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

Indian Railway Finance Corporation / Equity Capital Markets

Indian Railway Finance Corporation (IRFC) aims to raise around US$630m via selling new and existing shares in its Indian IPO.IRFC is the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas capital markets. Its primary business is financing the acquisition of rolling stock assets and project assets of the Indian railways and lending to other entities under the Ministry of Railways.IRFC’s AUM has grown by 25-32% over FY18-FY20, while disbursements have been growing at 34-43%. Although revenue growth has lagged AUM growth since at least FY18 as its net interest margin had been under pressure due to the rising cost of funds and fluctuation margin set by the Ministry of Railways. We have covered the above and other points in our previous note: <ul><li dir="ltr"><a href="https://www.smartkarma.com/insights/indian-railway-finance-pre-ipo-low-risk-low-margin-business" target="_blank" rel="noopener">Indian Railway Finance Pre-IPO - Low risk, low margin business</a></li></ul>In this note, we'll talk about updates for the newly filed DRHP and run the deal through our ECM framework

Indian Railway Finance Corporation (IRFC) aims to raise around US$630m via selling new and existing shares in its Indian IPO.IRFC is the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas capital markets. Its primary business is financing the acquisition of rolling stock assets and project assets of the Indian railways and lending to other entities under the Ministry of Railways.IRFC’s AUM has grown by 25-32% over FY18-FY20, while disbursements have been growing at 34-43%. Although revenue growth has lagged AUM growth since at least FY18 as its net interest margin had been under pressure due to the rising cost of funds and fluctuation margin set by the Ministry of Railways. We have covered the above and other points in our previous note: Indian Railway Finance Pre-IPO - Low risk, low margin businessIn this note, we'll talk about updates for the newly filed DRHP and run the deal through our ECM framework

Indian Railway Finance IPO - Low Risk, Low Margin, Low Returns

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

Thematic (Sector/Industry)

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.   

Reserve Bank of India – Continued Bank Waterboarding

*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. 

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Democratic Party control of the Senate has clearly moved the goal posts for fixed income investors. The reflation trade is back. This requires repositioning by bank credit investors.The good news is that the rise in Treasuries is beneficial to bank securities over the short term, especially since it is occurring in tandem with continued bear steepening from the short end of the curve. Globally, higher net interest margins should follow from the steepening of the U.S. yield curve as excess reserves are allocated into US$ securities. However, the impact on India-headquartered banks may be less as we discuss within.There are two less positive impacts. First, if the rise in rates is a reflection that inflation is expected to return, then this is not duration friendly. In fact, long duration fixed income securities suffered over the last week. Theoretically, credit curves should flatten in response to the yield curve steepening. However, given the enormous level of monetary accommodation over the last nine months, the question then becomes, how much further can spreads tighten? Credit only has limited upside in the current reflation scenario. Second, higher rates will raise the real effective US$ exchange rate. All else equal, a higher real effective US$ exchange rate is dollar positive.  Asia and emerging market (EM) securities could suffer.Against this backdrop, higher risk Additional Tier 1 (AT1) bank bonds outperformed, principally driven by Thailand- and other higher risk China-centric securities on expectations of increased economic activity. Thai banks performed across the credit continuum in Senior Unsecured, Tier 2 and AT1 notes. This seems to be a case of cognitive dissonance which ignores vaccine distribution and time extension risks. The COVID-19 situation is deteriorating in Thailand and elsewhere. High financial market valuations seem inconsistent with economic activity. A pronounced degradation of asset prices could materialize. Our preference is to fade the Thai-bank rally.France’s central bank noted that systemic risk may rise over the coming months due to high corporate debt and the current round of Covid-19 lockdowns. The regulator stated that a significant rise in defaults could occur in a slow economic recovery. Please see <a href="https://www.smartkarma.com/insights/bnp-paribas-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:46684" rel="noopener">BNP Paribas: Capital, Forbearance and CDS</a> for our assessment of this situation.In addition, we note that<a href="https://www.smartkarma.com/entities/commerzbank-ag" target="_blank" data-smartkarma-citation="entities:21596:1" rel="noopener">Commerzbank AG (CBK GR)</a> set a high bar for balance sheet clean-up by announcing a 50% increase in loan loss provisions for COVID-19. We would not be surprised to see additional healthy increases in loan loss provisioning. In fact, credit investors should be concerned if there are limited additional provisions taken. US banks kick-off the global bank earnings season on Friday.Market Outlook: Absent another behavioral lapse by the US President, ebullience over the prospects of additional stimulus spending should continue to positively impact the markets. Another lapse by the US President could see a temporary rise in demand for safe-haven assets. Eventually, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on how the Fed reacts. In this environment, artificially engineered credit costs may come back to hurt bank investors. Credit only has limited upside in the current reflation scenario and duration is not your friend at this point in the cycle.

