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

Edelweiss Financial Services / Equity Bottom-Up

*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

Specialist in Indian Banking and Economic Research

Hemindra Hazari

In a significant event, Deepak Parekh, the non-executive chairman of <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>, agreed to <a href="https://www.sebi.gov.in/enforcement/orders/feb-2021/summary-settlement-order-in-respect-of-mr-deepak-parekh-the-matter-of-non-compliance-with-the-erstwhile-listing-agreement_49028.html" target="_blank" rel="noopener">settle</a> with the Securities and Exchange Board of India (SEBI) in connection with the latter’s investigation of non-compliance with the erstwhile Listing Agreement.  Parekh settled the issue by paying Rs 937,500 (US$ 12,727) to SEBI “without admitting or denying the findings of fact and conclusions of law…” As per SEBI’s settlement order, the capital market regulator had conducted an investigation into an inter-corporate deposit (ICD) of Rs 7.5 bn extended by HDFC to Gliders Buildcon Realtors, a group company of Piramal Realty, in FY2012. Sometime in FY2015, at the request of Gliders Buildcon, HDFC converted the ICD into a term loan. Parekh was chairman of HDFC, and was on the committee which approved the loan. At the same time, he also belonged to the Advisory Board of the Piramal Group, including Piramal Realty, for which he received advisory fees for the calendar years 2011 to 2015 and for the FY2017 and FY2018. The order stated, “HDFC has adopted a Code of Conduct for all its Directors and Senior Management Personnel in terms of Clause 49 (I) (D) of the erstwhile listing agreement. However, the applicant failed to comply with the Code of Conduct of HDFC Ltd., resulting in the violation of Clause 49 (I) (D) (ii) of the erstwhile listing agreement.”What is surprising is that an individual of Parekh’s stature and experience, in a company which is a favourite of foreign investors and professes to maintain high standards of corporate governance and transparency, could have committed such a violation. Normally, board directors disclose their interests and recuse themselves from discussions where there may be even perceived conflicts of interest. In this particular case, Parekh was on the HDFC committee which approved the conversion of an ICD into a term loan for Gliders Buildcon, while also accepting advisory fees from the Piramal group. SEBI’s settlement order throws a spotlight on Parekh’s advisory role to companies (especially in real estate), from which he earns fees, while simultaneously being on the important loan committee of HDFC, which extends loans to corporates, many of whom are engaged in real estate. It is also disheartening that HDFC has neither publicly clarified this issue nor provided any explanation for the conduct of their non-executive chairman.The business media, apart from summarising the SEBI settlement order, has completely ignored the event, by neither analysing the implications nor providing additional information. Given the iconic stature of Parekh in India’s financial system and the prominence of HDFC, one expected the media and the sell-side to further investigate and comment on this important development. Sadly, the state of business journalism and sell-side research is such that when it comes to prominent companies and iconic business leaders, critical reporting and analysis are eschewed. The critical issue before HDFC from a corporate governance perspective is how the board of directors will view the payment by its chairman in settlement of an investigation by the capital markets regulator. Although the settlement order clearly states that the monetary payment does not imply admission of guilt or wrong doing, HDFC’s <a href="https://www.hdfc.com/allpolicies/Policy_on_Fit_and_Proper_Criteria_HDFC.pdf" target="_blank" rel="noopener">Fit and Proper Criteria</a>  for its directors, has a section on whether its directors “have come to the adverse notice of regulators such as SEBI…” As HDFC accepts deposits from the public, has a foreign shareholding of 72% and is the parent of prominent companies in the financial system such as <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>, <a href="https://www.smartkarma.com/entities/hdfc-asset-management-co-ltd" target="_blank" data-smartkarma-citation="entities:27027:1" rel="noopener">HDFC Asset Management Co Ltd (HDFCAMC IN)</a>, <a href="https://www.smartkarma.com/entities/hdfc-standard-life-insurance" target="_blank" data-smartkarma-citation="entities:26004:1" rel="noopener">HDFC Standard Life Insurance (HDFCLIFE IN)</a> and HDFC Ergo General Insurance, the conduct of its board directors, and especially its chairman, must be pristine. The role of HDFC’s independent directors and its Nominations and Remuneration Committee (NRC) in responding to Parekh’s payment settlement with SEBI and his eligibility to continue as a director will be closely watched by the capital market, and it may also set an example of how boards should respond when faced with such a situation. It is worth recalling that, even though there was no conclusive evidence of his wife’s wrongdoing, Caesar declared that “Caesar’s wife must be above suspicion”, and divorced her.

