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 Unwarranted Provision Reduction: Federal Bank’s (FB.IN) results were likely managed, as it posted FY 4Q21 bottom-line result of INR 4.8 bn – improving INR 737 mn (18.2%) linked quarter. One factor, which was simply ridiculous, given the state of Federal Bank’s balance sheet, drove the improvement – aggressively cutting loss provisions again; and*Reserve Cover Is Shallow: Net new problem loans increased INR 8.4 bn or 78.4% on an annualized basis – dangerously accelerating over FY 3Q21. We remain discouraged that management hasn’t taken the opportunity to more aggressively address the risk sitting pon balance sheet. In fact, we find that reserve cover is increasingly light by close to INR 84.5 bn (versus being short INR 50.0 bn just a quarter ago) – nearly 20 years of core operating performance.

*Another Unwarranted Provision Reduction: Federal Bank’s (FB.IN) results were likely managed, as it posted FY 4Q21 bottom-line result of INR 4.8 bn – improving INR 737 mn (18.2%) linked quarter. One factor, which was simply ridiculous, given the state of Federal Bank’s balance sheet, drove the improvement – aggressively cutting loss provisions again; and*Reserve Cover Is Shallow: Net new problem loans increased INR 8.4 bn or 78.4% on an annualized basis – dangerously accelerating over FY 3Q21. We remain discouraged that management hasn’t taken the opportunity to more aggressively address the risk sitting pon balance sheet. In fact, we find that reserve cover is increasingly light by close to INR 84.5 bn (versus being short INR 50.0 bn just a quarter ago) – nearly 20 years of core operating performance.    

Federal Bank – A Five Year Hole Has Developed

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.   

Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Edelweiss Financial Services / Equity Bottom-Up

We have highlighted across our prior insights that <a href="https://www.smartkarma.com/entities/edelweiss-financial-services-ltd" target="_blank" data-smartkarma-citation="entities:15015:1" rel="noopener">Edelweiss Financial Services (EDEL IN)</a> is shifting its credit business towards a co-lending model as part of its broader shift to a fee based business model from a fund based business model.
In the upcoming reform agenda for PSBs under EASE 4.0 program, there is likely to be a push towards co-lending as per <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/psbs-to-push-co-lending-with-nbfcs-digital-agri-financing/articleshow/82021101.cms" target="_blank" rel="noopener">media sources</a>. Edelweiss, who has already partnered with various government-owned banks (public-sector banks or PSBs), is well-positioned to benefit from this.

We have highlighted across our prior insights that Edelweiss Financial Services (EDEL IN) is shifting its credit business towards a co-lending model as part of its broader shift to a fee based business model from a fund based business model.
In the upcoming reform agenda for PSBs under EASE 4.0 program, there is likely to be a push towards co-lending as per media sources. Edelweiss, who has already partnered with various government-owned banks (public-sector banks or PSBs), is well-positioned to benefit from this.

Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs

Thematic (Sector/Industry)

*Cutting Your Nose To Spite Your Face: Despite the favorable Reserve Bank of India (RBI) ruling and the clarity that it may bring to bank classification of NPLs and interest charges, the fact is that Indian financial sector credit quality remains amongst the worst in Asia and globally. In fact, we would go as far to state that the breakdown in net new NPLs remains by far the worst in the world at well over 100% annualized growth at FY 3Q21. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those woes to the woodpile of Indian NPLs; and*Killing Me Softly: Following the Supreme Court decision on extending the compound interest relief to loansin excess of INR 20 mn and lifting of standstill on NPL classifications, the RBI has added insult to injury by notifying lenders that they will bear the impact of the compound interest waiver, without any visibility on whether or not this waiver will be reimbursed by or shared with the government. Non-bank Financial Companies (NBFC) have large borrowing from banks and could – as a result of the RBI’s utter incompetence – become net beneficiaries of this new guideline.

*Cutting Your Nose To Spite Your Face: Despite the favorable Reserve Bank of India (RBI) ruling and the clarity that it may bring to bank classification of NPLs and interest charges, the fact is that Indian financial sector credit quality remains amongst the worst in Asia and globally. In fact, we would go as far to state that the breakdown in net new NPLs remains by far the worst in the world at well over 100% annualized growth at FY 3Q21. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those woes to the woodpile of Indian NPLs; and*Killing Me Softly: Following the Supreme Court decision on extending the compound interest relief to loansin excess of INR 20 mn and lifting of standstill on NPL classifications, the RBI has added insult to injury by notifying lenders that they will bear the impact of the compound interest waiver, without any visibility on whether or not this waiver will be reimbursed by or shared with the government. Non-bank Financial Companies (NBFC) have large borrowing from banks and could – as a result of the RBI’s utter incompetence – become net beneficiaries of this new guideline.

Reserve Bank of India – Thanks For Nothing

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)

Federal Bank – A Five Year Hole Has Developed

FEDERAL BANK: FB's FY 4Q21 bottom-line QOQ result improved 18.2% due to an unwarranted provision cut. Net new NPLs accelerated 78.4% QOQ, while ...

Thomas J. Monaco

ICICI Bank – Much Better

ICICI BANK: ICICI reported a 6.5% linked quarter improvement in FY 4Q21 operating results. Credit weakness is still there, but the breakdown in net...

Thomas J. Monaco

HDFC Bank – Big Credit Disappointment

HDFC BANK: HDFCB released a disappointing FY 4Q21 bottom-line, declining 6.5% QOQ, due higher provisions and costs. Net new NPLs increased 130.4%...

Thomas J. Monaco

Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs

In the upcoming reform agenda for PSBs, there is likely to be a push towards co-lending. Edelweiss, who has already partnered with PSBs and is...

Ankit Agrawal, CFA

Reserve Bank of India – Thanks For Nothing

RESERVE BANK OF INDIA: Following the Supreme Court decision, the RBI has added insult to injury by telling the banks to bear the impact of the...

Thomas J. Monaco

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