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

*Bottom-line Overstated And Of Poor Quality: State Bank of India (SBIN.IN) [SBI] reported FY 4Q21 results of INR 61.3 bn, declining INR 0.5 bn (0.8%) linked quarter. Despite the loss provision increase of INR 7.2 bn (6.7%); this is not nearly enough given the continued credit stress. SBI’s fee revenues grew INR 61.6 bn (10.5%) linked quarter, likely attributed to non-core gains which should not be repeatable going forward; and*Reserve Challenge Should Lead To Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap.

*Bottom-line Overstated And Of Poor Quality: State Bank of India (SBIN.IN) [SBI] reported FY 4Q21 results of INR 61.3 bn, declining INR 0.5 bn (0.8%) linked quarter. Despite the loss provision increase of INR 7.2 bn (6.7%); this is not nearly enough given the continued credit stress. SBI’s fee revenues grew INR 61.6 bn (10.5%) linked quarter, likely attributed to non-core gains which should not be repeatable going forward; and*Reserve Challenge Should Lead To Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – No Let Up On Credit

Indiabulls Housing Finance / Equity Bottom-Up

*Bad News On The Doorstep: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 4Q21 results of INR 2.8 bn, declining INR 531 mn (16.1%) linked quarter. The linked quarter weakness can be attributed to both: a) net interest income decline of INR 804 mn (10.5%) tracking a decline in both loans of 6.8% and NIM compression of 59 bp to 2.94%; and b) loss provision increase of INR 1.7 bn (120.9%); and   *Wrong Turn: Net new NPLs had increased INR 8.0 bn for the quarter for an annualized rate of increase of 159.3% - a complete about face from FY 3Q21’s decline of 11.3%. Reserves ae now frighteningly low, and we would suggest INR 30.2 bn or 9x stated PBT.

*Bad News On The Doorstep: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 4Q21 results of INR 2.8 bn, declining INR 531 mn (16.1%) linked quarter. The linked quarter weakness can be attributed to both: a) net interest income decline of INR 804 mn (10.5%) tracking a decline in both loans of 6.8% and NIM compression of 59 bp to 2.94%; and b) loss provision increase of INR 1.7 bn (120.9%); and   *Wrong Turn: Net new NPLs had increased INR 8.0 bn for the quarter for an annualized rate of increase of 159.3% - a complete about face from FY 3Q21’s decline of 11.3%. Reserves ae now frighteningly low, and we would suggest INR 30.2 bn or 9x stated PBT. 

IndiaBulls Housing Finance – A Turn For The Worse

*Results Highly Reliant On Gains: Canara Bank (CBK.IN) [Canara] reported bottom-line results of INR 10.1 bn for FY 4Q21, improving INR 6.0 bn (85.5%) linked quarter. Results were driven one factor alone: am INR 9.3 bn (21.8%) increase in various sundry gains - securities, F/X, et al. As awe calculate, these various low quality items and gains amounted to INR 48.9 bn during FY 4Q21 or nearly 5x Canara’s stated bottom-line result; and  * Credit Leads To Solvency Concerns: Given the INR 27.3 bn in NCO, we calculate that annualized net new NPLs amount to 21.7%. We remain highly concerned about Canara’s credit outlook, given the concentrations of SMA loans, ‘BBB’ and below corporate, and MSME loans; and poor collection efficiency.  By our calculation, Canara’s loan loss reserve falls short by INR 674.0 bn or by 180.2% - representing 115% of Canara’s equity base and implying a lack of solvency.

*Results Highly Reliant On Gains: Canara Bank (CBK.IN) [Canara] reported bottom-line results of INR 10.1 bn for FY 4Q21, improving INR 6.0 bn (85.5%) linked quarter. Results were driven one factor alone: am INR 9.3 bn (21.8%) increase in various sundry gains - securities, F/X, et al. As awe calculate, these various low quality items and gains amounted to INR 48.9 bn during FY 4Q21 or nearly 5x Canara’s stated bottom-line result; and  * Credit Leads To Solvency Concerns: Given the INR 27.3 bn in NCO, we calculate that annualized net new NPLs amount to 21.7%. We remain highly concerned about Canara’s credit outlook, given the concentrations of SMA loans, ‘BBB’ and below corporate, and MSME loans; and poor collection efficiency.  By our calculation, Canara’s loan loss reserve falls short by INR 674.0 bn or by 180.2% - representing 115% of Canara’s equity base and implying a lack of solvency.

