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

*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.

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.   

*Positive Spin Still Off From Organizational Reality: HDFC Bank (HDFCB.IN) [HDFCB] released a FY 4Q21 balance sheet update, two weeks ahead of its scheduled financial results announcement on April 17, 2020. HDFCB tried to place a positive spin on its lending and deposit share gain update; and *Back to Reality: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results. An update on credit would have been more helpful.

*Positive Spin Still Off From Organizational Reality: HDFC Bank (HDFCB.IN) [HDFCB] released a FY 4Q21 balance sheet update, two weeks ahead of its scheduled financial results announcement on April 17, 2020. HDFCB tried to place a positive spin on its lending and deposit share gain update; and *Back to Reality: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results. An update on credit would have been more helpful.    

HDFC Bank – Update Does Little To Quell Fears

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.   

HDFC Bank – Story Appears Different From Reality

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 (ADR) (HDB US)

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

ICICI Bank – Much Better

ICICI BANK: ICICI reported a 6.5% linked quarter improvement in FY 4Q21 operating results. Credit weakness is still there, but the breakdown in net...

Thomas J. Monaco

HDFC Bank – Big Credit Disappointment

HDFC BANK: HDFCB released a disappointing FY 4Q21 bottom-line, declining 6.5% QOQ, due higher provisions and costs. Net new NPLs increased 130.4%...

Thomas J. Monaco

HDFC Bank – Update Does Little To Quell Fears

HDFC BANK: HDFCB released a FY 4Q21 balance sheet update. HDFCB tried to place a positive spin on its lending and deposit share gain update....

Thomas J. Monaco

HDFC Bank – Story Appears Different From Reality

HDFC BANK: HDFCB recently put a positive spin on nearly every aspect of its business. However, credit quality and provision realities are far...

Thomas J. Monaco

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