Silver Point

Thomas J. Monaco

Independent Insight Provider

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

Indiabulls Housing Finance / Equity Bottom-Up

*Quality Quarter: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 3Q21 results of INR 5.5 bn, increasing INR 2.3 bn (70.7%) linked quarter. Much of the linked quarter improvement can be attributed to net interest income growth resultant of strong loan growth and NIM improvement. Other reasons for the outperformance included both an increase in loan assignment income; adecline in loss provisions; and a decrease in its tax rate; and  *Credit Improving: While the stated NPL figure was higher, we note that due the recovery of INR 3.4 bn that net new NPLs had actually declined INR 572 mn for the quarter for an annualized rate of decline of 11.3% - which is in complete contravention to the Indian financial sector to date. Reserves would appear in-line with risk on and off balance for IndiaBulls – a welcome contradiction to the awful reserve cover at nearly every other Indian financial institution.

*Quality Quarter: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 3Q21 results of INR 5.5 bn, increasing INR 2.3 bn (70.7%) linked quarter. Much of the linked quarter improvement can be attributed to net interest income growth resultant of strong loan growth and NIM improvement. Other reasons for the outperformance included both an increase in loan assignment income; adecline in loss provisions; and a decrease in its tax rate; and  *Credit Improving: While the stated NPL figure was higher, we note that due the recovery of INR 3.4 bn that net new NPLs had actually declined INR 572 mn for the quarter for an annualized rate of decline of 11.3% - which is in complete contravention to the Indian financial sector to date. Reserves would appear in-line with risk on and off balance for IndiaBulls – a welcome contradiction to the awful reserve cover at nearly every other Indian financial institution. 

IndiaBulls Housing Finance – Sunny Disposition

*Positive Operating Jaws Return: Muthoot Finance (MUTH.IN) [Muthoot] reported FY 3Q21 bottom-line results of INR 9.8 bn, increasing INR 716 mn (7.8%) linked quarter. Results were even better when we exclude gains on the gold mark-up, as Muthoot’s core operating result improved INR 969 mn or 11.3%. Results were driven by positive operating jaws, despite the INR 478 mn or 469% linked quarter increase loss provisions which tracked the break in credit; and*Gold Pricing Could Impact Credit: While robustness gold prices augur well for Muthoot, we are concerned about a reversal in gold pricing which could hinder loan growth and credit quality. We note that net new NPLs amounted to INR 661mn during the quarter, which intimates that the annualized growth rate for Stage 3 loans remains elevated at 44.7% - in line with most of the Indian financial sector. While we agree that the backing of the gold loans has likely amongst the strongest collateral, losses will mount during this international risk-on period or when gold prices reverse. It is for these reasons that we believe reserve cover has fallen short to the tune of INR 2.8 bn – about 25% of FY 3Q21 PBT which isn’t bad relatively speaking.

*Positive Operating Jaws Return: Muthoot Finance (MUTH.IN) [Muthoot] reported FY 3Q21 bottom-line results of INR 9.8 bn, increasing INR 716 mn (7.8%) linked quarter. Results were even better when we exclude gains on the gold mark-up, as Muthoot’s core operating result improved INR 969 mn or 11.3%. Results were driven by positive operating jaws, despite the INR 478 mn or 469% linked quarter increase loss provisions which tracked the break in credit; and*Gold Pricing Could Impact Credit: While robustness gold prices augur well for Muthoot, we are concerned about a reversal in gold pricing which could hinder loan growth and credit quality. We note that net new NPLs amounted to INR 661mn during the quarter, which intimates that the annualized growth rate for Stage 3 loans remains elevated at 44.7% - in line with most of the Indian financial sector. While we agree that the backing of the gold loans has likely amongst the strongest collateral, losses will mount during this international risk-on period or when gold prices reverse. It is for these reasons that we believe reserve cover has fallen short to the tune of INR 2.8 bn – about 25% of FY 3Q21 PBT which isn’t bad relatively speaking.  

