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 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 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 gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter of core operating results.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 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 gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter of core operating results.   

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Additional Tier 1 bonds underperformed as investors shifted into High Yield and X-over rated Senior Unsecured notes. <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group's (3333 HK)</a> attempts to restore investor confidence disappointed and negatively impacted risk sentiment. China’s US$6 billion in issuance also likely absorbed excess US$ liquidity, despite the low yields on offer.   US high yield markets continued to outperform Asia’s, and the relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. Asia’s recent index widening appears to be Evergrande driven and a reduction in this company’s financial distress could have a materially positive impact on Asia’s HY index.In rate markets, US Treasury curve steepening paused as investors digested negative stimulus, vaccine, and Covid-19 news in Europe. US Treasury Secretary Mnuchin affirmed market sentiment that a stimulus package was unlikely to be agreed before the November 3 election. The reaction was limited by expectations that a stimulus agreement will be agreed at some point before the end of the winter. Nonetheless, short-term interest rate futures fell slightly as expectations of increased near-term monetary accommodation combined with limited near-term stimulus growth to lower rising rate expectations.In US equity markets, November futures on the Chicago Board of Options Exchange Volatility Index (VIX) were unchanged week-on-week as election result outcomes continued to point to a less contentious result than anticipated a few weeks ago. Meanwhile the spot VIX Index rose 2 index points on slightly higher perceived downside risks from rising Coronavirus cases in Europe as well as setbacks in stimulus and vaccine developments.Emerging market capital inflows were essentially unchanged during the week as US dollar safe-haven strength returned to the market on weaker economic expectations in Europe and as Brexit negotiations continued to disappoint. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits. More immediately, the Evergrande situation, Brexit negotiation uncertainty and Coronavirus resurgence may offset dollar weakness in safe-haven dollar flight. This may limit EM inflows.Financial institutions issued over US$16 billion in USD and Euros. Amongst Asia-headquartered banks, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> issued an Additional Tier 1 bond while the <a href="https://www.smartkarma.com/entities/agricultural-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1120:1" rel="noopener">Agricultural Bank of China (1288 HK)</a>, <a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank of China Ltd (H) (3988 HK)</a>, <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Bank (1988 HK)</a>, and <a href="https://www.smartkarma.com/entities/unionbank-of-the-philippines" target="_blank" data-smartkarma-citation="entities:23192:1" rel="noopener">UnionBank of the Philippines (UBP PM)</a> brought Senior Unsecured bonds of various maturities. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-s-new-at1-likely-coupon-and-curve-impact" target="_blank" data-smartkarma-citation="insights:44112" rel="noopener">Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact</a> for our pre-issuance valuation thoughts on BNKEA's new AT1 bond.  Concurrently, China saw interest of over US$27 billion for its bonds. <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> was left off the list of banks arranging China’s sovereign dollar debt sale for the first time since the nation returned with big annual deals in 2017, according to Bloomberg.Market Outlook Time to separate the signals from the noise for bank investors. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Asia’s Additional Tier 1 bonds underperformed as investors shifted into High Yield and X-over rated Senior Unsecured notes. China Evergrande Group's (3333 HK) attempts to restore investor confidence disappointed and negatively impacted risk sentiment. China’s US$6 billion in issuance also likely absorbed excess US$ liquidity, despite the low yields on offer.   US high yield markets continued to outperform Asia’s, and the relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. Asia’s recent index widening appears to be Evergrande driven and a reduction in this company’s financial distress could have a materially positive impact on Asia’s HY index.In rate markets, US Treasury curve steepening paused as investors digested negative stimulus, vaccine, and Covid-19 news in Europe. US Treasury Secretary Mnuchin affirmed market sentiment that a stimulus package was unlikely to be agreed before the November 3 election. The reaction was limited by expectations that a stimulus agreement will be agreed at some point before the end of the winter. Nonetheless, short-term interest rate futures fell slightly as expectations of increased near-term monetary accommodation combined with limited near-term stimulus growth to lower rising rate expectations.In US equity markets, November futures on the Chicago Board of Options Exchange Volatility Index (VIX) were unchanged week-on-week as election result outcomes continued to point to a less contentious result than anticipated a few weeks ago. Meanwhile the spot VIX Index rose 2 index points on slightly higher perceived downside risks from rising Coronavirus cases in Europe as well as setbacks in stimulus and vaccine developments.Emerging market capital inflows were essentially unchanged during the week as US dollar safe-haven strength returned to the market on weaker economic expectations in Europe and as Brexit negotiations continued to disappoint. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits. More immediately, the Evergrande situation, Brexit negotiation uncertainty and Coronavirus resurgence may offset dollar weakness in safe-haven dollar flight. This may limit EM inflows.Financial institutions issued over US$16 billion in USD and Euros. Amongst Asia-headquartered banks, Bank of East Asia (BNKEA) issued an Additional Tier 1 bond while the Agricultural Bank of China (1288 HK), Bank of China Ltd (H) (3988 HK), China Minsheng Bank (1988 HK), and UnionBank of the Philippines (UBP PM) brought Senior Unsecured bonds of various maturities. Please see Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact for our pre-issuance valuation thoughts on BNKEA's new AT1 bond.  Concurrently, China saw interest of over US$27 billion for its bonds. HSBC Holdings (HSBA LN) was left off the list of banks arranging China’s sovereign dollar debt sale for the first time since the nation returned with big annual deals in 2017, according to Bloomberg.Market Outlook Time to separate the signals from the noise for bank investors. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Bank Credit Weekly: Risk Pause as China Evergrande Impacts Asia Sentiment

