Alpha-Centric ESG Research

Kyle Rudden

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in <a href="https://www.smartkarma.com/insights/bitcoin-on-balance-sheets-indirect-crypto-exposure-considerations-for-crypto-leery-esg-investors" target="_blank" data-smartkarma-citation="insights:52207" rel="noopener">Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors</a>. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates <a href="https://www.smartkarma.com/entities/bitcoin-usd" target="_blank" data-smartkarma-citation="entities:25895:1" rel="noopener">Bitcoin (XBT)</a>'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates Bitcoin (XBT)'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

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

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Thematic (Sector/Industry)

A couple of days ago, <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> announced a co-lending partnership with a peer HFC (Housing Finance Company), <a href="https://www.smartkarma.com/entities/housing-development-finance-corporation" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener">HDFC Limited (HDFC IN)</a>. IHFL's promoter and MD, Gagan Banga, mentioned that IHFL is reorienting its business model completely towards being an origination and servicing platform rather than being a full-fledged lender. This announcement by IHFL, one of the top five HFCs in India, suggests that co-lending is increasingly gaining traction within the NBFC/HFC industry.
A few days ago, we had highlighted how the upcoming EASE 4.0 program is also likely to promote co-lending by PSBs and how Edelweiss could be a beneficiary of this. For more details, please refer to this - <a href="https://www.smartkarma.com/insights/edelweiss-a-beneficiary-of-potentially-increased-adoption-of-co-lending-by-psbs" target="_blank" data-smartkarma-citation="insights:50237" rel="noopener">Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs</a>.

A couple of days ago, Indiabulls Housing Finance (IHFL IN) announced a co-lending partnership with a peer HFC (Housing Finance Company), HDFC Limited (HDFC IN). IHFL's promoter and MD, Gagan Banga, mentioned that IHFL is reorienting its business model completely towards being an origination and servicing platform rather than being a full-fledged lender. This announcement by IHFL, one of the top five HFCs in India, suggests that co-lending is increasingly gaining traction within the NBFC/HFC industry.
A few days ago, we had highlighted how the upcoming EASE 4.0 program is also likely to promote co-lending by PSBs and how Edelweiss could be a beneficiary of this. For more details, please refer to this - Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs.

Indian NBFCs: Co-Lending Seems to Be Gaining Traction - Indiabulls/HDFC New Partners in Town

Equity Bottom-Up

Edelweiss Financial Services / Equity Bottom-Up

We have highlighted across our prior insights that <a href="https://www.smartkarma.com/entities/edelweiss-financial-services-ltd" target="_blank" data-smartkarma-citation="entities:15015:1" rel="noopener">Edelweiss Financial Services (EDEL IN)</a> is shifting its credit business towards a co-lending model as part of its broader shift to a fee based business model from a fund based business model.
In the upcoming reform agenda for PSBs under EASE 4.0 program, there is likely to be a push towards co-lending as per <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/psbs-to-push-co-lending-with-nbfcs-digital-agri-financing/articleshow/82021101.cms" target="_blank" rel="noopener">media sources</a>. Edelweiss, who has already partnered with various government-owned banks (public-sector banks or PSBs), is well-positioned to benefit from this.

We have highlighted across our prior insights that Edelweiss Financial Services (EDEL IN) is shifting its credit business towards a co-lending model as part of its broader shift to a fee based business model from a fund based business model.
In the upcoming reform agenda for PSBs under EASE 4.0 program, there is likely to be a push towards co-lending as per media sources. Edelweiss, who has already partnered with various government-owned banks (public-sector banks or PSBs), is well-positioned to benefit from this.

Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs

<a href="https://www.smartkarma.com/entities/edelweiss-financial-services-ltd" target="_blank" data-smartkarma-citation="entities:15015:1" rel="noopener">Edelweiss Financial Services (EDEL IN)</a> reported Q3FY21 earnings (PAT) of INR 117cr ex of Insurance business and BMU &amp; Corporate unit and pre minority interest. With recovery in the economy and in the residential real estate market, Edelweiss' credit business is turning around. The bad assets for the most part have been cleaned up and provided for. Wealth management, capital markets, ARC and asset management businesses continue to remain robust and provide strong fee-based income. Fee income has come back to pre-COVID levels at around INR 480cr per quarter. Insurance business is well funded to take losses for the next few years, as it scales up. BMU &amp; Corporate Unit (BMU: Balance Sheet Management Unit) was affected by negative carry from excess liquidity and one-off restructuring charges relating to consolidation at the holding company level into a Core Investment Company (CIC). Capital adequacy for Edelweiss remains robust at 23%+ levels across its credit businesses. Leverage at the group level is low at 3x and post the completion of the PAG deal, the balance sheet should only strengthen further.
Below we discuss key growth and profitability levers for Edelweiss going forward.

