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

*Results Down, Credibility Continues To Increase: LIC Housing Finance (LICHF.IN) [LIC] reported FY 4Q21 bottom-line results of 4.0 bn, declining INR 3.5 bn (45.0%) linked quarter. Results were weaker primarily due to a massive loss provision increase of INR 7.9 bn (4.2x) over the period reflecting an increase of 16% in Stage 3 loans; and*Negative Credit Delta: Despite recoveries of INR 400 mn, net new NPLs at LIC skyrocketed to INR 12.6 bn or increasing 62.0% on an annualized basis during the period – quite the change from annualized net new NPL decline of 3.2% in FY 3Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 22 bn to the reserve.

 *Results Down, Credibility Continues To Increase: LIC Housing Finance (LICHF.IN) [LIC] reported FY 4Q21 bottom-line results of 4.0 bn, declining INR 3.5 bn (45.0%) linked quarter. Results were weaker primarily due to a massive loss provision increase of INR 7.9 bn (4.2x) over the period reflecting an increase of 16% in Stage 3 loans; and*Negative Credit Delta: Despite recoveries of INR 400 mn, net new NPLs at LIC skyrocketed to INR 12.6 bn or increasing 62.0% on an annualized basis during the period – quite the change from annualized net new NPL decline of 3.2% in FY 3Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 22 bn to the reserve. 

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.

Thematic (Sector/Industry)

India was in a banking crisis before 2020 and the impact of the current crisis is far worse than in most other countries. Quarterly data of banks reveals dramatic deterioration in credit metrics during March 2021.

India was in a banking crisis before 2020 and the impact of the current crisis is far worse than in most other countries. Quarterly data of banks reveals dramatic deterioration in credit metrics during March 2021. 

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: We calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: We calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

With the Reserve Bank of India (RBI) imposing a <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51650" target="_blank" rel="noopener">penalty</a> of Rs 100 mn (US$ 1.4 mn) on <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> , the curtain has finally come down on the considerable irregularities (around 2014-2019) in the bank’s automobile loan division. After verifying a whistleblower’s <a href="https://twitter.com/MDahariya/status/1273101932782137347?s=20" target="_blank" rel="noopener">tweets</a>  (June 17, 2020), this analyst  highlighted (on July 4, 2020)  the <a href="https://hemindrahazari.com/2020/07/04/nothing-to-see-here-move-along-radio-silence-over-departure-of-two-top-hdfc-bank-executives/" target="_blank" rel="noopener">unusual</a> departures of two senior HDFC Bank executives, one of whom was in-charge of automobile loans, and exposed the complete lack of transparency by the bank on their exits. Even though the whistleblower tagged <a href="https://twitter.com/mdahariya/status/1273134673162645508?lang=en" target="_blank" rel="noopener">prominent</a>  banking editors in the media in his initial tweets, they <a href="https://hemindrahazari.com/2020/09/30/hdfc-bank-where-ignorance-is-bliss-block-whistleblowers-on-twitter/" target="_blank" rel="noopener">refused</a> to pursue the story. It was only when Bloomberg ‘<a href="https://www.bloombergquint.com/business/hdfc-bank-is-said-to-probe-lending-practices-at-vehicle-unit" target="_blank" rel="noopener">broke</a>’ the news (July 13, 2020) that the story got traction in the media and the RBI launched its investigation. There are many lessons to be drawn by stakeholders from this episode.<ol>
<li>Normally, when a regulator finds a violation, it calculates the gains derived from such operations and the monetary penalty is a multiple of the illegitimate gain, to deter such activity in the future. It is difficult to believe that over the course of 5 years the bank made gains of less than Rs 100 mn on this practice. Thus the RBI has levied a pittance of a penalty on HDFC Bank.</li>
<li>The bundling of the Global Positioning System (GPS) device with the automobile loan was approved by the bank, which received a <a href="https://twitter.com/MDahariya/status/1307619778186670080?s=20" target="_blank" rel="noopener">commission</a>  for each sale. Hence it was not the work of errant junior bank officials. This indicates that senior bank officials were to be held responsible for approving and facilitating the sale of a non-financial product by the bank in violation of  <a href="https://indiankanoon.org/doc/392253/#:~:text=Section%206(2)%20in%20BANKING%20REGULATION%20ACT%2C1949&amp;text=(2)%20No%20banking%20company%20shall,sub%2Dsection%20(1)." target="_blank" rel="noopener">Section 6(2)</a> of the Banking Regulation Act, 1949 (BRA).</li>
<li>HDFC Bank had poor compliance and vigilance controls which overlooked for some years the fact that bank officials in the automobile loans department were being <a href="https://twitter.com/MDahariya/status/1305355107870085120?s=20" target="_blank" rel="noopener">incentivised</a> by Trackpoint GPS Pvt. Ltd., a third party, for meeting sales targets and selling its GPS in contravention of <a href="https://indiankanoon.org/doc/500401/" target="_blank" rel="noopener">Section 10</a> of the BRA.</li>
<li>High performers, especially direct reportees to the CEO, need to be carefully monitored for compliance. HDFC Bank has to look into the role of Ashok Khanna, former Group Head, Automobile Loans (directly reporting to then CEO, Aditya Puri). How could Khanna have been unaware of the irregularities in his department which he headed for many years, and why did the board of directors grant him annual extensions after the bank’s official retirement date for staff? (He finally retired/was denied further extension on March 31, 2020.)</li>
<li>Regardless of the pedigree of the company and its Chief Executive Officer (CEO), stakeholders must question and assess the claims of the senior management and demand more transparency from the company.</li>
<li>Stakeholders and the regulator must pay attention to whistle blowers and look into their claims.</li>
<li>The sentinels of the ‘free-market’, namely, the business media, sell-side and credit rating analysts are unlikely to take the lead in investigating the claims of whistle blowers when it pertains to prominent companies and their ‘iconic’ CEOs.</li>
<li>Bank customers who have been mis-sold products are unlikely to get any relief from the banking regulator.</li>
<li>The class action suit <a href="https://hemindrahazari.com/2020/09/20/us-firms-class-action-suits-hdfc-banks-auto-loan-malpractices-have-hit-the-fan/" target="_blank" rel="noopener">filed</a> in the United States of America will be strengthened by the RBI’s penalty on HDFC Bank for the irregularities in its automobile loan division</li>
<li>
RBI’s penalty on HDFC Bank, and the regular updates by the whistleblower, indicate that stakeholders should look beyond a premium valuation on the capital market, consistent growth in earnings and superior asset quality ("best in class") to evaluate the quality of a company.  The fact that the regulator itself has credited the whistleblower complaint lends considerable weight to the whistleblower in question, whom HDFC Bank had tried its best to <a href="https://twitter.com/MDahariya/status/1399211870175694854?s=20" target="_blank" rel="noopener">discredit</a> . Aditya Puri (the previous CEO) had a <a href="https://hemindrahazari.com/2020/10/25/time-to-junk-the-less-savoury-parts-of-the-legacy-of-hdfc-banks-iconic-ceo/" target="_blank" rel="noopener">history</a> of compliance issues, and the irregularities which took place under his watch were grave. Despite this, one hopes that Sashidhar Jagdisan (the present CEO) takes compliance as seriously as achieving business targets, and such incidents are not repeated in the future.</li>
</ol>

