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

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 3Q21 results of INR 76.5 bn, which increased INR 12.5 bn (16.6%) linked quarter. On a core operating basis, results improved INR 11.5 bn (17.7%) to INR 76.5 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis; and*Reserve Cover Needs Improvement: At this time, provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 3Q21 results of INR 76.5 bn, which increased INR 12.5 bn (16.6%) linked quarter. On a core operating basis, results improved INR 11.5 bn (17.7%) to INR 76.5 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis; and*Reserve Cover Needs Improvement: At this time, provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.   

HDFC Bank – Credit Remains A Serious Challenge

Thematic (Sector/Industry)

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.   

Reserve Bank of India – Continued Bank Waterboarding

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Democratic Party control of the Senate has clearly moved the goal posts for fixed income investors. The reflation trade is back. This requires repositioning by bank credit investors.The good news is that the rise in Treasuries is beneficial to bank securities over the short term, especially since it is occurring in tandem with continued bear steepening from the short end of the curve. Globally, higher net interest margins should follow from the steepening of the U.S. yield curve as excess reserves are allocated into US$ securities. However, the impact on India-headquartered banks may be less as we discuss within.There are two less positive impacts. First, if the rise in rates is a reflection that inflation is expected to return, then this is not duration friendly. In fact, long duration fixed income securities suffered over the last week. Theoretically, credit curves should flatten in response to the yield curve steepening. However, given the enormous level of monetary accommodation over the last nine months, the question then becomes, how much further can spreads tighten? Credit only has limited upside in the current reflation scenario. Second, higher rates will raise the real effective US$ exchange rate. All else equal, a higher real effective US$ exchange rate is dollar positive.  Asia and emerging market (EM) securities could suffer.Against this backdrop, higher risk Additional Tier 1 (AT1) bank bonds outperformed, principally driven by Thailand- and other higher risk China-centric securities on expectations of increased economic activity. Thai banks performed across the credit continuum in Senior Unsecured, Tier 2 and AT1 notes. This seems to be a case of cognitive dissonance which ignores vaccine distribution and time extension risks. The COVID-19 situation is deteriorating in Thailand and elsewhere. High financial market valuations seem inconsistent with economic activity. A pronounced degradation of asset prices could materialize. Our preference is to fade the Thai-bank rally.France’s central bank noted that systemic risk may rise over the coming months due to high corporate debt and the current round of Covid-19 lockdowns. The regulator stated that a significant rise in defaults could occur in a slow economic recovery. Please see <a href="https://www.smartkarma.com/insights/bnp-paribas-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:46684" rel="noopener">BNP Paribas: Capital, Forbearance and CDS</a> for our assessment of this situation.In addition, we note that<a href="https://www.smartkarma.com/entities/commerzbank-ag" target="_blank" data-smartkarma-citation="entities:21596:1" rel="noopener">Commerzbank AG (CBK GR)</a> set a high bar for balance sheet clean-up by announcing a 50% increase in loan loss provisions for COVID-19. We would not be surprised to see additional healthy increases in loan loss provisioning. In fact, credit investors should be concerned if there are limited additional provisions taken. US banks kick-off the global bank earnings season on Friday.Market Outlook: Absent another behavioral lapse by the US President, ebullience over the prospects of additional stimulus spending should continue to positively impact the markets. Another lapse by the US President could see a temporary rise in demand for safe-haven assets. Eventually, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on how the Fed reacts. In this environment, artificially engineered credit costs may come back to hurt bank investors. Credit only has limited upside in the current reflation scenario and duration is not your friend at this point in the cycle.

