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

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, we calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which  is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, we calculate that net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which  is quite worrisome – especially considering the challenges at HDFCB’s NBFC subsidiary, HDB Financial Services.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.   

*Pre-release Says Nothing About Capital And Credit: Bajaj Finance (BAF.IN) [Bajaj] released a FY 4Q21 balance sheet update, ahead of its scheduled earnings update. Key highlights were limited to: AUM growth; new customer acquisition; and deposit growth; and  *Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn during FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x - representing nearly three years of PBT and over 50% of shareholder’s equity.

*Pre-release Says Nothing About Capital And Credit: Bajaj Finance (BAF.IN) [Bajaj] released a FY 4Q21 balance sheet update, ahead of its scheduled earnings update. Key highlights were limited to: AUM growth; new customer acquisition; and deposit growth; and  *Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn during FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x - representing nearly three years of PBT and over 50% of shareholder’s equity.

*Positive Spin Still Off From Organizational Reality: HDFC Bank (HDFCB.IN) [HDFCB] released a FY 4Q21 balance sheet update, two weeks ahead of its scheduled financial results announcement on April 17, 2020. HDFCB tried to place a positive spin on its lending and deposit share gain update; and *Back to Reality: 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, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs. 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. An update on credit would have been more helpful.

*Positive Spin Still Off From Organizational Reality: HDFC Bank (HDFCB.IN) [HDFCB] released a FY 4Q21 balance sheet update, two weeks ahead of its scheduled financial results announcement on April 17, 2020. HDFCB tried to place a positive spin on its lending and deposit share gain update; and *Back to Reality: 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, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs. 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. An update on credit would have been more helpful.    

HDFC Bank – Update Does Little To Quell Fears

Thematic (Sector/Industry)

*Can Kicked Less Far: On March 23, 2021, the Supreme Court in a final ruling  rejected pleas for a complete waiver of interest on loans under moratorium; ; and*Good News For Banks Is Still Bad News: Despite the favorable RBI Supreme Court ruling, Indian financial sector credit quality remains amongst the worst in Asia and globally. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those to the woodpile of Indian NPLs. Massive capital raises need to occur within the sector.

*Can Kicked Less Far: On March 23, 2021, the Supreme Court in a final ruling  rejected pleas for a complete waiver of interest on loans under moratorium; ; and*Good News For Banks Is Still Bad News: Despite the favorable RBI Supreme Court ruling, Indian financial sector credit quality remains amongst the worst in Asia and globally. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those to the woodpile of Indian NPLs. Massive capital raises need to occur within the sector.  

Reserve Bank of India – Heads You Win, Tails I Lose

*KMB’s Lack Of Credit Discussion Raises Eyebrows:On a competitor call, Kotak Mahindra Bank (KMB.IN) [KMB] management only spoke about the potential macro recovery with the ongoing COVID-19 vaccinations, and how well-prepared that the Indian financial sector is to address the current pandemic. It cited broadly stable NIMs with continued improvement in loan-to-deposit ratio, and held a discussion on loan growth;  and  *Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarters of stated PBT…for now.

*KMB’s Lack Of Credit Discussion Raises Eyebrows:On a competitor call, Kotak Mahindra Bank (KMB.IN) [KMB] management only spoke about the potential macro recovery with the ongoing COVID-19 vaccinations, and how well-prepared that the Indian financial sector is to address the current pandemic. It cited broadly stable NIMs with continued improvement in loan-to-deposit ratio, and held a discussion on loan growth;  and  *Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarters of stated PBT…for now. 

Kotak Mahindra Bank – Failing To Answer The Hard Questions

India

Indian Overseas Bank operates some 1,429 banking branches in India, as well as six branches in overseas locations.  The Group's banks provide loan and deposit schemes, Internet banking, and a full range of banking services.

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Indian Overseas Bank (IOB IN)

HDFC Bank – Big Credit Disappointment

HDFC BANK: HDFCB released a disappointing FY 4Q21 bottom-line, declining 6.5% QOQ, due higher provisions and costs. Net new NPLs increased 130.4%...

Thomas J. Monaco

Bajaj Finance – Who’s Kidding Whom?

BAJAJ FINANCE: Bajaj gave a FY 4Q21 update on AUM; customer acquisition; and deposit growth. No disclosure on how it will deal with India's worst...

Thomas J. Monaco

HDFC Bank – Update Does Little To Quell Fears

HDFC BANK: HDFCB released a FY 4Q21 balance sheet update. HDFCB tried to place a positive spin on its lending and deposit share gain update....

Thomas J. Monaco

Reserve Bank of India – Heads You Win, Tails I Lose

RESERVE BANK OF INDIA: The Supreme Court rejected pleas for a complete waiver of interest on loans under moratorium. Nevertheless, the Indian...

Thomas J. Monaco

Kotak Mahindra Bank – Failing To Answer The Hard Questions

KOTAK MAHINDRA BANK: On a recent call, KMB spoke of macro recovery. KMB’s is not exhibiting any sign of recovery as net new NPLs increased 122.8%.

Thomas J. Monaco

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