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

*Another Abysmal Result: Bank of Baroda (BOB.IN) [BOB] reported FY 1Q22 results of INR 12.1 bn, improving from the loss of INR 10.5 bn in FY 4Q21. However, on an operating basis, we note that linked quarter results improved to INR 2.6 bn versus a loss of INR 1,4 bn in FY 4Q21; and *Poor Reserve Cover Worsens:  Net new NPLs accelerated to INR 25.7 bn or 15.4% annualized versus INR 13.5 bn or 11.2% annualized at FY 4Q21. By our calculation, however, BOB’s reserves still remain light by INR 300 bn or nearly six years of FY 1Q22 earnings.

*Another Abysmal Result: Bank of Baroda (BOB.IN) [BOB] reported FY 1Q22 results of INR 12.1 bn, improving from the loss of INR 10.5 bn in FY 4Q21. However, on an operating basis, we note that linked quarter results improved to INR 2.6 bn versus a loss of INR 1,4 bn in FY 4Q21; and *Poor Reserve Cover Worsens:  Net new NPLs accelerated to INR 25.7 bn or 15.4% annualized versus INR 13.5 bn or 11.2% annualized at FY 4Q21. By our calculation, however, BOB’s reserves still remain light by INR 300 bn or nearly six years of FY 1Q22 earnings.

*Poor 2Q21 Result: DBS Group Holdings (DBS.SP) [DBS] reported 2Q21 results of SGD 1.7 bn, decreasing SGD 304  mn (15.1%) on a linked quarter basis. The weaker results were driven primarily by an overall revenue decline, a loan provision increase, and a higher tax rate;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. By our calculation, and given the NCOs of SGD 69 mn, we find that net new NPLs have re-accelerated – up SGD 266 mn or increasing 18.0% annualized versus SGD 85 mn or 5.6% in 1Q21. We feel that reserves should be shored up in the neighborhood of SGD 2.5bn – amounting now to about two quarters of operating results; and *Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

*Poor 2Q21 Result: DBS Group Holdings (DBS.SP) [DBS] reported 2Q21 results of SGD 1.7 bn, decreasing SGD 304  mn (15.1%) on a linked quarter basis. The weaker results were driven primarily by an overall revenue decline, a loan provision increase, and a higher tax rate;*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. By our calculation, and given the NCOs of SGD 69 mn, we find that net new NPLs have re-accelerated – up SGD 266 mn or increasing 18.0% annualized versus SGD 85 mn or 5.6% in 1Q21. We feel that reserves should be shored up in the neighborhood of SGD 2.5bn – amounting now to about two quarters of operating results; and *Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup's (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

*Credibility Gap Widens: LIC Housing Finance (LICHF.IN) [LIC] reported FY 1Q22 bottom-line results of INR 1.5 bn, declining INR 2.5 bn (61.5%) linked quarter. Negative operating jaws, were the culprit, as costs increased INR 469 mn (21.1%) whilst revenues declined INR 2.6 bn (16.7%); and*Very Negative Credit Delta: Despite the limited NCOs, net new NPLs at LIC still skyrocketed INR 44.7 bn or 190.3% on an annualized basis linked quarter significantly accelerating from a very high INR 12.6 bn (62.0%) during FY 4Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 158 bn to the reserve – which amounts to 78% of stated equity at just 50% cover of NPLs.

*Credibility Gap Widens: LIC Housing Finance (LICHF.IN) [LIC] reported FY 1Q22 bottom-line results of INR 1.5 bn, declining INR 2.5 bn (61.5%) linked quarter. Negative operating jaws, were the culprit, as costs increased INR 469 mn (21.1%) whilst revenues declined INR 2.6 bn (16.7%); and*Very Negative Credit Delta: Despite the limited NCOs, net new NPLs at LIC still skyrocketed INR 44.7 bn or 190.3% on an annualized basis linked quarter significantly accelerating from a very high INR 12.6 bn (62.0%) during FY 4Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 158 bn to the reserve – which amounts to 78% of stated equity at just 50% cover of NPLs.

LIC Housing Finance – Unmitigated Disaster

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released another disappointing set of results, as its FY 1Q22 bottom-line result declined another INR 4.6 bn (5.6%) to INR 77.3 bn on a linked quarter basis. The earnings disappointment came from a net interest income decline, a loss provision increase, and fee revenue weakness; and*Credit Challenged Still: We calculate that net new NPLs actually increased a whopping INR 57.6 bn or 152.8% on an annualized basis – accelerating from the INR 49.2 bn or 130.4% increase posted in FY 4Q20. By our calculation, reserves are massively short by nearly INR 316 bn or nearly an entire year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released another disappointing set of results, as its FY 1Q22 bottom-line result declined another INR 4.6 bn (5.6%) to INR 77.3 bn on a linked quarter basis. The earnings disappointment came from a net interest income decline, a loss provision increase, and fee revenue weakness; and*Credit Challenged Still: We calculate that net new NPLs actually increased a whopping INR 57.6 bn or 152.8% on an annualized basis – accelerating from the INR 49.2 bn or 130.4% increase posted in FY 4Q20. By our calculation, reserves are massively short by nearly INR 316 bn or nearly an entire year of core operating results. 

HDFC Bank – Is This Really India’s Best Bank?

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

Federal Bank – Capital Preservation Mode

India

Punjab National Bank provides financial services such as corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. The Company provides services to domestic conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies.

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Punjab National Bank (PNB IN)

Bank of Baroda – More Capital Please

BANK OF BARODA: BOB reported FY 1Q22 operating results of INR 2.6 bn versus a loss of INR 1.4 bn in FY 4Q21. Net new NPLs accelerated to 15.4%...

Thomas J. Monaco

DBS Group Holdings – Bad Print

DBS: DBS QOQ 2Q21 results declined 15.1% due to poor revenues and higher provisions. We worry that DBS has not caught the LVB risk, net new NPLs re...

Thomas J. Monaco

LIC Housing Finance – Unmitigated Disaster

LIC HOUSING: LIC's FY 1Q22 bottom-line results declined 61.5% linked quarter due to negative operating jaws. Net new NPLs skyrocketed 190.3%...

Thomas J. Monaco

HDFC Bank – Is This Really India’s Best Bank?

HDFC Bank: HDFCB QOQ results declined 5.6% due to a net interest income and fee revenue along with a loss provision increase. Reserves appear...

Thomas J. Monaco

Federal Bank – Capital Preservation Mode

FEDERAL BANK: Federal recently highlighted FY 1Q22 growth metrics in lending and deposits – both of which are contracting. In our view, it appears...

Thomas J. Monaco

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