Democratic Party control of the Senate has clearly moved the goal posts for fixed income investors. The reflation trade is back. This requires repositioning by bank credit investors.The good news is that the rise in Treasuries is beneficial to bank securities over the short term, especially since it is occurring in tandem with continued bear steepening from the short end of the curve. Globally, higher net interest margins should follow from the steepening of the U.S. yield curve as excess reserves are allocated into US$ securities. However, the impact on India-headquartered banks may be less as we discuss within.There are two less positive impacts. First, if the rise in rates is a reflection that inflation is expected to return, then this is not duration friendly. In fact, long duration fixed income securities suffered over the last week. Theoretically, credit curves should flatten in response to the yield curve steepening. However, given the enormous level of monetary accommodation over the last nine months, the question then becomes, how much further can spreads tighten? Credit only has limited upside in the current reflation scenario. Second, higher rates will raise the real effective US$ exchange rate. All else equal, a higher real effective US$ exchange rate is dollar positive.  Asia and emerging market (EM) securities could suffer.Against this backdrop, higher risk Additional Tier 1 (AT1) bank bonds outperformed, principally driven by Thailand- and other higher risk China-centric securities on expectations of increased economic activity. Thai banks performed across the credit continuum in Senior Unsecured, Tier 2 and AT1 notes. This seems to be a case of cognitive dissonance which ignores vaccine distribution and time extension risks. The COVID-19 situation is deteriorating in Thailand and elsewhere. High financial market valuations seem inconsistent with economic activity. A pronounced degradation of asset prices could materialize. Our preference is to fade the Thai-bank rally.France’s central bank noted that systemic risk may rise over the coming months due to high corporate debt and the current round of Covid-19 lockdowns. The regulator stated that a significant rise in defaults could occur in a slow economic recovery. Please see BNP Paribas: Capital, Forbearance and CDS for our assessment of this situation.In addition, we note thatCommerzbank AG (CBK GR) set a high bar for balance sheet clean-up by announcing a 50% increase in loan loss provisions for COVID-19. We would not be surprised to see additional healthy increases in loan loss provisioning. In fact, credit investors should be concerned if there are limited additional provisions taken. US banks kick-off the global bank earnings season on Friday.Market Outlook: Absent another behavioral lapse by the US President, ebullience over the prospects of additional stimulus spending should continue to positively impact the markets. Another lapse by the US President could see a temporary rise in demand for safe-haven assets. Eventually, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on how the Fed reacts. In this environment, artificially engineered credit costs may come back to hurt bank investors. Credit only has limited upside in the current reflation scenario and duration is not your friend at this point in the cycle.

Bank Credit Weekly: Moving the Goal Posts

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.<a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBLTB)</a> 5% coupon and <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (BNKEA)</a> 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFLIN)</a> 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank's (ICICIBC IN)</a> and <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank's (CBKIN)</a> debt curve sold off while <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank of India's (SBIIN)</a> notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see <a href="https://www.smartkarma.com/insights/bank-credit-compass-regime-change-may-limit-the-annual-january-bounce" target="_blank" data-smartkarma-citation="insights:46712" rel="noopener">Bank Credit Compass: Regime Change May Limit the Annual January Bounce</a>. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.Bangkok Bank's (BBLTB) 5% coupon and Bank of East Asia's (BNKEA) 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. Indiabulls Housing Finance's (IHFLIN) 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. ICICI Bank's (ICICIBC IN) and Canara Bank's (CBKIN) debt curve sold off while State Bank of India's (SBIIN) notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see Bank Credit Compass: Regime Change May Limit the Annual January Bounce. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFL IN)</a> 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's  (23 HK)</a> 2024 callable AT1 outperformed while <a href="https://www.smartkarma.com/entities/siam-commercial-bank-pub-co" target="_blank" data-smartkarma-citation="entities:214:1" rel="noopener">Siam Commercial Bank's (SCB TB)</a> 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: <a href="https://www.smartkarma.com/insights/bank-credit-weekly-fed-spikes-while-the-ecb-sweetens-the-punch-bowl" target="_blank" data-smartkarma-citation="insights:46524" rel="noopener">Fed Spikes While the ECB Sweetens the Punch Bowl</a>.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, Indiabulls Housing Finance's (IHFL IN) 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, Bank of East Asia's  (23 HK) 2024 callable AT1 outperformed while Siam Commercial Bank's (SCB TB) 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

India

Union Bank of India Limited provides a full range of banking services throughout India. The Company's activities include retail banking, commercial and personal banking, investment management, treasury and NRI services, cash management and assorted ATM facilities. Union Bank has an online tele-banking facility for all its core banking customers.

YES BANK Limited provides banking services. The Bank offers deposits, personal loans, e-banking, trade finance, corporate, and business banking services. YES BANK serves the food and agribusiness, life sciences, healthcare, biotechnology, telecommunications, media, information technology, and infrastructure development industries in India.

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

IDBI Bank Limited provides a range of banking and financial services. The Bank's services include fund-based operations, such as venture capital and fee-based activities, which include merchant banking and debenture trusteeship.

