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

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue.

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue. 

*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

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

MSCI Emerging Markets Index / Technical Analysis

As we highlighted in last week’s Int’l Compass, the weight of the evidence suggests commodities are in the early stages of a new secular bull market. Global Materials remains a favorite Sector overweight and we believe outperformance is likely to continue considering the Sector’s long-term bullish RS reversal. Additionally, we are upgrading equal-weighted Energy to overweight due to bullish price and RS inflections -- add exposure with a focus on small- and mid-caps.

As we highlighted in last week’s Int’l Compass, the weight of the evidence suggests commodities are in the early stages of a new secular bull market. Global Materials remains a favorite Sector overweight and we believe outperformance is likely to continue considering the Sector’s long-term bullish RS reversal. Additionally, we are upgrading equal-weighted Energy to overweight due to bullish price and RS inflections -- add exposure with a focus on small- and mid-caps.

Global Commodity-Related Equity Sectors In Secular Bull

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

SBI Cards & Payment Services / Equity Bottom-Up

<div><a href="https://www.smartkarma.com/entities/sbi-cards-payment-services-limited" target="_blank" data-smartkarma-citation="entities:28662:1" rel="noopener">SBI Cards (SBICARD IN)</a> is India's second largest credit card issuer with a market share of 18.7% in terms of number of cards outstanding. SBI Cards is a subsidiary of <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank Of India (SBIN IN)</a>, India’s largest commercial bank, and has Carlyle as its second largest share holder.</div><div>The stock made a tepid debut in the market in Mar 2020, owing to the timing being closely aligned with the COVID-19 onslaught. Its now trading above its listing price, and its operations are normalising. Furthermore, its largest competitor and the market leader in credit cards, <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> was recently barred by the banking regulator from issuing credit cards.</div>

SBI Cards (SBICARD IN) is India's second largest credit card issuer with a market share of 18.7% in terms of number of cards outstanding. SBI Cards is a subsidiary of State Bank Of India (SBIN IN), India’s largest commercial bank, and has Carlyle as its second largest share holder.The stock made a tepid debut in the market in Mar 2020, owing to the timing being closely aligned with the COVID-19 onslaught. Its now trading above its listing price, and its operations are normalising. Furthermore, its largest competitor and the market leader in credit cards, HDFC Bank (HDFCB IN) was recently barred by the banking regulator from issuing credit cards.

2021 High Conviction - SBI Cards & Payments - Multiple Tailwinds, Including Biggest Peers Recent Ban

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)

State Bank of India – On The Hook

STATE BANK OF INDIA: Yes Bank reported FY 3Q21 core operating losses INR 3.8 mn. Net new problem loan annualized growth rate of 99.5% and reserve...

Thomas J. Monaco

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

2021 High Conviction - SBI Cards & Payments - Multiple Tailwinds, Including Biggest Peers Recent Ban

SBI Cards is India's second largest credit card issuer with a market share of 18.7%. SBI Cards is a subsidiary of State Bank Of India (SBIN IN)...

Sumeet Singh

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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State Bank of India – On The Hook

STATE BANK OF INDIA: Yes Bank reported FY 3Q21 core operating losses INR 3.8 mn. Net new problem loan annualized growth rate of 99.5% and reserve...

Thomas J. Monaco

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

Global Commodity-Related Equity Sectors In Secular Bull

We believe commodities are in the early stages of a new secular bull market. Global Materials & Energy remain our favorite Sector overweights - add...

Vermilion Research

2021 High Conviction - SBI Cards & Payments - Multiple Tailwinds, Including Biggest Peers Recent Ban

SBI Cards is India's second largest credit card issuer with a market share of 18.7%. SBI Cards is a subsidiary of State Bank Of India (SBIN IN)...

Sumeet Singh