With the Reserve Bank of India (RBI) imposing a penalty of Rs 100 mn (US$ 1.4 mn) on HDFC Bank (HDFCB IN) , the curtain has finally come down on the considerable irregularities (around 2014-2019) in the bank’s automobile loan division. After verifying a whistleblower’s tweets  (June 17, 2020), this analyst  highlighted (on July 4, 2020)  the unusual departures of two senior HDFC Bank executives, one of whom was in-charge of automobile loans, and exposed the complete lack of transparency by the bank on their exits. Even though the whistleblower tagged prominent  banking editors in the media in his initial tweets, they refused to pursue the story. It was only when Bloomberg ‘broke’ the news (July 13, 2020) that the story got traction in the media and the RBI launched its investigation. There are many lessons to be drawn by stakeholders from this episode.
Normally, when a regulator finds a violation, it calculates the gains derived from such operations and the monetary penalty is a multiple of the illegitimate gain, to deter such activity in the future. It is difficult to believe that over the course of 5 years the bank made gains of less than Rs 100 mn on this practice. Thus the RBI has levied a pittance of a penalty on HDFC Bank.
The bundling of the Global Positioning System (GPS) device with the automobile loan was approved by the bank, which received a commission  for each sale. Hence it was not the work of errant junior bank officials. This indicates that senior bank officials were to be held responsible for approving and facilitating the sale of a non-financial product by the bank in violation of  Section 6(2) of the Banking Regulation Act, 1949 (BRA).
HDFC Bank had poor compliance and vigilance controls which overlooked for some years the fact that bank officials in the automobile loans department were being incentivised by Trackpoint GPS Pvt. Ltd., a third party, for meeting sales targets and selling its GPS in contravention of Section 10 of the BRA.
High performers, especially direct reportees to the CEO, need to be carefully monitored for compliance. HDFC Bank has to look into the role of Ashok Khanna, former Group Head, Automobile Loans (directly reporting to then CEO, Aditya Puri). How could Khanna have been unaware of the irregularities in his department which he headed for many years, and why did the board of directors grant him annual extensions after the bank’s official retirement date for staff? (He finally retired/was denied further extension on March 31, 2020.)
Regardless of the pedigree of the company and its Chief Executive Officer (CEO), stakeholders must question and assess the claims of the senior management and demand more transparency from the company.
Stakeholders and the regulator must pay attention to whistle blowers and look into their claims.
The sentinels of the ‘free-market’, namely, the business media, sell-side and credit rating analysts are unlikely to take the lead in investigating the claims of whistle blowers when it pertains to prominent companies and their ‘iconic’ CEOs.
Bank customers who have been mis-sold products are unlikely to get any relief from the banking regulator.
The class action suit filed in the United States of America will be strengthened by the RBI’s penalty on HDFC Bank for the irregularities in its automobile loan division