Specialist in Indian Banking and Economic Research

Hemindra Hazari

In a significant event, Deepak Parekh, the non-executive chairman of <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>, agreed to <a href="https://www.sebi.gov.in/enforcement/orders/feb-2021/summary-settlement-order-in-respect-of-mr-deepak-parekh-the-matter-of-non-compliance-with-the-erstwhile-listing-agreement_49028.html" target="_blank" rel="noopener">settle</a> with the Securities and Exchange Board of India (SEBI) in connection with the latter’s investigation of non-compliance with the erstwhile Listing Agreement.  Parekh settled the issue by paying Rs 937,500 (US$ 12,727) to SEBI “without admitting or denying the findings of fact and conclusions of law…” As per SEBI’s settlement order, the capital market regulator had conducted an investigation into an inter-corporate deposit (ICD) of Rs 7.5 bn extended by HDFC to Gliders Buildcon Realtors, a group company of Piramal Realty, in FY2012. Sometime in FY2015, at the request of Gliders Buildcon, HDFC converted the ICD into a term loan. Parekh was chairman of HDFC, and was on the committee which approved the loan. At the same time, he also belonged to the Advisory Board of the Piramal Group, including Piramal Realty, for which he received advisory fees for the calendar years 2011 to 2015 and for the FY2017 and FY2018. The order stated, “HDFC has adopted a Code of Conduct for all its Directors and Senior Management Personnel in terms of Clause 49 (I) (D) of the erstwhile listing agreement. However, the applicant failed to comply with the Code of Conduct of HDFC Ltd., resulting in the violation of Clause 49 (I) (D) (ii) of the erstwhile listing agreement.”What is surprising is that an individual of Parekh’s stature and experience, in a company which is a favourite of foreign investors and professes to maintain high standards of corporate governance and transparency, could have committed such a violation. Normally, board directors disclose their interests and recuse themselves from discussions where there may be even perceived conflicts of interest. In this particular case, Parekh was on the HDFC committee which approved the conversion of an ICD into a term loan for Gliders Buildcon, while also accepting advisory fees from the Piramal group. SEBI’s settlement order throws a spotlight on Parekh’s advisory role to companies (especially in real estate), from which he earns fees, while simultaneously being on the important loan committee of HDFC, which extends loans to corporates, many of whom are engaged in real estate. It is also disheartening that HDFC has neither publicly clarified this issue nor provided any explanation for the conduct of their non-executive chairman.The business media, apart from summarising the SEBI settlement order, has completely ignored the event, by neither analysing the implications nor providing additional information. Given the iconic stature of Parekh in India’s financial system and the prominence of HDFC, one expected the media and the sell-side to further investigate and comment on this important development. Sadly, the state of business journalism and sell-side research is such that when it comes to prominent companies and iconic business leaders, critical reporting and analysis are eschewed. The critical issue before HDFC from a corporate governance perspective is how the board of directors will view the payment by its chairman in settlement of an investigation by the capital markets regulator. Although the settlement order clearly states that the monetary payment does not imply admission of guilt or wrong doing, HDFC’s <a href="https://www.hdfc.com/allpolicies/Policy_on_Fit_and_Proper_Criteria_HDFC.pdf" target="_blank" rel="noopener">Fit and Proper Criteria</a>  for its directors, has a section on whether its directors “have come to the adverse notice of regulators such as SEBI…” As HDFC accepts deposits from the public, has a foreign shareholding of 72% and is the parent of prominent companies in the financial system such as <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a>, <a href="https://www.smartkarma.com/entities/hdfc-asset-management-co-ltd" target="_blank" data-smartkarma-citation="entities:27027:1" rel="noopener">HDFC Asset Management Co Ltd (HDFCAMC IN)</a>, <a href="https://www.smartkarma.com/entities/hdfc-standard-life-insurance" target="_blank" data-smartkarma-citation="entities:26004:1" rel="noopener">HDFC Standard Life Insurance (HDFCLIFE IN)</a> and HDFC Ergo General Insurance, the conduct of its board directors, and especially its chairman, must be pristine. The role of HDFC’s independent directors and its Nominations and Remuneration Committee (NRC) in responding to Parekh’s payment settlement with SEBI and his eligibility to continue as a director will be closely watched by the capital market, and it may also set an example of how boards should respond when faced with such a situation. It is worth recalling that, even though there was no conclusive evidence of his wife’s wrongdoing, Caesar declared that “Caesar’s wife must be above suspicion”, and divorced her.