In a significant event, Deepak Parekh, the non-executive chairman of HDFC Limited (HDFC IN), agreed to settle with the Securities and Exchange Board of India (SEBI) in connection with the latter’s investigation of non-compliance with the erstwhile Listing Agreement.  Parekh settled the issue by paying Rs 937,500 (US$ 12,727) to SEBI “without admitting or denying the findings of fact and conclusions of law…” As per SEBI’s settlement order, the capital market regulator had conducted an investigation into an inter-corporate deposit (ICD) of Rs 7.5 bn extended by HDFC to Gliders Buildcon Realtors, a group company of Piramal Realty, in FY2012. Sometime in FY2015, at the request of Gliders Buildcon, HDFC converted the ICD into a term loan. Parekh was chairman of HDFC, and was on the committee which approved the loan. At the same time, he also belonged to the Advisory Board of the Piramal Group, including Piramal Realty, for which he received advisory fees for the calendar years 2011 to 2015 and for the FY2017 and FY2018. The order stated, “HDFC has adopted a Code of Conduct for all its Directors and Senior Management Personnel in terms of Clause 49 (I) (D) of the erstwhile listing agreement. However, the applicant failed to comply with the Code of Conduct of HDFC Ltd., resulting in the violation of Clause 49 (I) (D) (ii) of the erstwhile listing agreement.”What is surprising is that an individual of Parekh’s stature and experience, in a company which is a favourite of foreign investors and professes to maintain high standards of corporate governance and transparency, could have committed such a violation. Normally, board directors disclose their interests and recuse themselves from discussions where there may be even perceived conflicts of interest. In this particular case, Parekh was on the HDFC committee which approved the conversion of an ICD into a term loan for Gliders Buildcon, while also accepting advisory fees from the Piramal group. SEBI’s settlement order throws a spotlight on Parekh’s advisory role to companies (especially in real estate), from which he earns fees, while simultaneously being on the important loan committee of HDFC, which extends loans to corporates, many of whom are engaged in real estate. It is also disheartening that HDFC has neither publicly clarified this issue nor provided any explanation for the conduct of their non-executive chairman.The business media, apart from summarising the SEBI settlement order, has completely ignored the event, by neither analysing the implications nor providing additional information. Given the iconic stature of Parekh in India’s financial system and the prominence of HDFC, one expected the media and the sell-side to further investigate and comment on this important development. Sadly, the state of business journalism and sell-side research is such that when it comes to prominent companies and iconic business leaders, critical reporting and analysis are eschewed. The critical issue before HDFC from a corporate governance perspective is how the board of directors will view the payment by its chairman in settlement of an investigation by the capital markets regulator. Although the settlement order clearly states that the monetary payment does not imply admission of guilt or wrong doing, HDFC’s Fit and Proper Criteria  for its directors, has a section on whether its directors “have come to the adverse notice of regulators such as SEBI…” As HDFC accepts deposits from the public, has a foreign shareholding of 72% and is the parent of prominent companies in the financial system such as HDFC Bank (HDFCB IN), HDFC Asset Management Co Ltd (HDFCAMC IN), HDFC Standard Life Insurance (HDFCLIFE IN) and HDFC Ergo General Insurance, the conduct of its board directors, and especially its chairman, must be pristine. The role of HDFC’s independent directors and its Nominations and Remuneration Committee (NRC) in responding to Parekh’s payment settlement with SEBI and his eligibility to continue as a director will be closely watched by the capital market, and it may also set an example of how boards should respond when faced with such a situation. It is worth recalling that, even though there was no conclusive evidence of his wife’s wrongdoing, Caesar declared that “Caesar’s wife must be above suspicion”, and divorced her. 

The Significance of Caesar’s Wife for the HDFC Board

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion. LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking.

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion. LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking. 

DBS Group Holdings – COVID & India Not A Good Combo

* It Just Keeps Getting Worse: Punjab National Bank (PNB.IN) [PNB] reported net income of INR 5.1 bn, declining INR 1.1 bn (18.5%) linked quarter. Three factors drove the poor result: a) net interest income declined INR 627 mn (0.8%) despite loan growth of 1.2%, as the NIM declined 9 bp to 2.93%; b) a loss provision increase of INR 5.8 bn (14.0%). Despite the increase, provisioins still fell short given the acerating level of credit risk; and c) a 10.6% linked quarter increase in PNB’s tax rate to 47.2%, which detracted INR 1.0 bn from the bottom-line; and*Credit Risk Leads to Capital Shortfall: Inclusive of the INR 9.6 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 82.6 bn or 33.3% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that at a minimum loss reserves are light by at least INR 730 mn  - or approximately 100% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions to be complete in FY 1H21.

* It Just Keeps Getting Worse: Punjab National Bank (PNB.IN) [PNB] reported net income of INR 5.1 bn, declining INR 1.1 bn (18.5%) linked quarter. Three factors drove the poor result: a) net interest income declined INR 627 mn (0.8%) despite loan growth of 1.2%, as the NIM declined 9 bp to 2.93%; b) a loss provision increase of INR 5.8 bn (14.0%). Despite the increase, provisioins still fell short given the acerating level of credit risk; and c) a 10.6% linked quarter increase in PNB’s tax rate to 47.2%, which detracted INR 1.0 bn from the bottom-line; and*Credit Risk Leads to Capital Shortfall: Inclusive of the INR 9.6 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 82.6 bn or 33.3% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that at a minimum loss reserves are light by at least INR 730 mn  - or approximately 100% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions to be complete in FY 1H21.  

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap.

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap. 

India

HDFC Asset Management Co. Ltd. operates as an investment management firm. The Company offers portfolio management and advisory services to individuals, institutions, trusts, private funds, charitable organizations, and investment companies. HDFC Asset Management serves customers in India.

HDFC Asset Management Co Ltd (HDFCAMC IN)

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HDFC Asset Management Co Ltd (HDFCAMC IN)

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

The Significance of Caesar’s Wife for the HDFC Board

The role of HDFC’s independent directors in responding to Deepak Parekh’s payment settlement with SEBI and his eligibility to continue as a...

Hemindra Hazari

DBS Group Holdings – COVID & India Not A Good Combo

DBS GROUP HOLDINGS: DBS reported a 4Q20 results decline of 22.0% linked quarter. Results remain troubling across the board. India deal poses...

Thomas J. Monaco

Punjab National Bank – Match Is Lit

PUNJAB NATIONAL BANK: PNB reported a net income decline of 18.5% linked quarter. Despite the increase, provisions still fell short to the tune of...

Thomas J. Monaco

State Bank of India – Bad Credit

STATE BANK OF INDIA: SBI reported FY 3Q21 result increase of 22.1%) linked quarter led by a completely unwarranted 58.1% decline in provisions and...

Thomas J. Monaco

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