Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Thematic (Sector/Industry)

<ul>
<li>Our core profitability and credit quality screens send out mixed signals; generally, credit quality metrics to end-September 2021 were constructive, in our view, whilst core profitability signals were underwhelming </li>
<li>We expect credit quality to worsen in the coming quarters, leading to higher credit costs going forward and, combined with core profitability softness, an erosion of returns</li>
<li>We like HDFC Bank, turn cautious on State Bank of India &amp; Axis Bank and are negative on Canara Bank &amp; Bandhan Bank; neutral on Kotak Mahindra &amp; ICICI Bank</li>
</ul>


Our core profitability and credit quality screens send out mixed signals; generally, credit quality metrics to end-September 2021 were constructive, in our view, whilst core profitability signals were underwhelming 
We expect credit quality to worsen in the coming quarters, leading to higher credit costs going forward and, combined with core profitability softness, an erosion of returns
We like HDFC Bank, turn cautious on State Bank of India &amp; Axis Bank and are negative on Canara Bank &amp; Bandhan Bank; neutral on Kotak Mahindra &amp; ICICI Bank


Indian Banks; A Time for Increased Caution

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

*Mixed Bottom-line: State Bank of India (SBIN.IN) [SBI] reported FY 2Q22 results of INR 76.3 bn, improving INR 11.2 bn (17.3%) linked quarter. In fairness, this was a strange quarter, as the provision cut of INR 98.6 bn (98.1%) was unjustified – and not aligned with reality, enabling results to appear far better than they actually were. Effectively cutting loss provisions to zero when NPL coverage is abysmal in order to offset frontloaded pension costs is far from a prudent banking practice; and*Reserve Challenge Should Lead To Capital Raise: Surprisingly, we found that net new NPLs increased just INR 41.7 bn or 10.8% on an annualized basis, which is a far cry from the INR 193.2 bn or 65.9% annualized posted at FY 4Q21. Given the capital and remaining credit challenges, SBI must be better prepared to take additional losses. By our calculation, we find that SBI’s reserves are short INR 841 tn – over two years of pre-tax results or nearly 18% of SBI’s market-cap.

*Mixed Bottom-line: State Bank of India (SBIN.IN) [SBI] reported FY 2Q22 results of INR 76.3 bn, improving INR 11.2 bn (17.3%) linked quarter. In fairness, this was a strange quarter, as the provision cut of INR 98.6 bn (98.1%) was unjustified – and not aligned with reality, enabling results to appear far better than they actually were. Effectively cutting loss provisions to zero when NPL coverage is abysmal in order to offset frontloaded pension costs is far from a prudent banking practice; and*Reserve Challenge Should Lead To Capital Raise: Surprisingly, we found that net new NPLs increased just INR 41.7 bn or 10.8% on an annualized basis, which is a far cry from the INR 193.2 bn or 65.9% annualized posted at FY 4Q21. Given the capital and remaining credit challenges, SBI must be better prepared to take additional losses. By our calculation, we find that SBI’s reserves are short INR 841 tn – over two years of pre-tax results or nearly 18% of SBI’s market-cap.

State Bank of India – Not A Prudent Move

*Ignoring Credit Deterioration, Results Improve: HDFC Ltd (HDFC.IN) [HDFC] reported FY 2Q22 results of INR 37.3 bn, increasing INR 9.8 bn (35.5%) linked quarter basis. HDFC witnessed positive operating jaws; a massive linked quarter increase in dividends; robust loan growth; a drop in loss provisions; and a lower tax rate. Nothing like pulling on every earnings lever to achieve the result you want; and*Credit Quality Worsens: Given the INR 3.8 bn in net recovery during FY 2Q22, net new NPLs accelerated to INR 22.1 bn and increased 51.1% on an annualized basis. We also find that HDFC’s reserve still needs shoring up by another INR 200 bn or over a year of PBT.

