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

*Ignoring Credit Deterioration, Results Improve: HDFC Ltd (HDFC.IN) [HDFC] reported FY 2Q22 results of INR 37.3 bn, increasing INR 9.8 bn (35.5%) linked quarter basis. HDFC witnessed positive operating jaws; a massive linked quarter increase in dividends; robust loan growth; a drop in loss provisions; and a lower tax rate. Nothing like pulling on every earnings lever to achieve the result you want; and*Credit Quality Worsens: Given the INR 3.8 bn in net recovery during FY 2Q22, net new NPLs accelerated to INR 22.1 bn and increased 51.1% on an annualized basis. We also find that HDFC’s reserve still needs shoring up by another INR 200 bn or over a year of PBT.

*Ignoring Credit Deterioration, Results Improve: HDFC Ltd (HDFC.IN) [HDFC] reported FY 2Q22 results of INR 37.3 bn, increasing INR 9.8 bn (35.5%) linked quarter basis. HDFC witnessed positive operating jaws; a massive linked quarter increase in dividends; robust loan growth; a drop in loss provisions; and a lower tax rate. Nothing like pulling on every earnings lever to achieve the result you want; and*Credit Quality Worsens: Given the INR 3.8 bn in net recovery during FY 2Q22, net new NPLs accelerated to INR 22.1 bn and increased 51.1% on an annualized basis. We also find that HDFC’s reserve still needs shoring up by another INR 200 bn or over a year of PBT.  

*Unnecessary Credit Leverage: Kotak Mahindra Bank (KMB.IN) [KMB] reported FY 2Q22 results of INR 20.3 bn, improving INR 3.9 bn (23.8%) linked quarter. Results were primarily driven by an INR 2.8 bn (39.8%) decline in loss provisions despite credit weakness; and*Credit Delta Less Intense, But Reserves Weak: By our calculation, we find that both net new stressed loans  amounted to an accelerating INR 5.5 bn at FY 2Q22 and aggregate an annualized growth rate of 26.1% - improving throughout the year. Given the weaker credit metrics and current weak reserve cover, we find that reserves at FY 2Q22 fall short by INR 61 bn - about three quarters of stated PBT.

*Unnecessary Credit Leverage: Kotak Mahindra Bank (KMB.IN) [KMB] reported FY 2Q22 results of INR 20.3 bn, improving INR 3.9 bn (23.8%) linked quarter. Results were primarily driven by an INR 2.8 bn (39.8%) decline in loss provisions despite credit weakness; and*Credit Delta Less Intense, But Reserves Weak: By our calculation, we find that both net new stressed loans  amounted to an accelerating INR 5.5 bn at FY 2Q22 and aggregate an annualized growth rate of 26.1% - improving throughout the year. Given the weaker credit metrics and current weak reserve cover, we find that reserves at FY 2Q22 fall short by INR 61 bn - about three quarters of stated PBT. 

Kotak Mahindra Bank – Watch Your Costs Too

*Credibility Gap Continues To Widen: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q22 bottom-line results of INR 2.5 bn, increasing INR 945 mn (61.6%) linked quarter. Results were simply odd, and driven by a loss provision cut of nearly INR 2.0 bn (23.4%) whilst problem loans continued to modestly tick higher. The oddness, in our view, came from now zero NCOs during FY 2Q22; and*Lack Of Clarity On Credit Delta: Despite the lack of NCOs, net new NPLs at LIC still increased 2.4% annualized versus 190.3% at FY 1Q21. By our calculation, LIC management ought to think about adding another INR 144 bn to the reserve.

*Credibility Gap Continues To Widen: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q22 bottom-line results of INR 2.5 bn, increasing INR 945 mn (61.6%) linked quarter. Results were simply odd, and driven by a loss provision cut of nearly INR 2.0 bn (23.4%) whilst problem loans continued to modestly tick higher. The oddness, in our view, came from now zero NCOs during FY 2Q22; and*Lack Of Clarity On Credit Delta: Despite the lack of NCOs, net new NPLs at LIC still increased 2.4% annualized versus 190.3% at FY 1Q21. By our calculation, LIC management ought to think about adding another INR 144 bn to the reserve.

