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

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Equity Bottom-Up

Edelweiss Financial Services / Equity Bottom-Up

While Edelweiss has faced significant provisioning led losses over the past one and half years, we believe the worst is behind us now. Edelweiss had significantly cleaned up its book in Q4FY20 and in the most recent reported quarter i.e. Q4FY21, it further took significant provisioning to account for adverse impact of COVID second wave and any additional stress. Going forward, we expect Edelweiss' asset quality to improve largely assisted by significant clean-up in the past few quarters. Additionally, the residential real estate market seems to have bottomed out with liquidity coming back to the market and demand turning favorable post COVID. In line with our original thesis, Edelweiss has also significantly accelerated its shift towards fee based business model over the past couple of years. All in all, we expect significant re-rating in the stock over the next 1 to 2 years.

While Edelweiss has faced significant provisioning led losses over the past one and half years, we believe the worst is behind us now. Edelweiss had significantly cleaned up its book in Q4FY20 and in the most recent reported quarter i.e. Q4FY21, it further took significant provisioning to account for adverse impact of COVID second wave and any additional stress. Going forward, we expect Edelweiss' asset quality to improve largely assisted by significant clean-up in the past few quarters. Additionally, the residential real estate market seems to have bottomed out with liquidity coming back to the market and demand turning favorable post COVID. In line with our original thesis, Edelweiss has also significantly accelerated its shift towards fee based business model over the past couple of years. All in all, we expect significant re-rating in the stock over the next 1 to 2 years.

Alpha-Centric ESG Research

Kyle Rudden

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in <a href="https://www.smartkarma.com/insights/bitcoin-on-balance-sheets-indirect-crypto-exposure-considerations-for-crypto-leery-esg-investors" target="_blank" data-smartkarma-citation="insights:52207" rel="noopener">Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors</a>. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates <a href="https://www.smartkarma.com/entities/bitcoin-usd" target="_blank" data-smartkarma-citation="entities:25895:1" rel="noopener">Bitcoin (XBT)</a>'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates Bitcoin (XBT)'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

Thematic (Sector/Industry)

A couple of days ago, <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> announced a co-lending partnership with a peer HFC (Housing Finance Company), <a href="https://www.smartkarma.com/entities/housing-development-finance-corporation" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener">HDFC Limited (HDFC IN)</a>. IHFL's promoter and MD, Gagan Banga, mentioned that IHFL is reorienting its business model completely towards being an origination and servicing platform rather than being a full-fledged lender. This announcement by IHFL, one of the top five HFCs in India, suggests that co-lending is increasingly gaining traction within the NBFC/HFC industry.
A few days ago, we had highlighted how the upcoming EASE 4.0 program is also likely to promote co-lending by PSBs and how Edelweiss could be a beneficiary of this. For more details, please refer to this - <a href="https://www.smartkarma.com/insights/edelweiss-a-beneficiary-of-potentially-increased-adoption-of-co-lending-by-psbs" target="_blank" data-smartkarma-citation="insights:50237" rel="noopener">Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs</a>.

A couple of days ago, Indiabulls Housing Finance (IHFL IN) announced a co-lending partnership with a peer HFC (Housing Finance Company), HDFC Limited (HDFC IN). IHFL's promoter and MD, Gagan Banga, mentioned that IHFL is reorienting its business model completely towards being an origination and servicing platform rather than being a full-fledged lender. This announcement by IHFL, one of the top five HFCs in India, suggests that co-lending is increasingly gaining traction within the NBFC/HFC industry.
A few days ago, we had highlighted how the upcoming EASE 4.0 program is also likely to promote co-lending by PSBs and how Edelweiss could be a beneficiary of this. For more details, please refer to this - Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs.

Indian NBFCs: Co-Lending Seems to Be Gaining Traction - Indiabulls/HDFC New Partners in Town

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

<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> reported Q3FY21 earnings (PAT) of INR 117cr ex of Insurance business and BMU &amp; Corporate unit and pre minority interest. With recovery in the economy and in the residential real estate market, Edelweiss' credit business is turning around. The bad assets for the most part have been cleaned up and provided for. Wealth management, capital markets, ARC and asset management businesses continue to remain robust and provide strong fee-based income. Fee income has come back to pre-COVID levels at around INR 480cr per quarter. Insurance business is well funded to take losses for the next few years, as it scales up. BMU &amp; Corporate Unit (BMU: Balance Sheet Management Unit) was affected by negative carry from excess liquidity and one-off restructuring charges relating to consolidation at the holding company level into a Core Investment Company (CIC). Capital adequacy for Edelweiss remains robust at 23%+ levels across its credit businesses. Leverage at the group level is low at 3x and post the completion of the PAG deal, the balance sheet should only strengthen further.
Below we discuss key growth and profitability levers for Edelweiss going forward.

Edelweiss Financial Services (EDEL IN) reported Q3FY21 earnings (PAT) of INR 117cr ex of Insurance business and BMU &amp; Corporate unit and pre minority interest. With recovery in the economy and in the residential real estate market, Edelweiss' credit business is turning around. The bad assets for the most part have been cleaned up and provided for. Wealth management, capital markets, ARC and asset management businesses continue to remain robust and provide strong fee-based income. Fee income has come back to pre-COVID levels at around INR 480cr per quarter. Insurance business is well funded to take losses for the next few years, as it scales up. BMU &amp; Corporate Unit (BMU: Balance Sheet Management Unit) was affected by negative carry from excess liquidity and one-off restructuring charges relating to consolidation at the holding company level into a Core Investment Company (CIC). Capital adequacy for Edelweiss remains robust at 23%+ levels across its credit businesses. Leverage at the group level is low at 3x and post the completion of the PAG deal, the balance sheet should only strengthen further.
Below we discuss key growth and profitability levers for Edelweiss going forward.

Edelweiss: Very Well Capitalized and On the Path to Profitability and Growth

India

Edelweiss Financial Services Ltd. provides financial services.  The Company offers financial services including lines of credit, investment banking, institutional and retail broking, financial planning, asset advisory, life insurance, and investment management services.

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Edelweiss Financial Services (EDEL IN)

Edelweiss: The Worst Is Behind Us

We anticipate Edelweiss to report strong Q1FY22 earnings as most of the cleanup in the credit book is behind us. Edelweiss is well capitalized to...

Ankit Agrawal, CFA

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

Bitcoin holdings by issuers and investors is driving crypto custody demand. Big banks are stepping. A big opportunity, but some ESG investors might...

Kyle Rudden

Indian NBFCs: Co-Lending Seems to Be Gaining Traction - Indiabulls/HDFC New Partners in Town

Recent announcement by Indiabulls HF, a large HFC, to completely reorient its business model towards co-lending suggests that co-lending as a...

Ankit Agrawal, CFA

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

Edelweiss: Very Well Capitalized and On the Path to Profitability and Growth

Edelweiss has had depressed earnings in the past but is poised to benefit from many growth and profitability levers going forward. It is also very...

Ankit Agrawal, CFA

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