In a significant event, Deepak Parekh, the non-executive chairman of HDFC Limited (HDFC IN), agreed to settle with the Securities and Exchange Board of India (SEBI) in connection with the latter’s investigation of non-compliance with the erstwhile Listing Agreement.  Parekh settled the issue by paying Rs 937,500 (US$ 12,727) to SEBI “without admitting or denying the findings of fact and conclusions of law…” As per SEBI’s settlement order, the capital market regulator had conducted an investigation into an inter-corporate deposit (ICD) of Rs 7.5 bn extended by HDFC to Gliders Buildcon Realtors, a group company of Piramal Realty, in FY2012. Sometime in FY2015, at the request of Gliders Buildcon, HDFC converted the ICD into a term loan. Parekh was chairman of HDFC, and was on the committee which approved the loan. At the same time, he also belonged to the Advisory Board of the Piramal Group, including Piramal Realty, for which he received advisory fees for the calendar years 2011 to 2015 and for the FY2017 and FY2018. The order stated, “HDFC has adopted a Code of Conduct for all its Directors and Senior Management Personnel in terms of Clause 49 (I) (D) of the erstwhile listing agreement. However, the applicant failed to comply with the Code of Conduct of HDFC Ltd., resulting in the violation of Clause 49 (I) (D) (ii) of the erstwhile listing agreement.”What is surprising is that an individual of Parekh’s stature and experience, in a company which is a favourite of foreign investors and professes to maintain high standards of corporate governance and transparency, could have committed such a violation. Normally, board directors disclose their interests and recuse themselves from discussions where there may be even perceived conflicts of interest. In this particular case, Parekh was on the HDFC committee which approved the conversion of an ICD into a term loan for Gliders Buildcon, while also accepting advisory fees from the Piramal group. SEBI’s settlement order throws a spotlight on Parekh’s advisory role to companies (especially in real estate), from which he earns fees, while simultaneously being on the important loan committee of HDFC, which extends loans to corporates, many of whom are engaged in real estate. It is also disheartening that HDFC has neither publicly clarified this issue nor provided any explanation for the conduct of their non-executive chairman.The business media, apart from summarising the SEBI settlement order, has completely ignored the event, by neither analysing the implications nor providing additional information. Given the iconic stature of Parekh in India’s financial system and the prominence of HDFC, one expected the media and the sell-side to further investigate and comment on this important development. Sadly, the state of business journalism and sell-side research is such that when it comes to prominent companies and iconic business leaders, critical reporting and analysis are eschewed. The critical issue before HDFC from a corporate governance perspective is how the board of directors will view the payment by its chairman in settlement of an investigation by the capital markets regulator. Although the settlement order clearly states that the monetary payment does not imply admission of guilt or wrong doing, HDFC’s Fit and Proper Criteria  for its directors, has a section on whether its directors “have come to the adverse notice of regulators such as SEBI…” As HDFC accepts deposits from the public, has a foreign shareholding of 72% and is the parent of prominent companies in the financial system such as HDFC Bank (HDFCB IN), HDFC Asset Management Co Ltd (HDFCAMC IN), HDFC Standard Life Insurance (HDFCLIFE IN) and HDFC Ergo General Insurance, the conduct of its board directors, and especially its chairman, must be pristine. The role of HDFC’s independent directors and its Nominations and Remuneration Committee (NRC) in responding to Parekh’s payment settlement with SEBI and his eligibility to continue as a director will be closely watched by the capital market, and it may also set an example of how boards should respond when faced with such a situation. It is worth recalling that, even though there was no conclusive evidence of his wife’s wrongdoing, Caesar declared that “Caesar’s wife must be above suspicion”, and divorced her. 

The Significance of Caesar’s Wife for the HDFC Board

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune 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.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking.

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune 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.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking. 

DBS Group Holdings – COVID & India Not A Good Combo

* It Just Keeps Getting Worse: Punjab National Bank (PNB.IN) [PNB] reported net income of INR 5.1 bn, declining INR 1.1 bn (18.5%) linked quarter. Three factors drove the poor result: a) net interest income declined INR 627 mn (0.8%) despite loan growth of 1.2%, as the NIM declined 9 bp to 2.93%; b) a loss provision increase of INR 5.8 bn (14.0%). Despite the increase, provisioins still fell short given the acerating level of credit risk; and c) a 10.6% linked quarter increase in PNB’s tax rate to 47.2%, which detracted INR 1.0 bn from the bottom-line; and*Credit Risk Leads to Capital Shortfall: Inclusive of the INR 9.6 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 82.6 bn or 33.3% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that at a minimum loss reserves are light by at least INR 730 mn  - or approximately 100% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions to be complete in FY 1H21.

* It Just Keeps Getting Worse: Punjab National Bank (PNB.IN) [PNB] reported net income of INR 5.1 bn, declining INR 1.1 bn (18.5%) linked quarter. Three factors drove the poor result: a) net interest income declined INR 627 mn (0.8%) despite loan growth of 1.2%, as the NIM declined 9 bp to 2.93%; b) a loss provision increase of INR 5.8 bn (14.0%). Despite the increase, provisioins still fell short given the acerating level of credit risk; and c) a 10.6% linked quarter increase in PNB’s tax rate to 47.2%, which detracted INR 1.0 bn from the bottom-line; and*Credit Risk Leads to Capital Shortfall: Inclusive of the INR 9.6 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 82.6 bn or 33.3% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that at a minimum loss reserves are light by at least INR 730 mn  - or approximately 100% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions to be complete in FY 1H21.  

India

Housing Development Finance Corporation Ltd. HDFC provides housing finance company. The Company provides wide range of housing loans, loan for home improvement, extensions, top ups, and non housing loans and loans for non resident Indian (NRI). HDFC serves customers in India, kuwait, Singapore, Oman, UAE, and the United Kingdom.

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HDFC Limited (HDFC IN)

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The Significance of Caesar’s Wife for the HDFC Board

The role of HDFC’s independent directors in responding to Deepak Parekh’s payment settlement with SEBI and his eligibility to continue as a...

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Punjab National Bank – Match Is Lit

PUNJAB NATIONAL BANK: PNB reported a net income decline of 18.5% linked quarter. Despite the increase, provisions still fell short to the tune of...

Thomas J. Monaco

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