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

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion. LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking.

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion. LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking. 

DBS Group Holdings – COVID & India Not A Good Combo

* 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. 

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 60 bn or just over two quarters of core operating results.

*Challenged Again: HDFC Ltd (HDFC.IN) [HDFC] reported FY 3Q21 results of INR 29.3 bn, marginally increasing INR 557 mn (1.9%) on a linked quarter basis. However, core operating results came in at INR 25.4 bn, declining INR 1.7 bn (6.1%) over the same period – despite net interest income improving INR 4.0 bn (11.2%) off of a 30 bp NIM improvement to 3.00% and loan growth of 1.9%; and*Credit Quality Reverses Course: Given the INR 2.3 bn in NCOs during FY 3Q21, net new NPLs accelerated to INR 8.5 bn and increased 32.5% on an annualized basis. We would have preferred that HDFC be even more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 60 bn or just over two quarters of core operating results.

*Results Down, Credibility Continues To Increase: We applaud for LIC Housing Finance (LICHF.IN) [LIC] for having the fortitude to properly manage its balance sheet during this difficult pandemic period. Its now paying off with respect to credit quality, with credit leverage fully anticipated in FY 4Q21.  As for the actual bottom-line, LIC reported FY 3Q21 INR 721.1 crs - declining INR 68.6 crs (8.7%) linked quarter. We fully anticipate bottom-line improvement in FY 4Q21; and*Credit Continues To Mend:  We note that net new NPLs at LIC were negative again as well – declining INR 47.3 crs for an annualized rate of NPL decline of 3.2% (versus a decline of 4.0% in the previous quarter). Reserves are likely where they need to be unlike most other Indian financials who have massive shortfalls.

*Results Down, Credibility Continues To Increase: We applaud for LIC Housing Finance (LICHF.IN) [LIC] for having the fortitude to properly manage its balance sheet during this difficult pandemic period. Its now paying off with respect to credit quality, with credit leverage fully anticipated in FY 4Q21.  As for the actual bottom-line, LIC reported FY 3Q21 INR 721.1 crs - declining INR 68.6 crs (8.7%) linked quarter. We fully anticipate bottom-line improvement in FY 4Q21; and*Credit Continues To Mend:  We note that net new NPLs at LIC were negative again as well – declining INR 47.3 crs for an annualized rate of NPL decline of 3.2% (versus a decline of 4.0% in the previous quarter). Reserves are likely where they need to be unlike most other Indian financials who have massive shortfalls.

LIC Housing Finance – This Is How It Should Be Done

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)

DBS Group Holdings – COVID & India Not A Good Combo

DBS GROUP HOLDINGS: DBS reported a 4Q20 results decline of 22.0% linked quarter. Results remain troubling across the board. India deal poses...

Thomas J. Monaco

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

HDFC – Credit Turn

HOUSING DEVELOPMENT FINANCE CORP: HDFC reported FY 3Q21 core results decline of 6.1%. Net new NPLs accelerated 32.5%, and reserves light by over...

Thomas J. Monaco

LIC Housing Finance – This Is How It Should Be Done

LIC HOUSING FINANCE: We applaud for LIC for properly managing its balance sheet. FY 3Q21 results declined 8.7% linked quarter but expect bottom...

Thomas J. Monaco