Democratic Party control of the Senate has clearly moved the goal posts for fixed income investors. The reflation trade is back. This requires repositioning by bank credit investors.The good news is that the rise in Treasuries is beneficial to bank securities over the short term, especially since it is occurring in tandem with continued bear steepening from the short end of the curve. Globally, higher net interest margins should follow from the steepening of the U.S. yield curve as excess reserves are allocated into US$ securities. However, the impact on India-headquartered banks may be less as we discuss within.There are two less positive impacts. First, if the rise in rates is a reflection that inflation is expected to return, then this is not duration friendly. In fact, long duration fixed income securities suffered over the last week. Theoretically, credit curves should flatten in response to the yield curve steepening. However, given the enormous level of monetary accommodation over the last nine months, the question then becomes, how much further can spreads tighten? Credit only has limited upside in the current reflation scenario. Second, higher rates will raise the real effective US$ exchange rate. All else equal, a higher real effective US$ exchange rate is dollar positive.  Asia and emerging market (EM) securities could suffer.Against this backdrop, higher risk Additional Tier 1 (AT1) bank bonds outperformed, principally driven by Thailand- and other higher risk China-centric securities on expectations of increased economic activity. Thai banks performed across the credit continuum in Senior Unsecured, Tier 2 and AT1 notes. This seems to be a case of cognitive dissonance which ignores vaccine distribution and time extension risks. The COVID-19 situation is deteriorating in Thailand and elsewhere. High financial market valuations seem inconsistent with economic activity. A pronounced degradation of asset prices could materialize. Our preference is to fade the Thai-bank rally.France’s central bank noted that systemic risk may rise over the coming months due to high corporate debt and the current round of Covid-19 lockdowns. The regulator stated that a significant rise in defaults could occur in a slow economic recovery. Please see BNP Paribas: Capital, Forbearance and CDS for our assessment of this situation.In addition, we note thatCommerzbank AG (CBK GR) set a high bar for balance sheet clean-up by announcing a 50% increase in loan loss provisions for COVID-19. We would not be surprised to see additional healthy increases in loan loss provisioning. In fact, credit investors should be concerned if there are limited additional provisions taken. US banks kick-off the global bank earnings season on Friday.Market Outlook: Absent another behavioral lapse by the US President, ebullience over the prospects of additional stimulus spending should continue to positively impact the markets. Another lapse by the US President could see a temporary rise in demand for safe-haven assets. Eventually, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on how the Fed reacts. In this environment, artificially engineered credit costs may come back to hurt bank investors. Credit only has limited upside in the current reflation scenario and duration is not your friend at this point in the cycle.

Bank Credit Weekly: Moving the Goal Posts

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)

Indian Railway Finance IPO - Low Risk, Low Margin, Low Returns

Indian Railway Finance Corporation (IRFC) aims to raise around US$630m via its Indian IPO. IRFC is the dedicated financing arm of the Indian...

Sumeet Singh

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

Reserve Bank of India – Continued Bank Waterboarding

RESERVE BANK OF INDIA: India’s financial sector needs to prepare for even more challenging times. If the RBI is correct, FY 2022 will see continued...

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

Bank Credit Weekly: Moving the Goal Posts

Fixed income goal posts were clearly moved by Democratic Party control of the Senate. Credit has limited upside in the current reflation scenario....

Hank Calenti, CFA

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