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

*KC And The Mark Up Band At It Again: HDFC Bank’s (HDFCB.IN) [HDFCB] and HDFC Ltd’s (HDFC.IN) [HDFC] Boards of Directors each approved HDFCB’s purchase of a 4.99% stake in HDFC ERGO General Insurance (ERGO) in a related party transaction at a purchase price of INR 19.1 bn. HDFC’s stake in ERGO on closing will decline to 44.9%, and a gain of INR 16.0 bn will be booked; and*A Stretch: No doubt that HDFC likely will use these one-time gains to boost loss provisioning efforts. Nevertheless, this ERGO deal could ultimately pave the way for an even greater alignment of interests between HDFCB, HDFC, and HDFC Life.

*KC And The Mark Up Band At It Again: HDFC Bank’s (HDFCB.IN) [HDFCB] and HDFC Ltd’s (HDFC.IN) [HDFC] Boards of Directors each approved HDFCB’s purchase of a 4.99% stake in HDFC ERGO General Insurance (ERGO) in a related party transaction at a purchase price of INR 19.1 bn. HDFC’s stake in ERGO on closing will decline to 44.9%, and a gain of INR 16.0 bn will be booked; and*A Stretch: No doubt that HDFC likely will use these one-time gains to boost loss provisioning efforts. Nevertheless, this ERGO deal could ultimately pave the way for an even greater alignment of interests between HDFCB, HDFC, and HDFC Life.

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/nifty-index" target="_blank" data-smartkarma-citation="entities:23617:1" rel="noopener">NIFTY Index (NIFTY INDEX)</a> is the flagship index of the National Stock Exchange of India (NSE). The index has 50 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 29 September 2021 and the announcement of the changes will be made four weeks prior to the effective date.More than a third of the way through the review period that runs from February to July, we see one possible change to the index with <a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a> replacing <a href="https://www.smartkarma.com/entities/indian-oil-corp-ltd" target="_blank" data-smartkarma-citation="entities:7781:1" rel="noopener">Indian Oil Corp (IOCL IN)</a>. There could be more changes if some large stocks like <a href="https://www.smartkarma.com/entities/adani-green-energy-ltd" target="_blank" data-smartkarma-citation="entities:29012:1" rel="noopener">Adani Green Energy Ltd (ADANIGR IN)</a> and <a href="https://www.smartkarma.com/entities/dmart" target="_blank" data-smartkarma-citation="entities:23656:1" rel="noopener">Avenue Supermarts Ltd (DMART IN)</a> are included in the Futures &amp; Options (F&amp;O) segment of the market.<a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a> does not make the cut for index inclusion following the 10% reduction in its free float following the open offer.Passive funds benchmarked to the <a href="https://www.smartkarma.com/entities/nifty-index" target="_blank" data-smartkarma-citation="entities:23617:1" rel="noopener">NIFTY Index (NIFTY INDEX)</a> will need to trade around 3 days of ADV on <a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a> and <a href="https://www.smartkarma.com/entities/indian-oil-corp-ltd" target="_blank" data-smartkarma-citation="entities:7781:1" rel="noopener">Indian Oil Corp (IOCL IN)</a>. Plus there will be flow from active funds and from cash and carry baskets on the index.<a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a> trades at a valuation premium to its regional peers, while <a href="https://www.smartkarma.com/entities/indian-oil-corp-ltd" target="_blank" data-smartkarma-citation="entities:7781:1" rel="noopener">Indian Oil Corp (IOCL IN)</a> trades at a discount to its domestic peers.The big event to watch for is the potential inclusion of <a href="https://www.smartkarma.com/entities/adani-green-energy-ltd" target="_blank" data-smartkarma-citation="entities:29012:1" rel="noopener">Adani Green Energy Ltd (ADANIGR IN)</a> and <a href="https://www.smartkarma.com/entities/dmart" target="_blank" data-smartkarma-citation="entities:23656:1" rel="noopener">Avenue Supermarts Ltd (DMART IN)</a> in the F&amp;O segment that will open the door for index inclusion.

The NIFTY Index (NIFTY INDEX) is the flagship index of the National Stock Exchange of India (NSE). The index has 50 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 29 September 2021 and the announcement of the changes will be made four weeks prior to the effective date.More than a third of the way through the review period that runs from February to July, we see one possible change to the index with Info Edge India (INFOE IN) replacing Indian Oil Corp (IOCL IN). There could be more changes if some large stocks like Adani Green Energy Ltd (ADANIGR IN) and Avenue Supermarts Ltd (DMART IN) are included in the Futures &amp; Options (F&amp;O) segment of the market.Vedanta Ltd (VEDL IN) does not make the cut for index inclusion following the 10% reduction in its free float following the open offer.Passive funds benchmarked to the NIFTY Index (NIFTY INDEX) will need to trade around 3 days of ADV on Info Edge India (INFOE IN) and Indian Oil Corp (IOCL IN). Plus there will be flow from active funds and from cash and carry baskets on the index.Info Edge India (INFOE IN) trades at a valuation premium to its regional peers, while Indian Oil Corp (IOCL IN) trades at a discount to its domestic peers.The big event to watch for is the potential inclusion of Adani Green Energy Ltd (ADANIGR IN) and Avenue Supermarts Ltd (DMART IN) in the F&amp;O segment that will open the door for index inclusion.

NIFTY50 Index Rebalance Preview: Info Edge Could Replace IOC

* 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. 