LIC Housing Finance – No NCOs Whatsoever?

*Not Fooling Anyone: HDFC Bank (HDFCB.IN) [HDFCB] released a nonsensical set of FY 2Q22 earnings results, despite exhibiting that the bottom-line improved INR 11.0 bn (14.3%) linked quarter. On an operating basis, core results aggregated INR 81.6 bn, up INR 10.3 bn (14.5%) over the period. Puzzling is the INR 75.1 bn (28.5%) increase in problem loans, and the INR 9.1 bn (18.8%) decline in loss provisions during FY 2Q22; and *Credit Disaster Continues:We calculate that net new NPLs actually increased a whopping INR 114.1 bn or 43.2%. By our calculation, reserves are massively short by nearly INR 371.3 bn or over year (and growing) of core operating results – despite the massive under-providing against credit this quarter which suggests that the provision shortfall is closer to two years of results.

*Not Fooling Anyone: HDFC Bank (HDFCB.IN) [HDFCB] released a nonsensical set of FY 2Q22 earnings results, despite exhibiting that the bottom-line improved INR 11.0 bn (14.3%) linked quarter. On an operating basis, core results aggregated INR 81.6 bn, up INR 10.3 bn (14.5%) over the period. Puzzling is the INR 75.1 bn (28.5%) increase in problem loans, and the INR 9.1 bn (18.8%) decline in loss provisions during FY 2Q22; and *Credit Disaster Continues:We calculate that net new NPLs actually increased a whopping INR 114.1 bn or 43.2%. By our calculation, reserves are massively short by nearly INR 371.3 bn or over year (and growing) of core operating results – despite the massive under-providing against credit this quarter which suggests that the provision shortfall is closer to two years of results.  

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

Led by a powerful rebound in exports (+38.1% YoY in Jul-Sep 2021, and 43.4% YoY in Jan-Sep 2021) and stronger investment spending evident in capital goods output (+19.1% YoY in August, +60.1% YoY in Apr-Aug 2021) and machinery imports (+53.1% YoY in Apr-Sep 2021), we continue to expect at least 10.5% real GDP growth in FY2021/22 (well above the IMF's forecast of 9.5%). Private consumption has been relatively sluggish, but shows signs of a pickup since September. After likely growth of 15% YoY in 1H-FY2021/22, real GDP will comfortably exceed 6% YoY growth in the second half of the fiscal year. 
The external balances remain particularly robust, with a current account surplus of 1.25% of GDP in FY2020/21 followed by a surplus of 0.9% of GDP in 1Q-FY2021/22 (Apr-Jun 2021) despite a sharply wider merchandise-trade deficit. With robust capital inflows, India's foreign reserves have risen 16% YoY to US$639.5 billion as of 8 October 2021. The fiscal deficit will likely be much smaller than the officially-projected figure, as revenues have soared while expenditure has been restrained: in the first 5 months of FY2021/22 (Apr-Aug 2021), the fiscal deficit was just 31.1% of the projected estimate for the full fiscal year -- particularly helped by the 70.5% YoY rise in net tax revenues, led by corporate tax revenue rising 160% YoY and customs duties 136% YoY. Given the robust external liquidity position, and a sharp improvement in the fiscal balance, we expect the global rating agencies to be obliged to raise India's sovereign rating by a notch over the next year. 
The strong fiscal position allows the possibility of reductions in excise duties on petroleum products to keep those prices in check as global crude-oil prices rise. CPI inflation (the RBI's inflation target) has already moderated to 4.35% YoY in September, and will likely moderate to 4% by November as the near-normal monsoon results in a bountiful kharif harvest. We expect CPI inflation to remain below 5% YoY in Jan-Mar 2022 too (despite the low base, which leads the RBI to forecast 5.8% inflation during that quarter). With inflation surprising to the downside, we think the RBI will have room for a cut in the policy rate (or other easing measures such as reductions in CRR) after the next Budget is presented. Despite challenging valuations (which will improve as the economy strengthens further and EPS growth stays robust), we recommend staying Overweight India.

