Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The <a href="https://www.smartkarma.com/entities/s-p-bse-sensex-index" target="_blank" data-smartkarma-citation="entities:31494:1" rel="noopener">S&amp;P BSE SENSEX Index (SENSEX INDEX)</a> is the flagship index of the Bombay Stock Exchange (BSE). The index has 30 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 18 June.The June review uses the market cap and turnover data from 1 November to 30 April to determine the stocks to be included and excluded from the index, and the announcement of the changes is done 4 weeks before the rebalance effective date.At the current time, we see <a href="https://www.smartkarma.com/entities/wipro-ltd" target="_blank" data-smartkarma-citation="entities:15360:1" rel="noopener">Wipro Ltd (WPRO IN)</a> being included in the index and <a href="https://www.smartkarma.com/entities/oil-natural-gas-corp-ltd" target="_blank" data-smartkarma-citation="entities:3456:1" rel="noopener">Oil &amp; Natural Gas Corp (ONGC IN)</a> being deleted.<a href="https://www.smartkarma.com/entities/tata-steel-ltd" target="_blank" data-smartkarma-citation="entities:20934:1" rel="noopener">Tata Steel Ltd (TATA IN)</a> could be included in the index at the expense of <a href="https://www.smartkarma.com/entities/wipro-ltd" target="_blank" data-smartkarma-citation="entities:15360:1" rel="noopener">Wipro Ltd (WPRO IN)</a> if it jumps one rank - it has around two and a half months to do that, though each passing day will require a bigger outperformance to make that possible.

The S&amp;P BSE SENSEX Index (SENSEX INDEX) is the flagship index of the Bombay Stock Exchange (BSE). The index has 30 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 18 June.The June review uses the market cap and turnover data from 1 November to 30 April to determine the stocks to be included and excluded from the index, and the announcement of the changes is done 4 weeks before the rebalance effective date.At the current time, we see Wipro Ltd (WPRO IN) being included in the index and Oil &amp; Natural Gas Corp (ONGC IN) being deleted.Tata Steel Ltd (TATA IN) could be included in the index at the expense of Wipro Ltd (WPRO IN) if it jumps one rank - it has around two and a half months to do that, though each passing day will require a bigger outperformance to make that possible.

Sensex June21 Index Rebalance Preview: Deletion Almost Certain; Addition a Wild Card for Now

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

* 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. 

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 60 bn or just over two quarters of core operating results.

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 60 bn or just over two quarters of core operating results.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

ICICI Bank – Lower Provision Despite Increasing Credit Risk

India

HDFC Standard Life Insurance Company Limited is a life insurance firm. The Company offers protection, pension, savings and investment, and children's and women's plans to individuals. HDFC Standard Life Insurance serves customers in India and United Arab Emirates.

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HDFC Life Insurance (HDFCLIFE IN)

Sensex June21 Index Rebalance Preview: Deletion Almost Certain; Addition a Wild Card for Now

ONGC is an almost certain deletion at the Sensex review in June. The inclusion at the current time is Wipro, but Tata Steel could be included if it...

Brian Freitas

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

HDFC – Credit Turn

HOUSING DEVELOPMENT FINANCE CORP: HDFC reported FY 3Q21 core results decline of 6.1%. Net new NPLs accelerated 32.5%, and reserves light by over...

Thomas J. Monaco

ICICI Bank – Lower Provision Despite Increasing Credit Risk

ICICI BANK: ICICI had a linked quarter FY 3Q21 poor quality earnings increase of 16.2%. Net new NPLs increased 43.7% on an annualized basis, and a...

Thomas J. Monaco

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