Edelweiss Financial Services (EDEL IN) reported Q3FY21 earnings (PAT) of INR 117cr ex of Insurance business and BMU &amp; Corporate unit and pre minority interest. With recovery in the economy and in the residential real estate market, Edelweiss' credit business is turning around. The bad assets for the most part have been cleaned up and provided for. Wealth management, capital markets, ARC and asset management businesses continue to remain robust and provide strong fee-based income. Fee income has come back to pre-COVID levels at around INR 480cr per quarter. Insurance business is well funded to take losses for the next few years, as it scales up. BMU &amp; Corporate Unit (BMU: Balance Sheet Management Unit) was affected by negative carry from excess liquidity and one-off restructuring charges relating to consolidation at the holding company level into a Core Investment Company (CIC). Capital adequacy for Edelweiss remains robust at 23%+ levels across its credit businesses. Leverage at the group level is low at 3x and post the completion of the PAG deal, the balance sheet should only strengthen further.
Below we discuss key growth and profitability levers for Edelweiss going forward.

Edelweiss: Very Well Capitalized and On the Path to Profitability and Growth

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

*Negative Operating Performance: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported yet another consolidated loss of INR 630.0 mn (post minority interest) for FY 3Q21 – declining INR 69.0 mn (12.3%) linked quarter. Excluding the gain on sale of securities, Edelweiss’ core operating results were actually frightening at a loss of INR 4.9 bn – down a further INR 106 mn (2.2%) over the same period. Nothing appears to be going right for Edelweiss, with management now beginning to discuss liquidity metrics; and *Wheels Falling Off The Bus: We are significantly troubled by the enormity of the breakdown in credit, as net new NPLs, by our calculation, increased INR 2.7 bn linked quarter for an annualized rate of growth of 106% - far and away the worst showing of any Indian financial under our coverage. Given the net new NPL increase, we find that loss reserves are light to tune of INR 15.7 bn or 2.3x stated equity of INR 6.9 bn at FY 3Q21.  Negative operating losses coupled with potentially challenged liquidity, and the poor credit cushion could invite regulatory intervention.

*Negative Operating Performance: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported yet another consolidated loss of INR 630.0 mn (post minority interest) for FY 3Q21 – declining INR 69.0 mn (12.3%) linked quarter. Excluding the gain on sale of securities, Edelweiss’ core operating results were actually frightening at a loss of INR 4.9 bn – down a further INR 106 mn (2.2%) over the same period. Nothing appears to be going right for Edelweiss, with management now beginning to discuss liquidity metrics; and *Wheels Falling Off The Bus: We are significantly troubled by the enormity of the breakdown in credit, as net new NPLs, by our calculation, increased INR 2.7 bn linked quarter for an annualized rate of growth of 106% - far and away the worst showing of any Indian financial under our coverage. Given the net new NPL increase, we find that loss reserves are light to tune of INR 15.7 bn or 2.3x stated equity of INR 6.9 bn at FY 3Q21.  Negative operating losses coupled with potentially challenged liquidity, and the poor credit cushion could invite regulatory intervention. 

Edelweiss Financial Services – The Whole Package

India

ICRA Limited provides investment information and credit rating services in India.

Pilani Investment and Industries Corporation Ltd. is an investment company. The Company derives dividend income from the companies in which it holds interests.  Pilani has investments in textile manufacturing, newspaper publishing, and real estate.

JSW Holdings Limited is an investment holding company.  The Company invests in the shares of companies.

Religare Enterprises Limited is a holding company for one of India's diversified financial services groups. The Company offers an integrated suite of financial services through its underlying subsidiaries and operating entities, including loans to SMEs, capital markets, wealth management, life and health insurance, and asset management.

CARE Ratings Limited operates as a credit rating agency. The Company offers credit assessment of companies that helps corporates to raise capital and assists the investors to form an informed investment decision based on the credit risk. CARE Ratings serves corporates, financial sectors, state government entities, and local bodies.

Kalyani Investment Company Ltd. is an investment company. The Company invests in a diversified portfolio of the shares of both listed and unlisted companies.