*Ignoring Credit Deterioration, Results Improve: HDFC Ltd (HDFC.IN) [HDFC] reported FY 2Q22 results of INR 37.3 bn, increasing INR 9.8 bn (35.5%) linked quarter basis. HDFC witnessed positive operating jaws; a massive linked quarter increase in dividends; robust loan growth; a drop in loss provisions; and a lower tax rate. Nothing like pulling on every earnings lever to achieve the result you want; and*Credit Quality Worsens: Given the INR 3.8 bn in net recovery during FY 2Q22, net new NPLs accelerated to INR 22.1 bn and increased 51.1% on an annualized basis. We also find that HDFC’s reserve still needs shoring up by another INR 200 bn or over a year of PBT.  

<ul>
<li>We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward</li>
<li>We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios</li>
<li>We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs</li>
<li>We highlight <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a> as a restructuring and earnings recovery story, and <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> for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see <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 (SBIN IN)</a> as an attractive value play, despite its lighter core capital ratio</li>
<li>We are cautious on <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank (CBK IN)</a>, seeing it as a potential value trap; at first look, <a href="https://www.smartkarma.com/entities/bandhan-bank-ltd" target="_blank" data-smartkarma-citation="entities:26705:1" rel="noopener">Bandhan Bank Ltd (BANDHAN IN)</a> looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios</li>
<li>Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns</li>
</ul>


We screen 7 Indian banks for their core profitability and their credit quality credentials, in order to identify banks that are good value and have potential to deliver higher returns going forward
We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality, as well as capital adequacy ratios
We expect credit quality to continue to worsen in the coming quarters, especially as the moratorium on new NPL classification began to normalise as from April; yet we believe that certain Indian banks are well positioned and have already taken action to counter the threat of higher delinquencies, through cost of risk charges and write-offs
We highlight Axis Bank Ltd (AXSB IN) as a restructuring and earnings recovery story, and HDFC Bank (HDFCB IN) for its high quality balance sheet and premium returns, which are not yet fully reflected in valuations; we also see State Bank Of India (SBIN IN) as an attractive value play, despite its lighter core capital ratio
We are cautious on Canara Bank (CBK IN), seeing it as a potential value trap; at first look, Bandhan Bank Ltd (BANDHAN IN) looks appealing on prospective PBV ratio to ROE and high pre-provision returns but we are wary of its high share of micro-finance and SME credit risk exposure in the light of rising NPA ratios
Risks to our view include, for our bullish calls, worse than expected credit quality resulting in higher cost of risk, higher than expected opex and weak revenue generation; for our bear calls, better than expected revenues with lower than expected opex and cost of risk leading to higher post-provision returns


Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Post market close on 23 August, the Index Maintenance Sub-Committee (IMSC) of NSE Indices announced the results of the September index review for the NIFTY family of indices. The rebalance will be effective after the close of trading on 29 September and passive funds will need to trade at the close (VWAP over the last 30 minutes of trading) on the day.There are no changes to the <a href="https://www.smartkarma.com/entities/nifty-index" target="_blank" data-smartkarma-citation="entities:23617:1" rel="noopener">NIFTY Index (NIFTY INDEX)</a>, in line with what we expected.There are 5 changes to the NIFTY Next 50 Index. <a href="https://www.smartkarma.com/entities/bank-of-baroda" target="_blank" data-smartkarma-citation="entities:545:1" rel="noopener">Bank Of Baroda (BOB IN)</a>, <a href="https://www.smartkarma.com/entities/cholamandalam-investment-and-finance" target="_blank" data-smartkarma-citation="entities:17583:1" rel="noopener">Cholamandalam Investment and Finance (CIFC IN)</a>, <a href="https://www.smartkarma.com/entities/jindal-steel-power-ltd" target="_blank" data-smartkarma-citation="entities:6614:1" rel="noopener">Jindal Steel &amp; Power (JSP IN)</a>, <a href="https://www.smartkarma.com/entities/pi-industries-ltd" target="_blank" data-smartkarma-citation="entities:6040:1" rel="noopener">Pi Industries (PI IN)</a> and <a href="https://www.smartkarma.com/entities/steel-authority-of-india" target="_blank" data-smartkarma-citation="entities:14323:1" rel="noopener">Steel Authority of India (SAIL IN)</a> will be included in the index, while <a href="https://www.smartkarma.com/entities/abbott-india-ltd" target="_blank" data-smartkarma-citation="entities:9687:1" rel="noopener">Abbott India (BOOT IN)</a>, <a href="https://www.smartkarma.com/entities/alkem-laboratories-ltd" target="_blank" data-smartkarma-citation="entities:26928:1" rel="noopener">Alkem Laboratories Ltd (ALKEM IN)</a>, <a href="https://www.smartkarma.com/entities/mrf-ltd" target="_blank" data-smartkarma-citation="entities:2930:1" rel="noopener">Mrf Ltd (MRF IN)</a>, <a href="https://www.smartkarma.com/entities/petronet-lng-ltd" target="_blank" data-smartkarma-citation="entities:15235:1" rel="noopener">Petronet LNG (PLNG IN)</a> and <a href="https://www.smartkarma.com/entities/united-breweries-ltd" target="_blank" data-smartkarma-citation="entities:18080:1" rel="noopener">United Breweries (UBBL IN)</a> will be deleted from the index.While the headline impact in terms of ADV looks low, a look at the impact compared to the delivery volumes paints a different picture.There are a whole bunch of changes to constituents of other indices too. However, the assets tracking these indices are small and there will be negligible impact on the stocks.There is an expansion of the index universe for the NIFTY indices with REITs and Infrastructure Investment Trusts (InvITs) becoming eligible for inclusion in the indices.

Post market close on 23 August, the Index Maintenance Sub-Committee (IMSC) of NSE Indices announced the results of the September index review for the NIFTY family of indices. The rebalance will be effective after the close of trading on 29 September and passive funds will need to trade at the close (VWAP over the last 30 minutes of trading) on the day.There are no changes to the NIFTY Index (NIFTY INDEX), in line with what we expected.There are 5 changes to the NIFTY Next 50 Index. Bank Of Baroda (BOB IN), Cholamandalam Investment and Finance (CIFC IN), Jindal Steel &amp; Power (JSP IN), Pi Industries (PI IN) and Steel Authority of India (SAIL IN) will be included in the index, while Abbott India (BOOT IN), Alkem Laboratories Ltd (ALKEM IN), Mrf Ltd (MRF IN), Petronet LNG (PLNG IN) and United Breweries (UBBL IN) will be deleted from the index.While the headline impact in terms of ADV looks low, a look at the impact compared to the delivery volumes paints a different picture.There are a whole bunch of changes to constituents of other indices too. However, the assets tracking these indices are small and there will be negligible impact on the stocks.There is an expansion of the index universe for the NIFTY indices with REITs and Infrastructure Investment Trusts (InvITs) becoming eligible for inclusion in the indices.

NIFTY NEXT50 Index Rebalance: More Beneath The Surface

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)

Indian Banks; A Time for Increased Caution

Credit quality is likely to worsen, leading to higher credit costs going forward and eroded returns; We like HDFC Bank, turn cautious on SBI &...

Victor Galliano

State Bank of India – Not A Prudent Move

SBI: SBI reported a QOQ FY 2Q22 results increase of 17.3%. A provision cut of 98% was unjustified, only serving to offset frontloaded pension...

Thomas J. Monaco

HDFC Ltd. – In the Land of The Blind

HDFC: HDFC reported a QOQ FY 2Q22 results increase of 35.5%, as management pulled on every earnings lever. Net new NPLs increased 51.1% annualized,...

Thomas J. Monaco

Indian Banks; Screening for Investment Ideas, Despite the Credit Quality Hurdles

Screening for ideas, we are positive on Axis Bank and HDFC Bank, and State Bank of India too; due to credit quality concerns, we are cautious on...

Victor Galliano

NIFTY NEXT50 Index Rebalance: More Beneath The Surface

There are 5 changes to the NIFTY Next 50 Index that will be implemented at the close on 29 September. The impact is quite large compared to the...

Brian Freitas

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