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

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.  

Indiabulls Housing Finance / Equity Bottom-Up

*Solid Quarter: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 2Q21 results of INR 7.1 bn, increasing INR 4.4 bn (160.0%) linked quarter. Much of the linked quarter improvement can be attributed to net interest income growth of INR 4.7 bn (64.8%) resultant of INR 135.0 bn (14.5%) loan growth, NIM improvement of 137 bp (by our calculation) of 137 bp to 4.49%, and a buyback of bonds reducing debt by 9%; and*Credit Improving:During FY 2Q21, stated Stage 3 NPLs improved INR 4.3 bn (21.1%), declining 68 bp over the period to 1.52%.  Reinforcing this improvement, we find that net new NPLs were negative by a whopping INR 13.0 bn or over 100% on an annualized basis.

*Solid Quarter: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 2Q21 results of INR 7.1 bn, increasing INR 4.4 bn (160.0%) linked quarter. Much of the linked quarter improvement can be attributed to net interest income growth of INR 4.7 bn (64.8%) resultant of INR 135.0 bn (14.5%) loan growth, NIM improvement of 137 bp (by our calculation) of 137 bp to 4.49%, and a buyback of bonds reducing debt by 9%; and*Credit Improving:During FY 2Q21, stated Stage 3 NPLs improved INR 4.3 bn (21.1%), declining 68 bp over the period to 1.52%.  Reinforcing this improvement, we find that net new NPLs were negative by a whopping INR 13.0 bn or over 100% on an annualized basis. 

IndiaBulls Housing Finance – Rocking and Rolling

*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

*Results Supported By Premature Provision Cut: State Bank of India (SBIN.IN) [SBI] reported FY 2Q21 results of INR 45.7 bn, increasing INR 3.8 bn (9.2%) linked quarter. Results were even better when we exclude the FY 1Q21 exceptional gain of INR 15.4 bn – increasing INR 19.2 bn or 72.6% linked quarter. Results were driven by three factors: a) net interest income improvement of INR 15.4 bn (5.8%) due primarily to NIM improvement of 8 bp to 2.96%; b) a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics; and c) non-interest income improvement of INR 5.7 bn (7.2%); and* Credit Risk and Weak Cover: By our calculation, we find net new NPL growth of INR 144.0 bn or 44.4% on an annualized basis and that the annualized NCO rate of 66 bp – which are quite troublesome even for an SOE bank. We also find that reserves are light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap.

*Results Supported By Premature Provision Cut: State Bank of India (SBIN.IN) [SBI] reported FY 2Q21 results of INR 45.7 bn, increasing INR 3.8 bn (9.2%) linked quarter. Results were even better when we exclude the FY 1Q21 exceptional gain of INR 15.4 bn – increasing INR 19.2 bn or 72.6% linked quarter. Results were driven by three factors: a) net interest income improvement of INR 15.4 bn (5.8%) due primarily to NIM improvement of 8 bp to 2.96%; b) a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics; and c) non-interest income improvement of INR 5.7 bn (7.2%); and* Credit Risk and Weak Cover: By our calculation, we find net new NPL growth of INR 144.0 bn or 44.4% on an annualized basis and that the annualized NCO rate of 66 bp – which are quite troublesome even for an SOE bank. We also find that reserves are light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – Credit Continues To Fall Off A Cliff

*All Good: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 2Q21 bottom-line results of INR 33.7 bn - increasing INR 3.8 bn (12.6%) linked quarter. From a core operating perspective, we note that HDFC came in at INR 32.0 bn, a whopping INR 15.5 bn (93.4%) increase over FY 1Q21.*Credit Risk Decelerating: The trend in annualized NCOs has declined, by our calculation, to 16 bp from 21 bp in the previous quarter. In addition, the level of net new NPLs has also decelerated to INR 3.6 bn or 14.2% on an annualized basis versus 46.6% in FY 1Q21. We would have preferred that HDFC remained 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 68 bn or just over two quarters of core operating results; and*Positive Operating Jaws: . Key to core operating result performance was: a) net interest income improvement of INR 2.8 bn (8.3%) led by both linked quarter loan growth of 2.0% and NIM improvement of 17 bp to 2.75%; b) an INT 306 mn (7.7%) decline in operating expenses which pushed HDFC’s C/I ratio even lower by 160 bp to 9.2%.

*All Good: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 2Q21 bottom-line results of INR 33.7 bn - increasing INR 3.8 bn (12.6%) linked quarter. From a core operating perspective, we note that HDFC came in at INR 32.0 bn, a whopping INR 15.5 bn (93.4%) increase over FY 1Q21.*Credit Risk Decelerating: The trend in annualized NCOs has declined, by our calculation, to 16 bp from 21 bp in the previous quarter. In addition, the level of net new NPLs has also decelerated to INR 3.6 bn or 14.2% on an annualized basis versus 46.6% in FY 1Q21. We would have preferred that HDFC remained 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 68 bn or just over two quarters of core operating results; and*Positive Operating Jaws: . Key to core operating result performance was: a) net interest income improvement of INR 2.8 bn (8.3%) led by both linked quarter loan growth of 2.0% and NIM improvement of 17 bp to 2.75%; b) an INT 306 mn (7.7%) decline in operating expenses which pushed HDFC’s C/I ratio even lower by 160 bp to 9.2%.

Housing Development Finance Corp. – “Great Quarter Guys”

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)

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Thomas J. Monaco

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State Bank of India – Credit Continues To Fall Off A Cliff

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Housing Development Finance Corp. – “Great Quarter Guys”

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Thomas J. Monaco