Canara Bank – India’s Trash Compactor

*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

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary:  A flattening US interest rate yield curve changed the dynamics for credit investors for most of the month of April, in complete contrast to how interest rates behaved in March. The narrative changed to one that was Treasury bond supportive, and this supported shorter-duration securities. Meanwhile yield curve flattening pushed credit spreads in the opposite direction longer out the curve.The sweet spot for total return investors moved dramatically. Investors that were positioned in higher duration bonds witnessed underperformance on a total return basis. Meanwhile, investors in lower duration bonds outperformed on a total return basis. However, as the month ended, we began to witness a return of the reflation trade with US interest rates ending the month on an upswing. May could see a repeat of March’s carry-trade performance.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had a mixed performance with one-third of the +100 bonds that we track widening during the month. Vaccine versus virus concerns led to lower economic growth projections by the market than seen in the prior month. Expectations for an unsynchronized global recovery also factored. Taken together, this would delay the much needed catch-up in credit fundamentals to match the monetary accommodation driven spread compression over the last year. As such, bond spread tightening was less ebullient while widening lessened the amount of fundamental performance needed to justify lofty spread levels.

Executive Summary:  A flattening US interest rate yield curve changed the dynamics for credit investors for most of the month of April, in complete contrast to how interest rates behaved in March. The narrative changed to one that was Treasury bond supportive, and this supported shorter-duration securities. Meanwhile yield curve flattening pushed credit spreads in the opposite direction longer out the curve.The sweet spot for total return investors moved dramatically. Investors that were positioned in higher duration bonds witnessed underperformance on a total return basis. Meanwhile, investors in lower duration bonds outperformed on a total return basis. However, as the month ended, we began to witness a return of the reflation trade with US interest rates ending the month on an upswing. May could see a repeat of March’s carry-trade performance.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had a mixed performance with one-third of the +100 bonds that we track widening during the month. Vaccine versus virus concerns led to lower economic growth projections by the market than seen in the prior month. Expectations for an unsynchronized global recovery also factored. Taken together, this would delay the much needed catch-up in credit fundamentals to match the monetary accommodation driven spread compression over the last year. As such, bond spread tightening was less ebullient while widening lessened the amount of fundamental performance needed to justify lofty spread levels.

Bank Credit Compass: Total Return Sweet Spot Moves, but May Rebound

India

Bank of India, through its subsidiaries, provides corporate, commercial, personal banking, retail, rural, and development banking.  The Group specializes its services towards corporate and medium businesses, in addition to upmarket retail customers.

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Bank Of India (BOI IN)

State Bank of India – No Let Up On Credit

STATE BANK OF INDIA: SBI reported a QOQ FY 4Q21 results decline of 0.8% - supported by gains. Net new NPLs accelerated to 65.9% from 41.6%. SBI...

Thomas J. Monaco

IndiaBulls Housing Finance – A Turn For The Worse

INDIABULLS HOUSING FINANCE: IndiaBulls reported a QOQ FY 4Q21 results decline of 16.1% due to a net interest income decline and loss provision...

Thomas J. Monaco

Canara Bank – India’s Trash Compactor

CANARA BANK: Canara reported QOQ bottom-line improvement of 85.5%, reliant on gains. Net new NPLs amount to 21.7%, but its reserve shortfall...

Thomas J. Monaco

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

Bank Credit Compass: Total Return Sweet Spot Moves, but May Rebound

The sweet spot for total return investors moved dramatically in April. However, as the month ended, the reflation trade returned. May could see a...

Hank Calenti, CFA

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