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

*Provision Unnecessarily Lowered: Bajaj Finance (BAF.IN) [Bajaj] posted FY 3Q21 results of INR 11.5 bn, improving INR 1.8 bn (18.8%) linked quarter.  FY 3Q21 results were driven primarily by an INR 4.0 bn (20.5%) drop in the loss provision, despite a 123.4% linked quarter increase in gross NPLs;  and*Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn at FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x  - representing nearly three years of PBT and over 50% of shareholder’s equity. Bajaj has actually lowered its loss provision guidance to between INR 59.25-59.75 bn for FY 2021 versus INR 60-63 bn earlier.

*Provision Unnecessarily Lowered: Bajaj Finance (BAF.IN) [Bajaj] posted FY 3Q21 results of INR 11.5 bn, improving INR 1.8 bn (18.8%) linked quarter.  FY 3Q21 results were driven primarily by an INR 4.0 bn (20.5%) drop in the loss provision, despite a 123.4% linked quarter increase in gross NPLs;  and*Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn at FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x  - representing nearly three years of PBT and over 50% of shareholder’s equity. Bajaj has actually lowered its loss provision guidance to between INR 59.25-59.75 bn for FY 2021 versus INR 60-63 bn earlier.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has <a href="https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1101" target="_blank" rel="noopener">proposed</a>, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (<a href="https://hemindrahazari.com/2019/01/31/ilfs-collapse-what-happens-when-infrastructure-development-is-privatised-hemindra-hazari/" target="_blank" rel="noopener">here</a>) and <a href="https://www.smartkarma.com/entities/dewan-housing-finance-corp" target="_blank" data-smartkarma-citation="entities:8142:1" rel="noopener">Dewan Housing Finance (DEWH IN)</a> (<a href="https://hemindrahazari.com/2019/01/29/panel-discussion-on-cobrapost-expose-of-dhfl/" target="_blank" rel="noopener">here</a>) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has proposed, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (here) and Dewan Housing Finance (DEWH IN) (here) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Indian Accounting Research Analyst, Trudence Capital Advisors

Nitin Mangal

Indian Accounting Research Analyst

The controversies created by hate speeches have not only ignited the political angle but have also gradually started to influence the corporate strategic decision making. Various Indian giant corporates have started to boycott news channels that play a hand in spreading toxicity, abuse, fake news,and hate speeches. This is a very strong indication that ESG investing is gaining traction in the country and the companies eventually are becoming quite sensitive to these matters.

The controversies created by hate speeches have not only ignited the political angle but have also gradually started to influence the corporate strategic decision making. Various Indian giant corporates have started to boycott news channels that play a hand in spreading toxicity, abuse, fake news,and hate speeches. This is a very strong indication that ESG investing is gaining traction in the country and the companies eventually are becoming quite sensitive to these matters.

Boycotting Hate Speeches: Will It Find Its Way into ESG Investing?

*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.

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Asia Index Pvt. Ltd. has announced the changes to the S&amp;P BSE Sensex for the upcoming review. The rebalance will be effective 22 June 2020 and passive funds will need to trade at the close (VWAP over the last 30 minutes of trading) on 19 June 2020.As we expected, <a href="https://www.smartkarma.com/entities/hero-motocorp-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2391:1">Hero Motocorp (HMCL IN)</a> has been excluded and <a href="https://www.smartkarma.com/entities/bajaj-finserv-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5669:1">Bajaj Finserv (BJFIN IN)</a> has been included in the Sensex.There has been a wide divergence in the performance of the stocks over the last few months and this is best traded against peers from the same sector.We take a look at the impact of the change, the recent performance of the stocks and recommend a couple of trades.

Asia Index Pvt. Ltd. has announced the changes to the S&amp;P BSE Sensex for the upcoming review. The rebalance will be effective 22 June 2020 and passive funds will need to trade at the close (VWAP over the last 30 minutes of trading) on 19 June 2020.As we expected, Hero Motocorp (HMCL IN) has been excluded and Bajaj Finserv (BJFIN IN) has been included in the Sensex.There has been a wide divergence in the performance of the stocks over the last few months and this is best traded against peers from the same sector.We take a look at the impact of the change, the recent performance of the stocks and recommend a couple of trades.

Sensex Index Review - Bajaj Finserv In, Hero MotoCorp Out

India

Bajaj Finserv Ltd. is currently engaged in life insurance; general insurance and consumer finance businesses and has plans to expand its business by offering a wide array of financial products and services in India. The Company is also active in wind-energy generation.

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Bajaj Finserv (BJFIN IN)

Bajaj Finance – Credit Disaster

BAJAJ FINANCE: BAF FY 3Q21 results increased 18.8% linked quarter, driven by a 20.5% drop in provisions despite a 123.4% increase in NPLs. We...

Thomas J. Monaco

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Instead of forcible conversion to banks the RBI should ensure that it improves the regulation of important NBFCs so as to ensure that these...

Hemindra Hazari

Boycotting Hate Speeches: Will It Find Its Way into ESG Investing?

In this insight, we are highlighting how the boycott of toxic channels can find its way in ESG investing and act as a catalyst in shifting...

Nitin Mangal

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

Sensex Index Review - Bajaj Finserv In, Hero MotoCorp Out

Asia Index Pvt. Ltd. has announced the changes to the S&P BSE Sensex for the upcoming review. The rebalance will be effective 22 June 2020 and...

Brian Freitas

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