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

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue.

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue. 

*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. 

*Results Down, Credibility Up: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q21 bottom-line of INR 7.9 bn, declining INR 266 mn (3.3%) on a linked period basis. LIC’s conservatism with respect to provisioning – especially relative to the rest of the Indian financial sector – is quite admirable;*Credit On The Mend: During the period, we note that Stage 3 NPLs declined INR 625 mn (1.1%) to INR 58.8 bn and represent 2.79% of total loans – down 4 bp linked quarter. In addition, we note that net new NPLs at LIC were negative as well – declining INR 586 mn for an annualized rate of NPL decline of 4.0%. Coupled with NCOs of just INR 39 mn  - which amount to just 1 bp of total loans on an annualized basis, we find that reserves improved INR 1.0 bn or 4.0% linked quarter. While we admire LIC’s conservatism relative to peer, we would still be comfortable with reserves being INR 3.3 bn (11.8%) higher. That said, at this pace, LIC should get there within three quarters; and        *Competition Intensifying: Increasing competition could impact profitability, however, with both housing lenders and private banks significantly cutting interest rates.

*Results Down, Credibility Up: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q21 bottom-line of INR 7.9 bn, declining INR 266 mn (3.3%) on a linked period basis. LIC’s conservatism with respect to provisioning – especially relative to the rest of the Indian financial sector – is quite admirable;*Credit On The Mend: During the period, we note that Stage 3 NPLs declined INR 625 mn (1.1%) to INR 58.8 bn and represent 2.79% of total loans – down 4 bp linked quarter. In addition, we note that net new NPLs at LIC were negative as well – declining INR 586 mn for an annualized rate of NPL decline of 4.0%. Coupled with NCOs of just INR 39 mn  - which amount to just 1 bp of total loans on an annualized basis, we find that reserves improved INR 1.0 bn or 4.0% linked quarter. While we admire LIC’s conservatism relative to peer, we would still be comfortable with reserves being INR 3.3 bn (11.8%) higher. That said, at this pace, LIC should get there within three quarters; and        *Competition Intensifying: Increasing competition could impact profitability, however, with both housing lenders and private banks significantly cutting interest rates.

LIC Housing Finance – Doing The Right Thing

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

Shriram Transport Finance – Frightening Glory

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

India

Indostar Capital Finance Limited operates as non-banking finance company. The Company offers corporate and SME lending, as well as provides vehicle and housing finance services. Indostar Capital Finance serves customers in India.

IndoStar Capital Finance Ltd (INDOSTAR IN)

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IndoStar Capital Finance Ltd (INDOSTAR IN)

State Bank of India – On The Hook

STATE BANK OF INDIA: Yes Bank reported FY 3Q21 core operating losses INR 3.8 mn. Net new problem loan annualized growth rate of 99.5% and reserve...

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

LIC Housing Finance – Doing The Right Thing

LIC HOUSING FINANCE: Although Results Were Weaker Linked Quarter, They Were Driven By Higher Credit Costs. This Was Unnecessary Given Credit...

Thomas J. Monaco

Shriram Transport Finance – Frightening Glory

SHRIRAM TRANSPORT FINANCE: Shriram Is Exhibiting Early Signs of Positive Credit Deltas, And Likely Exits This COVID Crisis Earlier Than Peer.

Thomas J. Monaco

Bajaj Finance – Removing The Lipstick

BAJAJ FINANCE: Results Would Suggest That Credit Portfolio Risk Has Significantly Deteriorated, and That Reserves Need Buttressing By Over Five...

Thomas J. Monaco

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