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

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 3Q21 results of INR 76.5 bn, which increased INR 12.5 bn (16.6%) linked quarter. On a core operating basis, results improved INR 11.5 bn (17.7%) to INR 76.5 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. 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, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis; and*Reserve Cover Needs Improvement: At this time, 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.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 3Q21 results of INR 76.5 bn, which increased INR 12.5 bn (16.6%) linked quarter. On a core operating basis, results improved INR 11.5 bn (17.7%) to INR 76.5 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. 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, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis; and*Reserve Cover Needs Improvement: At this time, 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 – Credit Remains A Serious Challenge

*RBI Fines Bajaj: The Reserve Bank of India (RBI) fined Bajaj Finance (BAF.IN) [Bajaj] INR 25 mn for failing to ensure that its debt recovery agents were following the appropriate guidelines; and*Credit Costs Pressured: While the Bajaj penalty is not material, the more intense level of regulatory scrutiny could negatively impact near-term retail loan collection efficiency and raise concerns over the cost of risk and the revival of loan growth. This recent action on recovery methods on top of already high bounce rates could potentially lead to a slowdown in the collection efficiencies and higher loss provisions.

*RBI Fines Bajaj: The Reserve Bank of India (RBI) fined Bajaj Finance (BAF.IN) [Bajaj] INR 25 mn for failing to ensure that its debt recovery agents were following the appropriate guidelines; and*Credit Costs Pressured: While the Bajaj penalty is not material, the more intense level of regulatory scrutiny could negatively impact near-term retail loan collection efficiency and raise concerns over the cost of risk and the revival of loan growth. This recent action on recovery methods on top of already high bounce rates could potentially lead to a slowdown in the collection efficiencies and higher loss provisions. 

Thematic (Sector/Industry)

*New Circular, New Loopholes: The Reserve Bank of India (RBI) has proposed capping non-bank financial company (NBFC) dividend payout ratios to a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

*New Circular, New Loopholes: The Reserve Bank of India (RBI) has proposed capping non-bank financial company (NBFC) dividend payout ratios to a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

Reserve Bank of India – Nothing Changes

*Management Call Doesn’t Allay Fears: FY 2Q21 results were significantly driven a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics.  We find that reserves were light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. The recent virtual call held by a competitor unfortunately did not allay our concern; and*Other Items Discussed: State Bank of India (SBIN.IN) [SBI] did reiterate its guidance for problem loan formation (slippages and restructuring) at 2.5% of loans outstanding in FY21. While SBI’s CET 1 ratio stood at 10.5% as of FY 2Q21,our calculated loss reserve shortfall would suggest that SBI has further wood to chop in this area.In addition, SBI is confident that it will be able to enhance its digital platform YONO into a more robust and scalable platform.

*Management Call Doesn’t Allay Fears: FY 2Q21 results were significantly driven a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics.  We find that reserves were light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. The recent virtual call held by a competitor unfortunately did not allay our concern; and*Other Items Discussed: State Bank of India (SBIN.IN) [SBI] did reiterate its guidance for problem loan formation (slippages and restructuring) at 2.5% of loans outstanding in FY21. While SBI’s CET 1 ratio stood at 10.5% as of FY 2Q21,our calculated loss reserve shortfall would suggest that SBI has further wood to chop in this area.In addition, SBI is confident that it will be able to enhance its digital platform YONO into a more robust and scalable platform.

State Bank of India – Reserve Shortfall Needs To Be Addressed

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES Bank's (YES IN)</a> US$-bond hit par-value recently. Par is plenty for investors. Having delivered 20 price points in return since our Buy recommendation, pre-rescue in February, Smartkarma readers should be satiated with this above average return. Upside is now much less likely, although temporarily pricing slightly over par could occur during the next few months. As such, we move to Underweight YES Bank’s 3 ¾% coupon Nov. 2023 maturity bond, from Overweight on a relative value basis.We put YES Bank’s recent bond outperformance down to a combination of a broad risk asset rally and positive news flow plus the lack of negative news regarding the recovery of the institution. The Reserve Bank of India’s take-over of <a href="https://www.smartkarma.com/entities/lakshmi-vilas-bank-ltd" target="_blank" data-smartkarma-citation="entities:17552:1" rel="noopener">Lakshmi Vilas Bank (LVB IN)</a> has both removed the spotlight from YES Bank and reminded investors that this entity was rescued.Delivery on management’s restructuring goals remains to be seen while headwinds build for India, post-COVID-19. As such, with less than two-years to maturity and spreads at less than one-half their levels of one-year ago, now is not the time to jump in. We believe it is time to lighten allocation to this security and reposition elsewhere.

YES Bank's (YES IN) US$-bond hit par-value recently. Par is plenty for investors. Having delivered 20 price points in return since our Buy recommendation, pre-rescue in February, Smartkarma readers should be satiated with this above average return. Upside is now much less likely, although temporarily pricing slightly over par could occur during the next few months. As such, we move to Underweight YES Bank’s 3 ¾% coupon Nov. 2023 maturity bond, from Overweight on a relative value basis.We put YES Bank’s recent bond outperformance down to a combination of a broad risk asset rally and positive news flow plus the lack of negative news regarding the recovery of the institution. The Reserve Bank of India’s take-over of Lakshmi Vilas Bank (LVB IN) has both removed the spotlight from YES Bank and reminded investors that this entity was rescued.Delivery on management’s restructuring goals remains to be seen while headwinds build for India, post-COVID-19. As such, with less than two-years to maturity and spreads at less than one-half their levels of one-year ago, now is not the time to jump in. We believe it is time to lighten allocation to this security and reposition elsewhere. 

YES Bank: Par Is Plenty- Move to Underweight

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 – Credit Remains A Serious Challenge

HDFC BANK: HDFCB reported FY 3Q21 results increased 16.6% linked quarter. Net new NPLs increased 151% annualized, and reserves are currently short...

Thomas J. Monaco

Bajaj Finance – Smack

BAJAJ FINANCE: RBI fined Bajaj Finance INR 25 mn for failing to ensure that its debt recovery agents were following the appropriate guidelines....

Thomas J. Monaco

Reserve Bank of India – Nothing Changes

RESERVE BANK OF INDIA: New proposed dividend cap on Nonbank financials companies, while trying to rein-in systemic risk, is laden with loopholes.

Thomas J. Monaco

State Bank of India – Reserve Shortfall Needs To Be Addressed

STATE BANK OF INDIA: Recent Call Suggests No Real Progress On Significant Reserve Shortfall, And That Another Capital Raise Not Out Of Question

Thomas J. Monaco

YES Bank: Par Is Plenty- Move to Underweight

Despite incredibly poor asset quality, goals that are years from being realized and liquidity which remains well overstated, YES Bank’s US$-bond...

Hank Calenti, CFA

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