JM Financial Limited is a holding company which has subsidiaries in all major financial services. The Company's services include investment banking, institutional and retail brokerage, asset management (MF & alternative assets), commodities and asset reconstruction.

PTC India Financial Services Ltd. is an investment special purpose vehicle of PTC India Limited established with the mandate to provide financial services in the energy value chain. The Company provides non-fund based financial services adding value to green field and brown field projects at various stages of growth and development.

Geojit BNP Paribas Financial Services Ltd provides a range of financial services.  The Company provides brokerage, portfolio management, insurance, commodities trading, and other products and services.

Indiabulls Ventures Limited is engaged in consumer finance business. The Company, through its subsidiaries, provides consumer loans and loans to businesses through its mobile application software. Indiabulls Ventures also provides securities and derivative brokerage services. Indiabulls Ventures serves clients in India.

Central China Securities Co., Ltd. is a securities company engaged in the brokerage, investment banking, investment management, and trading businesses primarily in China. The Company trades in stocks, funds, bonds, and commodity and financial futures on behalf of its clients; and provides margin financing, securities lending, and wealth management services.

OSK Holdings Berhad is an investment holding company. Through its subsidiaries, the Company provides retail and institutional broking in equities, futures and fixed income, underwriting and placement of securities, corporate finance and advisory, commercial and wholesale banking, asset management, trustee services and issues derivatives and structured products.

Ares Acquisition Corporation operates as a blank check company. The Company aims to acquire one and more businesses and assets, via a merger, capital stock exchange, asset acquisition, stock purchase, and reorganization.

GAMCO Investors, Inc. provides discretionary investment services to a broad spectrum of investors. The Company's principal objective is to seek long term capital appreciation primarily through the equity markets by applying its analytical process to management of client portfolios.

Equity Holdings Limited provides personal trust and financial services to customers in Australia.   Services include will and estate planning, trustee for settlements, financial guardian, investment and property management and fund investments. Other services provided by the company  include income tax services, short term share trading and mortgage loans and investments.

Aizawa Securities Co Ltd is a comprehensive securities firm. The Company provides financial services such as dealing, brokerage, underwriting, and distribution of securities, and investment trust.

JAFCO Co., Ltd. forms venture capital groups to invest primarily in domestic and foreign private companies with high potential for future growth.  The Company also provides management services to the groups, makes loans and offers consultation services to the invested companies.

China Bills Finance Corporation acts as a dealer and broker of commercial paper, certificates of deposit, acceptances, and treasury bills.  The Company also acts as a registrar, underwriter and guarantor of commercial paper, and as a broker of interbank placements with financial institutions.

Guotai Junan International Holdings Ltd. is a securities brokerage house. The Company's services include securities and futures dealing and broking services for various financial markets, corporate finance and ECM services, asset and fund management services and financing services such as margin financing and other types of financing.

Shinyoung Securities Co., Ltd. offers brokerage, securities dealing, and underwriting services in Korea.  The Company also provides mutual funds, certificate of deposits (CDs), corporate finance, bonds, and online trading services to its clients.

Edelweiss Financial Services Ltd. provides financial services.  The Company offers financial services including lines of credit, investment banking, institutional and retail broking, financial planning, asset advisory, life insurance, and investment management services.

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Edelweiss Financial Services (EDEL IN)

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

Bitcoin holdings by issuers and investors is driving crypto custody demand. Big banks are stepping. A big opportunity, but some ESG investors might...

Kyle Rudden

Indian NBFCs: Co-Lending Seems to Be Gaining Traction - Indiabulls/HDFC New Partners in Town

Recent announcement by Indiabulls HF, a large HFC, to completely reorient its business model towards co-lending suggests that co-lending as a...

Ankit Agrawal, CFA

Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs

In the upcoming reform agenda for PSBs, there is likely to be a push towards co-lending. Edelweiss, who has already partnered with PSBs and is...

Ankit Agrawal, CFA

Edelweiss: Very Well Capitalized and On the Path to Profitability and Growth

Edelweiss has had depressed earnings in the past but is poised to benefit from many growth and profitability levers going forward. It is also very...

Ankit Agrawal, CFA

Edelweiss Financial Services – The Whole Package

EDELWEISS FINANCIAL SERVICES: Edelweiss reported another loss. We are troubled by the enormity of the breakdown in credit, light loss reserves at...

Thomas J. Monaco

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