RBI’s penalty on HDFC Bank, and the regular updates by the whistleblower, indicate that stakeholders should look beyond a premium valuation on the capital market, consistent growth in earnings and superior asset quality ("best in class") to evaluate the quality of a company.  The fact that the regulator itself has credited the whistleblower complaint lends considerable weight to the whistleblower in question, whom HDFC Bank had tried its best to discredit . Aditya Puri (the previous CEO) had a history of compliance issues, and the irregularities which took place under his watch were grave. Despite this, one hopes that Sashidhar Jagdisan (the present CEO) takes compliance as seriously as achieving business targets, and such incidents are not repeated in the future.


HDFC Bank Penalty: RBI Strokes HDFC Bank on the Knuckles

*Poor Result: Bank of Baroda (BOB.IN) [BOB] reported a FY 4Q21 loss of INR 10.5 bn, quite a reversal of fortune from the gains of INR 10.6 bn in FY 3Q21. Several factors drove BOB’s poor performance: a) net interest income declined INR 3.7 bn (5.0%) linked quarter driven by NIM expansion of 5 bp to 2.72% while the loan book only grew 0.2%; b) a loss provision increase of INR 1.5 bn (4.4%) despite further weakness in lending; an operating expense increase of INR 3.9 bn (7.3%) driven primarily by other costs which increased INR 3.1 bn (13.8%) – pushing BOB’s C/I ratio 3.2% higher to 63.2%; and the write-down of INR 33.1 bn in un-utilized DTAs; and*Poor Reserve Cover: Further, net new NPLs remain elevated at INR 13.5 bn or 11.2% annualized. Keep in mind, a bank with over 8% of NPLs is typically considered an insolvent institution. By our calculation, however, BOB’s reserves still remain light by INR 293 bn or nearly 12 quarters of pre-tax earnings.

*Poor Result: Bank of Baroda (BOB.IN) [BOB] reported a FY 4Q21 loss of INR 10.5 bn, quite a reversal of fortune from the gains of INR 10.6 bn in FY 3Q21. Several factors drove BOB’s poor performance: a) net interest income declined INR 3.7 bn (5.0%) linked quarter driven by NIM expansion of 5 bp to 2.72% while the loan book only grew 0.2%; b) a loss provision increase of INR 1.5 bn (4.4%) despite further weakness in lending; an operating expense increase of INR 3.9 bn (7.3%) driven primarily by other costs which increased INR 3.1 bn (13.8%) – pushing BOB’s C/I ratio 3.2% higher to 63.2%; and the write-down of INR 33.1 bn in un-utilized DTAs; and*Poor Reserve Cover: Further, net new NPLs remain elevated at INR 13.5 bn or 11.2% annualized. Keep in mind, a bank with over 8% of NPLs is typically considered an insolvent institution. By our calculation, however, BOB’s reserves still remain light by INR 293 bn or nearly 12 quarters of pre-tax earnings.

Bank of Baroda – No Light In This Tunnel

India

HDFC Bank Ltd. offers a wide range of services to the global corporate sector. The Bank provides corporate banking and custodial services and is active in the treasury and capital markets. HDFC also markets project advisory services and capital market products such as Global Deposit Receipts, Euro currency loans, and Euro currency bonds.

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HDFC Bank (HDFCB IN)

LIC Housing Finance – Hit With A Brick

LIC HOUSING FINANCE: LIC reported a poor FY 4Q21 bottom-line, declining 45.0% linked quarter due to a massive loss provision reflecting a 16%...

Thomas J. Monaco

India Banks – Still In Crisis?

India was in a banking crisis before 2020 and the current crisis is worse than in many other countries. Unlike most regions, India latest quarterly...

Daniel Tabbush

HDFC Bank – Rose Colored Glasses

HDFC BANK: A competitor hosted a recent conference call with HDFCB. It chose to focus on numerous items not having to do with credit. The longer...

Thomas J. Monaco

HDFC Bank Penalty: RBI Strokes HDFC Bank on the Knuckles

The irregularities which took place under Puri's watch were grave. Despite this, one hopes that Sashi Jagdisan (the present CEO) takes compliance...

Hemindra Hazari

Bank of Baroda – No Light In This Tunnel

BANK OF BARODA: BOB reported a FY 4Q21 loss of INR 10.5 bn. Net new NPLs remain elevated at 11.2% annualized. BOB’s reserves still remain light by...

Thomas J. Monaco

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