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">India Bank Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a> for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies.

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank (YES IN) to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in India Bank Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies. 

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

Thematic (Sector/Industry)

*Capital Forbearance and Liquidity Moves: The Reserve Bank of India (RBI) announced several measures designed to further improve banking system liquidity and capital at its latest monetary policy meeting; and *Additional Measures: The RBI was kind enough to extend other programs as well: a) Real Time Gross Settlement System (RTGS), used for large value transactions, is to be made available 24 hours per day; extension of the 2018 co-origination scheme; and the granting of a certificate of authorization to all PSOs (both new and existing) on a perpetual basis.

*Capital Forbearance and Liquidity Moves: The Reserve Bank of India (RBI) announced several measures designed to further improve banking system liquidity and capital at its latest monetary policy meeting; and *Additional Measures: The RBI was kind enough to extend other programs as well: a) Real Time Gross Settlement System (RTGS), used for large value transactions, is to be made available 24 hours per day; extension of the 2018 co-origination scheme; and the granting of a certificate of authorization to all PSOs (both new and existing) on a perpetual basis. 

Reserve Bank of India – Greasing The Skid

Specialist in Indian Banking and Economic Research

Hemindra Hazari

On the opening date of Vedanta’s delisting offer (October 5, 2020), <a href="https://www.smartkarma.com/entities/icici-securities-ltd" target="_blank" data-smartkarma-citation="entities:26737:1" rel="noopener">Icici Securities (ISEC IN)</a> (I-Sec) issued a results research note on <a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a> with the following bizarre statement: “Vedanta has highlighted the SEBI [The Securities and Exchange Board of India] approved book value (ex the revaluation reserves) of Rs 89.3/share.” I-Sec, a listed subsidiary of <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank Ltd (ICICIBC IN)</a> , is an investment bank and sell-side firm. The report was authored by <a href="https://www.linkedin.com/in/abhijit-mitra-aa795846/?originalSubdomain=in" target="_blank" rel="noopener">Abhijit Mitra</a> (with 8 1/2 years sell-side experience) and Udaykiran Paluri. Even a novice analyst would know that a company’s accounts are certified by the auditor, and the capital market regulator has no role to approve or disapprove a company’s book value.In any credible sell-side firm, the maker-checker (or “four eyes”) principle requires that a supervisory analyst approve the research note prior to publication. Normally, an editor reviews the note for grammar, sentence construction, logic and overall flow. An experienced sell-side editor would have rectified the “SEBI approved” phrase, as the terminology is not used in sell-side research. In a domestic firm like I-Sec <a href="https://www.linkedin.com/in/manoj-menon-8ab8712/?originalSubdomain=in" target="_blank" rel="noopener">Manoj Menon</a>, as the head of institutional research, should have signed off as the supervisory analyst, and this phrase should have been immediately flagged. All research reports also have to be approved by the compliance department prior to publication. It is a mystery how in a prominent sell-side firm, majority-owned by a leading bank, such a phrase slipped through these quality control measures.Despite being a listed company, I-Sec has displayed a complete lack of transparency in clarifying how such an appalling lapse took place. SEBI directed the company to issue a public statement, which was carried in the prominent newspapers, whereby the company acknowledged that the phrase should read as “Vedanta has highlighted that the FY20 book value is Rs 89.3/share.” I-Sec declined to clarify to the media as well as to this writer how its internal systems could have failed, permitting such a statement to be published in a research report.An alternative explanation is that, even though I-Sec was not involved in the Vedanta delisting offer as an investment bank, it was trying to support the founders of Vedanta by persuading the company’s minority shareholders that, since the regulator had “approved” the book value, it was an appropriate floor price for the issue. Media <a href="https://www.pressreader.com/india/business-standard/20201009/282050509529492" target="_blank" rel="noopener">reports</a>, citing sources, say that SEBI may launch a probe on the timing of the I-Sec report. The Vedanta delisting offer was controversial, as the management depressed the book value by taking huge write-offs of Rs 174 bn. Moreover, the management had chosen not to pass on the dividend of Hindustan Zinc to shareholders, contrary to the promises in its dividend distribution policy.Whatever the explanation, the credibility of I-Sec, and particularly its research, has been tarnished by this episode. To date no action has been taken on the concerned officials who had approved the phrase. The public ignominy of issuing an erratum in prominent media agencies may just be the beginning, and further penalties may lie in store.

