Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Equity Bottom-Up

Cholamandalam Investment and Finance / Equity Bottom-Up

Back in November 2020, M M Murugappan retired and Vellayan Subbiah joined the board as Chairman. At the time, the move seemed like a non-event, as it seemed like a group-wide replacement than a targeted role. But subsequently the CEO, Arun Alagappan, cousin of Vellayan Subbiah, who joined as Executive Director in 2017 and was elevated to CEO not too long ago in 2019, also resigned in Jan 2021. Meanwhile, since Nov 2020, there has been an increasing emphasis from RBI on converting large NBFCs into banks. These events together have translated this seemingly innocuous move (Vellayan Subbiah joining as Chairman) into a meaningful leadership change at <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> ["Chola"]. Going by the commentary from Vellayan Subbiah at the recent earnings call, this can potentially lead to long-run transformational changes at Chola. Below we share the history of Chola and the role Vellayan Subbiah has played in shaping it, to put in perspective our favorable view on the leadership change and highlight what could be in store for Chola.

Back in November 2020, M M Murugappan retired and Vellayan Subbiah joined the board as Chairman. At the time, the move seemed like a non-event, as it seemed like a group-wide replacement than a targeted role. But subsequently the CEO, Arun Alagappan, cousin of Vellayan Subbiah, who joined as Executive Director in 2017 and was elevated to CEO not too long ago in 2019, also resigned in Jan 2021. Meanwhile, since Nov 2020, there has been an increasing emphasis from RBI on converting large NBFCs into banks. These events together have translated this seemingly innocuous move (Vellayan Subbiah joining as Chairman) into a meaningful leadership change at Cholamandalam Investment and Finance (CIFC IN) ["Chola"]. Going by the commentary from Vellayan Subbiah at the recent earnings call, this can potentially lead to long-run transformational changes at Chola. Below we share the history of Chola and the role Vellayan Subbiah has played in shaping it, to put in perspective our favorable view on the leadership change and highlight what could be in store for Chola.

Leadership Change Alert | Chola Investment: Vellayan Is Back; Watch Out for Transformational Leap

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

*Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.

 *Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.  

Bank of the Philippine Islands / Equity Bottom-Up

*Weak Results: Bank of the Philippine Islands (BPI.PM) [BPI] reported 4Q20 results of PHP 4.2 bn, declining PHP 1.3 bn (23.1%) linked quarter. Results were difficult across the board for BPI, but primarily driven by a justified PHP 885 mn (14.6%) increase in loss provisions – reversing the decline seen in 3Q20. BPI will be holding an analyst briefing on Friday 29 January 2021; and  *Credit Quality Challenges Set To Continue: BPI is still contending with higher than normal NCOs which have caused an accelerated level of net new NPLs at 4Q20 of 65.4%. Given the continued break in credit which shows no signs of abating, we find that BPI’s reserves are short by over PHP 19.0 bn – nearly five years of bottom-line performance.

*Weak Results: Bank of the Philippine Islands (BPI.PM) [BPI] reported 4Q20 results of PHP 4.2 bn, declining PHP 1.3 bn (23.1%) linked quarter. Results were difficult across the board for BPI, but primarily driven by a justified PHP 885 mn (14.6%) increase in loss provisions – reversing the decline seen in 3Q20. BPI will be holding an analyst briefing on Friday 29 January 2021; and  *Credit Quality Challenges Set To Continue: BPI is still contending with higher than normal NCOs which have caused an accelerated level of net new NPLs at 4Q20 of 65.4%. Given the continued break in credit which shows no signs of abating, we find that BPI’s reserves are short by over PHP 19.0 bn – nearly five years of bottom-line performance.  

Bank of Philippine Islands – Lots Of Wood To Chop

*KTB Better Results On Improving Credit Deltas: Krung Thai Bank (KTB.TB)[KTB] reported 4Q20 net profit of THB 3.5 bn, increasing THB 396 mn (13.0%) linked quarter. Despite the THB 3.2 bn (25.5%) linked quarter reduction in loss provisions, operating results actually exhibited a decline of THB 262 mn (9.0%); and*Credit Should Continue To Drive Performance: KTB’s hard work controlling credit risk is paying off, as net new NPLs increased just THB 707 mn for an annualized rate of growth of 2.6% - the lowest of the Thai banks under coverage. Provided there are no major “unknown unknowns” in the moratorium portfolio from here, we would envision KTB to at least cutting its loss provision in half from here.

*KTB Better Results On Improving Credit Deltas: Krung Thai Bank (KTB.TB)[KTB] reported 4Q20 net profit of THB 3.5 bn, increasing THB 396 mn (13.0%) linked quarter. Despite the THB 3.2 bn (25.5%) linked quarter reduction in loss provisions, operating results actually exhibited a decline of THB 262 mn (9.0%); and*Credit Should Continue To Drive Performance: KTB’s hard work controlling credit risk is paying off, as net new NPLs increased just THB 707 mn for an annualized rate of growth of 2.6% - the lowest of the Thai banks under coverage. Provided there are no major “unknown unknowns” in the moratorium portfolio from here, we would envision KTB to at least cutting its loss provision in half from here. 

Krung Thai Bank – Lower Credit Tail Risk

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

We have all seen how credit costs have come down for US banks. While the theme is relevant globally, the delta can vary dramatically. A closer look at banks with exposure to oil may give insights to how DBS will model its provisions during the final quarter of 2020.

We have all seen how credit costs have come down for US banks. While the theme is relevant globally, the delta can vary dramatically. A closer look at banks with exposure to oil may give insights to how DBS will model its provisions during the final quarter of 2020. 

Singapore

DBS Group Holdings Limited and its subsidiaries provide a variety of financial services.  The Company offers services including mortgage financing, lease and hire purchase financing, nominee and trustee, funds management, corporate advisory and brokerage .  DBS Group also acts as the primary dealer in Singapore government securities.

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DBS (DBS SP)

Leadership Change Alert | Chola Investment: Vellayan Is Back; Watch Out for Transformational Leap

With Vellayan back at the helm and with the kind of vision he is approaching his role at Chola, Chola seems to be gearing up for a transformational...

Ankit Agrawal, CFA

Axis Bank – Evil Result

AXIS BANK: Axis reported a 33.8% decline in linked quarter FY 3Q21 results. Given the hefty increase in net new NPLs, results make little sense....

Thomas J. Monaco

Bank of Philippine Islands – Lots Of Wood To Chop

BANK OF THE PHILIPPINE ISLANDS: BPI reported a 23.1% linked quarter earnings decline in 4Q20. Results were difficult across the board for BPI,...

Thomas J. Monaco

Krung Thai Bank – Lower Credit Tail Risk

KRUNG THAI BANK: KTB reported a 4Q20 net profit increase of 13.0% linked quarter. KTB’s hard work controlling credit risk is paying off, as net new...

Thomas J. Monaco

DBS – Modeling Provisions

We have all seen how credit costs have come down for US banks. DBS can see a significant decline in credit costs, with meaningful gas and energy...

Daniel Tabbush

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