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

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

Thematic (Sector/Industry)

*HFC Harmonization With NBFCs: The Reserve Bank of India (RBI) had initially published a draft proposal for changes in regulations for Housing Finance Companies (HFC) in June 2020, seeking commentary from stakeholders by July 15, 2020; and*Final Regulatory Changes: After stakeholder review, there is essentially one key change to the draft proposal mandating a higher 60% of total assets be “qualifying housing finance assets” and that a minimum of 50% of total assets be housing loans. The RBI has indicated that other differences between HFC and NBFC regulations will be eliminated over a period of two years.

*HFC Harmonization With NBFCs: The Reserve Bank of India (RBI) had initially published a draft proposal for changes in regulations for Housing Finance Companies (HFC) in June 2020, seeking commentary from stakeholders by July 15, 2020; and*Final Regulatory Changes: After stakeholder review, there is essentially one key change to the draft proposal mandating a higher 60% of total assets be “qualifying housing finance assets” and that a minimum of 50% of total assets be housing loans. The RBI has indicated that other differences between HFC and NBFC regulations will be eliminated over a period of two years.

Reserve Bank of India  - Final HFC Changes

India Financials

Saumya Agarwal

Bajaj Finance reported its Q2FY21 results today.  As a leading financer of consumer, rural, SME, commercial loans and mortgages in India, its Q2FY21 results reflected  the prevailing demand environment.

Bajaj Finance reported its Q2FY21 results today.  As a leading financer of consumer, rural, SME, commercial loans and mortgages in India, its Q2FY21 results reflected  the prevailing demand environment. 

Bajaj Finance Q2FY21 Result: Weighed Down by Tepid AUM Growth, Surplus Liquidity and High Provisions

Lakshmi Iyer, CFA

Credit

The key highlight of <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Holdings (IIFL IN)</a> 1Q FY ’21 result was the improvement in liquidity and the reduction in the percentage of its loans under moratorium. The company has also resumed lending in certain segments. We raise our recommendation to hold based on its performance as well as the fact that as the company’s bonds are trading in line with Asian single-B names.<div class="content-highlight">Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.</div>

The key highlight of IIFL Holdings (IIFL IN) 1Q FY ’21 result was the improvement in liquidity and the reduction in the percentage of its loans under moratorium. The company has also resumed lending in certain segments. We raise our recommendation to hold based on its performance as well as the fact that as the company’s bonds are trading in line with Asian single-B names.Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

IIFL Finance - Turned the Liquidity Corner

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

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

<a href="https://www.smartkarma.com/entities/bajaj-finance-ltd" target="_blank" data-smartkarma-citation="entities:8950:1" rel="noopener">Bajaj Finance (BAF IN)</a> reported its earnings this week. While Bajaj Finance remains a strong franchise in an industry with strong long-term secular growth prospects, we anticipate that the business faces significant headwinds and uncertainty in the near-term. We believe the valuations at current levels of 6x P/B are quite optimistic in the face of this uncertainty. COVID cases are on the rise in India and while the government is not imposing lockdowns, the general public or local authorities in most affected areas are proactively self-imposing restraints like partial lock-downs, affecting the demand environment adversely vs that projected by BAF's management and that reflected by BAF's current valuation. As a result, we are near-term bearish with the caveat that on a long-term basis, BAF remains an attractive investment opportunity. Overall, we advise investors to exit at current levels and re-enter later on at better entry points at a more opportune time.

Bajaj Finance (BAF IN) reported its earnings this week. While Bajaj Finance remains a strong franchise in an industry with strong long-term secular growth prospects, we anticipate that the business faces significant headwinds and uncertainty in the near-term. We believe the valuations at current levels of 6x P/B are quite optimistic in the face of this uncertainty. COVID cases are on the rise in India and while the government is not imposing lockdowns, the general public or local authorities in most affected areas are proactively self-imposing restraints like partial lock-downs, affecting the demand environment adversely vs that projected by BAF's management and that reflected by BAF's current valuation. As a result, we are near-term bearish with the caveat that on a long-term basis, BAF remains an attractive investment opportunity. Overall, we advise investors to exit at current levels and re-enter later on at better entry points at a more opportune time. 

Bajaj Finance: Limited Margin of Safety in Light of Near Term Headwinds

India

Bajaj Finance Limited is a financial services company that operates branches in India, which provide an assortment of financial services.

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Bajaj Finance Ltd (BAF IN)

Bajaj Finance – Removing The Lipstick

BAJAJ FINANCE: Results Would Suggest That Credit Portfolio Risk Has Significantly Deteriorated, and That Reserves Need Buttressing By Over Five...

Thomas J. Monaco

Reserve Bank of India - Final HFC Changes

RESERVE BANK OF INDIA - Final Housing Finance and Non-Bank Financial Company Rule Harmonization Regulations Now Set With Stricter Rules.

Thomas J. Monaco

Bajaj Finance Q2FY21 Result: Weighed Down by Tepid AUM Growth, Surplus Liquidity and High Provisions

Bajaj Finance reported its Q2FY21 results today. As a leading financer of consumer, rural, SME, commercial and mortgages in India, its Q2 results...

Saumya Agarwal

IIFL Finance - Turned the Liquidity Corner

The key highlight of IIFL Holdings (IIFL IN) 1Q FY ’21 result was the improvement in liquidity and the reduction in the percentage of its loans...

Lakshmi Iyer, CFA

Bajaj Finance: Limited Margin of Safety in Light of Near Term Headwinds

Bajaj Finance (BAF IN) reported its earnings this week. While Bajaj Finance remains a strong franchise in an industry with strong long-term secular...

Ankit Agrawal, CFA

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