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.

*NIM Driven Bottom-line: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 3Q21 operating results of INR 2.9 bn, increasing INR 260 mn (9.8%) linked quarter. Much of LTFH’s strength during the quarter was attributed to net interest income growth of INR 2.1 bn (15.8%) associated with improving cost of funds (down 72 bp linked quarter) on liquidity improvement.*Credit Risk Challenges: While LTFH would like to have the investment community believe that it has turned the corner with credit, that notion is patently false. Inclusive of INR 12.8 mn in NCOs, we calculate a continued acceleration of net new NPL growth to 101% on an annualized basis – which is troubling. We calculate that reserves need a boost close to INR 80 bn or nearly five years of pre-tax earnings; and   *Banking License May Be Out of Reach: LTFH's Tier-1 ratio was 17.8% at FY 3Q21. However, if our reserve shortfall analysis is correct, LTFH’s stated Tier 1 capital ratio will be quite challenged, leaving it short of the Reserve Bank of India’s (RBI) plan for larger NBFCs to become banks.

*NIM Driven Bottom-line: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 3Q21 operating results of INR 2.9 bn, increasing INR 260 mn (9.8%) linked quarter. Much of LTFH’s strength during the quarter was attributed to net interest income growth of INR 2.1 bn (15.8%) associated with improving cost of funds (down 72 bp linked quarter) on liquidity improvement.*Credit Risk Challenges: While LTFH would like to have the investment community believe that it has turned the corner with credit, that notion is patently false. Inclusive of INR 12.8 mn in NCOs, we calculate a continued acceleration of net new NPL growth to 101% on an annualized basis – which is troubling. We calculate that reserves need a boost close to INR 80 bn or nearly five years of pre-tax earnings; and   *Banking License May Be Out of Reach: LTFH's Tier-1 ratio was 17.8% at FY 3Q21. However, if our reserve shortfall analysis is correct, LTFH’s stated Tier 1 capital ratio will be quite challenged, leaving it short of the Reserve Bank of India’s (RBI) plan for larger NBFCs to become banks.

L&T Finance Holdings – Credit Risk Jeopardizes Bank License

*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

*RBI Fines Bajaj: The Reserve Bank of India (RBI) fined Bajaj Finance (BAF.IN) [Bajaj] INR 25 mn for failing to ensure that its debt recovery agents were following the appropriate guidelines; and*Credit Costs Pressured: While the Bajaj penalty is not material, the more intense level of regulatory scrutiny could negatively impact near-term retail loan collection efficiency and raise concerns over the cost of risk and the revival of loan growth. This recent action on recovery methods on top of already high bounce rates could potentially lead to a slowdown in the collection efficiencies and higher loss provisions.

*RBI Fines Bajaj: The Reserve Bank of India (RBI) fined Bajaj Finance (BAF.IN) [Bajaj] INR 25 mn for failing to ensure that its debt recovery agents were following the appropriate guidelines; and*Credit Costs Pressured: While the Bajaj penalty is not material, the more intense level of regulatory scrutiny could negatively impact near-term retail loan collection efficiency and raise concerns over the cost of risk and the revival of loan growth. This recent action on recovery methods on top of already high bounce rates could potentially lead to a slowdown in the collection efficiencies and higher loss provisions. 

India

Central Bank Of India is a full service commercial bank. The Bank's services include taking deposits, lending services, and investing. Central bank operates branches throughout India.

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Central Bank Of India (CBOI 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

L&T Finance Holdings – Credit Risk Jeopardizes Bank License

L&T FINANCE: LTFH reported a FY 3Q21 result increase of 9.8% linked quarter. Continued acceleration of net new NPL growth and a reserve shortfall...

Thomas J. Monaco

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

Bajaj Finance – Smack

BAJAJ FINANCE: RBI fined Bajaj Finance INR 25 mn for failing to ensure that its debt recovery agents were following the appropriate guidelines....

Thomas J. Monaco

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