Indian Overseas Bank operates some 1,429 banking branches in India, as well as six branches in overseas locations.  The Group's banks provide loan and deposit schemes, Internet banking, and a full range of banking services.

Punjab National Bank provides financial services such as corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. The Company provides services to domestic conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies.

Bank of Baroda owns and operates commercial banks in India.  The Group's banks provide the traditional forms of banking services, including CD's, Credit Card services and a variety of car loans, in addition to gold banking and a range of insurance services.  The Group also owns IBU International Finance Limited, an international banking company in Hong Kong.

UCO Bank provides a full range of banking services throughout India. UCO Bank operates over 1,700 banking branches in India, as well as four branches in overseas locations.

Indian Bank is a full service bank owned by the Government of India. The Bank offers a wide range of services including a foreign currency banking unit at Colombo and specialized overseas branches at Chennai, Bangalore, and Mumbai exclusively for handling foreign exchange  transactions arising out of export, import, remittances and non resident Indian business.

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.

Bank of the Philippine Islands, through its subsidiaries, provides commercial banking services. The Company's products includes ATM, debit card system, credit card, electronic cash card, internet platform and other services.

BDO Unibank Inc provides banking services. The Bank offers saving accounts, investment, loans, credit and debit cards, remittance, insurance, and trade financing services. BDO Unibank serves customers in Philippines.

Bank for Investment and Development of Vietnam provides commercial banking services. The Company offers deposits, personal loans, e-banking, guarantees, and trade finance for customers, corporate, and financial institutions. Bank for Investment also offers foreign exchange, money market, derivatives, and debt market services.

Bank of Nanjing Co., Ltd. operates commercial banking businesses. The Company offers deposits, loans, settlement, discounting, financial bond issuance, government bond underwriting, bank guarantee, and other related financial services. Bank of Nanjing provides services for enterprises and individuals.

First Financial Holding Co., Ltd. is a holding company.  Through its subsidiaries, the Company accepts deposits, provides loans and discount, letters of credit, and guarantee services, invests in marketable securities, provides securities brokerage and investment services, as well as provides insurance services.

E.Sun Financial Holding Company Ltd. is a holding company.  Through its subsidiaries, the Company provides banking, brokerage and dealer services.

Shinkin Central Bank is a central bank for shinkin banks nationwide, operating as a cooperative financial institution.  The Bank has developed businesses in a variety of fields that contribute the shinkin banking industry.  The Bank's services include enhancement of the credit standing, efficient use of shikin bank's surplus funds, and settlement of domestic exchange transaction.

Taiwan Cooperative Financial Holding, through subsidiaries, offers financial services.  The Company offers commercial banking, asset management, bills finance, and securities brokerage services.

Hua Nan Financial Holdings Co., Ltd. is a holding company. Through its subsidiaries, the Company conducts commercial banking, savings, trust, and international banking businesses. In addition, the Group also provides insurance services and acts as a dealer, broker, and underwriter for financial securities.

Hua Nan Financial Holdings Co Ltd. (2880 TT)

PT Bank Negara Indonesia (Persero) Tbk is a state-owned bank that conducts commercial and consumer banking services.

Canara Bank Ltd. provides a full range of banking services throughout India. The Group's activities include retail banking, commercial and personal banking, investment management, treasury & NRI services, cash management and assorted ATM facilities.

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Canara Bank (CBK IN)

HDFC Bank – Credit Remains A Serious Challenge

HDFC BANK: HDFCB reported FY 3Q21 results increased 16.6% linked quarter. Net new NPLs increased 151% annualized, and reserves are currently short...

Thomas J. Monaco

Reserve Bank of India – Continued Bank Waterboarding

RESERVE BANK OF INDIA: India’s financial sector needs to prepare for even more challenging times. If the RBI is correct, FY 2022 will see continued...

Thomas J. Monaco

Bank Credit Weekly: Moving the Goal Posts

Fixed income goal posts were clearly moved by Democratic Party control of the Senate. Credit has limited upside in the current reflation scenario....

Hank Calenti, CFA

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

Duration desires drove performance over the holiday shortened week. A US Senate leadership change could negatively impact the market as Goldilocks...

Hank Calenti, CFA

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

Asia’s AT1, Subordinated and high yield Senior Unsecured bonds outperformed over the holiday shortened week. Thin markets were directionless, so we...

Hank Calenti, CFA

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