The <a href="https://www.smartkarma.com/entities/nifty-index" target="_blank" data-smartkarma-citation="entities:23617:1" rel="noopener">NIFTY Index (NIFTY INDEX)</a> is the flagship index of the National Stock Exchange of India (NSE). The index has 50 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 25 March and the announcement of the changes will be done four weeks prior to the effective date.We are now almost at the end of the review period. There are 3 stocks that meet the criteria for inclusion in the <a href="https://www.smartkarma.com/entities/nifty-index" target="_blank" data-smartkarma-citation="entities:23617:1" rel="noopener">NIFTY Index (NIFTY INDEX)</a>: <a href="https://www.smartkarma.com/entities/tata-consumer-products" target="_blank" data-smartkarma-citation="entities:258:1" rel="noopener">Tata Consumer Products (TATACONS IN)</a>, <a href="https://www.smartkarma.com/entities/icici-lombard-general-insura" target="_blank" data-smartkarma-citation="entities:25882:1" rel="noopener">Icici Lombard General Insurance Company (ICICIGI IN)</a> and <a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a>. The three lowest ranked stocks in the index are <a href="https://www.smartkarma.com/entities/gail-india-ltd" target="_blank" data-smartkarma-citation="entities:15263:1" rel="noopener">Gail India Ltd (GAIL IN)</a>, <a href="https://www.smartkarma.com/entities/indian-oil-corp-ltd" target="_blank" data-smartkarma-citation="entities:7781:1" rel="noopener">Indian Oil Corp (IOCL IN)</a> and <a href="https://www.smartkarma.com/entities/upl-ltd" target="_blank" data-smartkarma-citation="entities:20776:1" rel="noopener">UPL Ltd (UPLL IN)</a>.We see a high probability of <a href="https://www.smartkarma.com/entities/tata-consumer-products" target="_blank" data-smartkarma-citation="entities:258:1" rel="noopener">Tata Consumer Products (TATACONS IN)</a> being included and <a href="https://www.smartkarma.com/entities/gail-india-ltd" target="_blank" data-smartkarma-citation="entities:15263:1" rel="noopener">Gail India Ltd (GAIL IN)</a> being excluded, and a lower probability of <a href="https://www.smartkarma.com/entities/icici-lombard-general-insura" target="_blank" data-smartkarma-citation="entities:25882:1" rel="noopener">Icici Lombard General Insurance Company (ICICIGI IN)</a> being included and <a href="https://www.smartkarma.com/entities/indian-oil-corp-ltd" target="_blank" data-smartkarma-citation="entities:7781:1" rel="noopener">Indian Oil Corp (IOCL IN)</a> being excluded.<a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a>'s average free float market cap is less than 1% lower than <a href="https://www.smartkarma.com/entities/icici-lombard-general-insura" target="_blank" data-smartkarma-citation="entities:25882:1" rel="noopener">Icici Lombard General Insurance Company (ICICIGI IN)</a> - can get close going into the tail end of the review period.The index committee has a wide berth when choosing the number of changes to be made and it is highly unlikely that there will be more than 2 changes, especially since a maximum of 5 changes can be made in a year.<a href="https://www.smartkarma.com/entities/dmart" target="_blank" data-smartkarma-citation="entities:23656:1" rel="noopener">Avenue Supermarts (DMART IN)</a> has the highest market cap among non index constituents but is not eligible for index inclusion since there are no listed Futures and Options on the stock, a prerequisite for index inclusion.

The NIFTY Index (NIFTY INDEX) is the flagship index of the National Stock Exchange of India (NSE). The index has 50 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 25 March and the announcement of the changes will be done four weeks prior to the effective date.We are now almost at the end of the review period. There are 3 stocks that meet the criteria for inclusion in the NIFTY Index (NIFTY INDEX): Tata Consumer Products (TATACONS IN), Icici Lombard General Insurance Company (ICICIGI IN) and Info Edge India (INFOE IN). The three lowest ranked stocks in the index are Gail India Ltd (GAIL IN), Indian Oil Corp (IOCL IN) and UPL Ltd (UPLL IN).We see a high probability of Tata Consumer Products (TATACONS IN) being included and Gail India Ltd (GAIL IN) being excluded, and a lower probability of Icici Lombard General Insurance Company (ICICIGI IN) being included and Indian Oil Corp (IOCL IN) being excluded.Info Edge India (INFOE IN)'s average free float market cap is less than 1% lower than Icici Lombard General Insurance Company (ICICIGI IN) - can get close going into the tail end of the review period.The index committee has a wide berth when choosing the number of changes to be made and it is highly unlikely that there will be more than 2 changes, especially since a maximum of 5 changes can be made in a year.Avenue Supermarts (DMART IN) has the highest market cap among non index constituents but is not eligible for index inclusion since there are no listed Futures and Options on the stock, a prerequisite for index inclusion.

NIFTY50 Index Rebalance Preview - Nearing The End of the Review Period

India

ICICI Lombard General Insurance Company Limited operates as an insurance company. The Company offers motor, health, travel, rural, business, third party, personal accident, and home insurance, as well as claim settlements and renewals services. ICICI Lombard General Insurance serves customers in India.

ICICI Lombard General Insurance Company (ICICIGI IN)

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ICICI Lombard General Insurance Company (ICICIGI IN)

HDFC Bank – Inside Job

HDFC BANK: HDFCB and HDFC’s Boards HDFCB’s purchase of a 4.99% stake in HDFC ERGO in a related party transaction. HDFC’s stake in ERGO will decline...

Thomas J. Monaco

NIFTY50 Index Rebalance Preview: Info Edge Could Replace IOC

We see one potential changes to the NIFTY50 index at the September review. Adani Green and Avenue Supermarts could join the index if listed F&O are...

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

NIFTY50 Index Rebalance Preview - Nearing The End of the Review Period

There is just over a week remaining in the review period. We expect TATACONS to replace GAIL, and see a low probability of ICICIGI replacing IOCL....

Brian Freitas

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