Finance (LICHF.IN) [LIC] for having the fortitude to properly manage its balance sheet during this difficult pandemic period. Its now paying off with respect to credit quality, with credit leverage fully anticipated in FY 4Q21.  As for the actual bottom-line, LIC reported FY 3Q21 INR 721.1 crs - declining INR 68.6 crs (8.7%) linked quarter. We fully anticipate bottom-line improvement in FY 4Q21; and*Credit Continues To Mend:  We note that net new NPLs at LIC were negative again as well – declining INR 47.3 crs for an annualized rate of NPL decline of 3.2% (versus a decline of 4.0% in the previous quarter). Reserves are likely where they need to be unlike most other Indian financials who have massive shortfalls.

*Results Down, Credibility Continues To Increase: We applaud for LIC Housing Finance (LICHF.IN) [LIC] for having the fortitude to properly manage its balance sheet during this difficult pandemic period. Its now paying off with respect to credit quality, with credit leverage fully anticipated in FY 4Q21.  As for the actual bottom-line, LIC reported FY 3Q21 INR 721.1 crs - declining INR 68.6 crs (8.7%) linked quarter. We fully anticipate bottom-line improvement in FY 4Q21; and*Credit Continues To Mend:  We note that net new NPLs at LIC were negative again as well – declining INR 47.3 crs for an annualized rate of NPL decline of 3.2% (versus a decline of 4.0% in the previous quarter). Reserves are likely where they need to be unlike most other Indian financials who have massive shortfalls.

LIC Housing Finance – This Is How It Should Be Done

*Provision Unnecessarily Lowered: Bajaj Finance (BAF.IN) [Bajaj] posted FY 3Q21 results of INR 11.5 bn, improving INR 1.8 bn (18.8%) linked quarter.  FY 3Q21 results were driven primarily by an INR 4.0 bn (20.5%) drop in the loss provision, despite a 123.4% linked quarter increase in gross NPLs;  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 at 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. Bajaj has actually lowered its loss provision guidance to between INR 59.25-59.75 bn for FY 2021 versus INR 60-63 bn earlier.

*Provision Unnecessarily Lowered: Bajaj Finance (BAF.IN) [Bajaj] posted FY 3Q21 results of INR 11.5 bn, improving INR 1.8 bn (18.8%) linked quarter.  FY 3Q21 results were driven primarily by an INR 4.0 bn (20.5%) drop in the loss provision, despite a 123.4% linked quarter increase in gross NPLs;  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 at 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. Bajaj has actually lowered its loss provision guidance to between INR 59.25-59.75 bn for FY 2021 versus INR 60-63 bn earlier.

India

Muthoot Finance Ltd. is a gold financing company. The Company provides personal and business loans secured by gold jewellery, or Gold Loans primarily to individuals who possess gold jewelry but can't access formal credit lines.

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Muthoot Finance (MUTH IN)

State Bank of India – Bad Credit

STATE BANK OF INDIA: SBI reported FY 3Q21 result increase of 22.1%) linked quarter led by a completely unwarranted 58.1% decline in provisions and...

Thomas J. Monaco

HDFC – Credit Turn

HOUSING DEVELOPMENT FINANCE CORP: HDFC reported FY 3Q21 core results decline of 6.1%. Net new NPLs accelerated 32.5%, and reserves light by over...

Thomas J. Monaco

ICICI Bank – Lower Provision Despite Increasing Credit Risk

ICICI BANK: ICICI had a linked quarter FY 3Q21 poor quality earnings increase of 16.2%. Net new NPLs increased 43.7% on an annualized basis, and a...

Thomas J. Monaco

LIC Housing Finance – This Is How It Should Be Done

LIC HOUSING FINANCE: We applaud for LIC for properly managing its balance sheet. FY 3Q21 results declined 8.7% linked quarter but expect bottom...

Thomas J. Monaco

Bajaj Finance – Credit Disaster

BAJAJ FINANCE: BAF FY 3Q21 results increased 18.8% linked quarter, driven by a 20.5% drop in provisions despite a 123.4% increase in NPLs. We...

Thomas J. Monaco

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