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

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Equity Bottom-Up

Edelweiss Financial Services / Equity Bottom-Up

<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

Thematic (Sector/Industry)

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st; and*Further Clarification Expected September 28th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on September 28th.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st; and*Further Clarification Expected September 28th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on September 28th. 

Reserve Bank of India – Toothless Tiger

*Dreadful Bottom-line Continues: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported a consolidated loss of INR 2.6 bn (post minority interest) for FY 1Q21. While still loss making, losses were reduced INR 20.2 bn (88.4%) linked quarter reflecting several factors: a) impairment charges declined INR 22.9 bn (89.8%) as no COVID-19 related provisions were taken during FY 1Q21; b) expense declines of INR 1.8 bn (16.8%) pushing Edelweiss to be just modestly operationally profitable as its C/I ratio was reduced from 133.2% to 98.0%; and c) an INR 1.1 bn (13.2%) improvement in net revenues driven by lower interest costs, possibly due to a reduction in overall debt and lower cost of funds; *Restructure Continues: Edelweiss continues to take various steps to restructure its overall business: a) de-leveraging the  credit entities; , b) debt repayment; and c) asset/stake disposals; and *Awful Disclosure: Edelweiss is still required under the law to provide adequate quarterly financial disclosures. This must be improved  - especially if the Company is actually a going concern.

*Dreadful Bottom-line Continues: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported a consolidated loss of INR 2.6 bn (post minority interest) for FY 1Q21. While still loss making, losses were reduced INR 20.2 bn (88.4%) linked quarter reflecting several factors: a) impairment charges declined INR 22.9 bn (89.8%) as no COVID-19 related provisions were taken during FY 1Q21; b) expense declines of INR 1.8 bn (16.8%) pushing Edelweiss to be just modestly operationally profitable as its C/I ratio was reduced from 133.2% to 98.0%; and c) an INR 1.1 bn (13.2%) improvement in net revenues driven by lower interest costs, possibly due to a reduction in overall debt and lower cost of funds; *Restructure Continues: Edelweiss continues to take various steps to restructure its overall business: a) de-leveraging the  credit entities; , b) debt repayment; and c) asset/stake disposals; and *Awful Disclosure: Edelweiss is still required under the law to provide adequate quarterly financial disclosures. This must be improved  - especially if the Company is actually a going concern.   

Edelweiss Financial Services – Better, But Still Bad

With 51% stake sale in the Wealth Management (WM) and Capital Markets (CM) businesses and significant wind-down of the corporate credit book since our initiation note on <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> in Dec 2019, Edelweiss' business has gone through significant changes. Taking into account the updated fundamentals, we reassess Edelweiss' valuation and catalysts.

With 51% stake sale in the Wealth Management (WM) and Capital Markets (CM) businesses and significant wind-down of the corporate credit book since our initiation note on Edelweiss Financial Services (EDEL IN) in Dec 2019, Edelweiss' business has gone through significant changes. Taking into account the updated fundamentals, we reassess Edelweiss' valuation and catalysts.

Edelweiss: The Way Forward - Detailed Valuation and Catalysts Update

India

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)

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

Reserve Bank of India – Toothless Tiger

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing...

Thomas J. Monaco

Edelweiss Financial Services – Better, But Still Bad

*Dreadful Bottom-line Continues: Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported a consolidated loss of INR 2.6 bn (post minority...

Thomas J. Monaco

Edelweiss: The Way Forward - Detailed Valuation and Catalysts Update

Edelweiss announced its Q1FY21 earnings this Friday. Alongside

Ankit Agrawal, CFA

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