Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.Market Outlook: Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.Market Outlook: Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Home First Finance / Equity Capital Markets

<div>Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company aims to raise around US$200m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.</div><div>HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.</div><div>
However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.
I have covered various aspects of the deal in, <a href="https://www.smartkarma.com/insights/home-first-finance-pre-ipo-riding-on-affordable-housing" target="_blank" rel="noopener">Home First Finance Pre-IPO - Riding on affordable housing</a>. In this note I’ll talk about the updates from the company’s re-filed DRHP.
</div>

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company aims to raise around US$200m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.
However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.
I have covered various aspects of the deal in, Home First Finance Pre-IPO - Riding on affordable housing. In this note I’ll talk about the updates from the company’s re-filed DRHP.


Home First Finance Pre-IPO - Earnings Not Showing the COVID Strain but Other Metrics Are

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

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*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

<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

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)

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

The Fed spikes while the ECB sweetens the seasonal punch bowl. US stimulus may add the moonshine. This could be a festive week for bank securities....

Hank Calenti, CFA

Home First Finance Pre-IPO - Earnings Not Showing the COVID Strain but Other Metrics Are

Home First Finance is an affordable housing finance company targeting first time home buyers. It aims to raise US$200m in its India IPO. It is...

Sumeet Singh

Axis Bank – Denying Evil

AXIS BANK: Allegations Of Exorbitant Lending To The Questionable SREI Without Verification Lead To Aggressive Denials Of Wrongdoing By Axis.

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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