On the opening date of Vedanta’s delisting offer (October 5, 2020), Icici Securities (ISEC IN) (I-Sec) issued a results research note on Vedanta Ltd (VEDL IN) with the following bizarre statement: “Vedanta has highlighted the SEBI [The Securities and Exchange Board of India] approved book value (ex the revaluation reserves) of Rs 89.3/share.” I-Sec, a listed subsidiary of ICICI Bank Ltd (ICICIBC IN) , is an investment bank and sell-side firm. The report was authored by Abhijit Mitra (with 8 1/2 years sell-side experience) and Udaykiran Paluri. Even a novice analyst would know that a company’s accounts are certified by the auditor, and the capital market regulator has no role to approve or disapprove a company’s book value.In any credible sell-side firm, the maker-checker (or “four eyes”) principle requires that a supervisory analyst approve the research note prior to publication. Normally, an editor reviews the note for grammar, sentence construction, logic and overall flow. An experienced sell-side editor would have rectified the “SEBI approved” phrase, as the terminology is not used in sell-side research. In a domestic firm like I-Sec Manoj Menon, as the head of institutional research, should have signed off as the supervisory analyst, and this phrase should have been immediately flagged. All research reports also have to be approved by the compliance department prior to publication. It is a mystery how in a prominent sell-side firm, majority-owned by a leading bank, such a phrase slipped through these quality control measures.Despite being a listed company, I-Sec has displayed a complete lack of transparency in clarifying how such an appalling lapse took place. SEBI directed the company to issue a public statement, which was carried in the prominent newspapers, whereby the company acknowledged that the phrase should read as “Vedanta has highlighted that the FY20 book value is Rs 89.3/share.” I-Sec declined to clarify to the media as well as to this writer how its internal systems could have failed, permitting such a statement to be published in a research report.An alternative explanation is that, even though I-Sec was not involved in the Vedanta delisting offer as an investment bank, it was trying to support the founders of Vedanta by persuading the company’s minority shareholders that, since the regulator had “approved” the book value, it was an appropriate floor price for the issue. Media reports, citing sources, say that SEBI may launch a probe on the timing of the I-Sec report. The Vedanta delisting offer was controversial, as the management depressed the book value by taking huge write-offs of Rs 174 bn. Moreover, the management had chosen not to pass on the dividend of Hindustan Zinc to shareholders, contrary to the promises in its dividend distribution policy.Whatever the explanation, the credibility of I-Sec, and particularly its research, has been tarnished by this episode. To date no action has been taken on the concerned officials who had approved the phrase. The public ignominy of issuing an erratum in prominent media agencies may just be the beginning, and further penalties may lie in store.

Currying Favour with Vedanta? I-Sec Report’s Appalling Lapse

India

ICICI Bank Limited operates as a bank. The Bank offers saving accounts, loans, debit, credit cards, insurance, investments, mortgages, and online banking services. ICICI Bank serves customers worldwide.

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ICICI Bank Ltd (ICICIBC IN)

HDFC Bank – Not A Great Quarter

HDFC Bank: Improved Bottom-line Clouded By Supreme Court Ruling On Credit Quality Calculations. Reserve Cover Lower Than On/Off Balance Sheet Risk...

Thomas J. Monaco

Bank Credit Weekly: Risk Pause as China Evergrande Impacts Asia Sentiment

A must-read on US$-risk sentiment derived from high yield and equity markets, interest rates, dollar levels, capital flows and issuance to frame...

Hank Calenti, CFA

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

In this 2'nd insight in our Yes Bank Deposit Run Anniversary Series, we apply Yes Bank deposit flight rates to derive “Yes-Stressed” LCRs at India...

Hank Calenti, CFA

Reserve Bank of India – Greasing The Skid

*Capital Forbearance and Liquidity Moves: The Reserve Bank of India (RBI) announced several measures designed to further improve banking system...

Thomas J. Monaco

Currying Favour with Vedanta? I-Sec Report’s Appalling Lapse

On the opening date of Vedanta’s delisting offer (October 5, 2020), ICICI Securities (I-Sec) issued a results research note on Vedanta with the...

Hemindra Hazari

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