Led by a powerful rebound in exports (+38.1% YoY in Jul-Sep 2021, and 43.4% YoY in Jan-Sep 2021) and stronger investment spending evident in capital goods output (+19.1% YoY in August, +60.1% YoY in Apr-Aug 2021) and machinery imports (+53.1% YoY in Apr-Sep 2021), we continue to expect at least 10.5% real GDP growth in FY2021/22 (well above the IMF's forecast of 9.5%). Private consumption has been relatively sluggish, but shows signs of a pickup since September. After likely growth of 15% YoY in 1H-FY2021/22, real GDP will comfortably exceed 6% YoY growth in the second half of the fiscal year. 
The external balances remain particularly robust, with a current account surplus of 1.25% of GDP in FY2020/21 followed by a surplus of 0.9% of GDP in 1Q-FY2021/22 (Apr-Jun 2021) despite a sharply wider merchandise-trade deficit. With robust capital inflows, India's foreign reserves have risen 16% YoY to US$639.5 billion as of 8 October 2021. The fiscal deficit will likely be much smaller than the officially-projected figure, as revenues have soared while expenditure has been restrained: in the first 5 months of FY2021/22 (Apr-Aug 2021), the fiscal deficit was just 31.1% of the projected estimate for the full fiscal year -- particularly helped by the 70.5% YoY rise in net tax revenues, led by corporate tax revenue rising 160% YoY and customs duties 136% YoY. Given the robust external liquidity position, and a sharp improvement in the fiscal balance, we expect the global rating agencies to be obliged to raise India's sovereign rating by a notch over the next year. 
The strong fiscal position allows the possibility of reductions in excise duties on petroleum products to keep those prices in check as global crude-oil prices rise. CPI inflation (the RBI's inflation target) has already moderated to 4.35% YoY in September, and will likely moderate to 4% by November as the near-normal monsoon results in a bountiful kharif harvest. We expect CPI inflation to remain below 5% YoY in Jan-Mar 2022 too (despite the low base, which leads the RBI to forecast 5.8% inflation during that quarter). With inflation surprising to the downside, we think the RBI will have room for a cut in the policy rate (or other easing measures such as reductions in CRR) after the next Budget is presented. Despite challenging valuations (which will improve as the economy strengthens further and EPS growth stays robust), we recommend staying Overweight India.  

India: Capex- & Export-Led Rebound Likely to Receive Fiscal and Monetary Fillip Too

India

iShares MSCI India Index ETF is an exchange-traded fund registered in Singapore. The Fund seeks to provide investment results that, before expenses, closely correspond to the performance of the MSCI India Index. The Fund invests all or substantially all of its assets in shares comprising the MSCI India Index in substantially the same weightings as constituted in the underlying index.

iShares MSCI India Index ETF (INDIA SP)

HDFC Ltd. – In the Land of The Blind

HDFC: HDFC reported a QOQ FY 2Q22 results increase of 35.5%, as management pulled on every earnings lever. Net new NPLs increased 51.1% annualized,...

Thomas J. Monaco

Kotak Mahindra Bank – Watch Your Costs Too

KOTAK MAHINDRA BANK: KMB reported a QOQ FY 2Q22 operating result increase of 12.1%, driven by an unnecessary 40% reduction in provisions. Stressed...

Thomas J. Monaco

LIC Housing Finance – No NCOs Whatsoever?

LIC HOUSING: LIC reported a QOQ FY 2Q22 bottom-line increase of 61.6%, driven by a loss provision cut. Oddly, LIC had zero NCOs and negative loan...

Thomas J. Monaco

HDFC Bank – Extending & Pretending

HDFC BANK: HDFCB released a nonsensical set of FY 2Q22 operating basis, which exhibited improvement of 14.5% QOQ. Puzzling is the 28.5% increase in...

Thomas J. Monaco

India: Capex- & Export-Led Rebound Likely to Receive Fiscal and Monetary Fillip Too

After likely real GDP growth of 15%YoY in Apr-Sep21, the fiscal coffers are full; this will allow oil excise duty cuts. With inflation below 5%,...

Prasenjit K. Basu