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

*KC And The Mark Up Band At It Again: HDFC Bank’s (HDFCB.IN) [HDFCB] and HDFC Ltd’s (HDFC.IN) [HDFC] Boards of Directors each approved HDFCB’s purchase of a 4.99% stake in HDFC ERGO General Insurance (ERGO) in a related party transaction at a purchase price of INR 19.1 bn. HDFC’s stake in ERGO on closing will decline to 44.9%, and a gain of INR 16.0 bn will be booked; and*A Stretch: No doubt that HDFC likely will use these one-time gains to boost loss provisioning efforts. Nevertheless, this ERGO deal could ultimately pave the way for an even greater alignment of interests between HDFCB, HDFC, and HDFC Life.

*KC And The Mark Up Band At It Again: HDFC Bank’s (HDFCB.IN) [HDFCB] and HDFC Ltd’s (HDFC.IN) [HDFC] Boards of Directors each approved HDFCB’s purchase of a 4.99% stake in HDFC ERGO General Insurance (ERGO) in a related party transaction at a purchase price of INR 19.1 bn. HDFC’s stake in ERGO on closing will decline to 44.9%, and a gain of INR 16.0 bn will be booked; and*A Stretch: No doubt that HDFC likely will use these one-time gains to boost loss provisioning efforts. Nevertheless, this ERGO deal could ultimately pave the way for an even greater alignment of interests between HDFCB, HDFC, and HDFC Life.

*Results Down, Credibility Continues To Increase: LIC Housing Finance (LICHF.IN) [LIC] reported FY 4Q21 bottom-line results of 4.0 bn, declining INR 3.5 bn (45.0%) linked quarter. Results were weaker primarily due to a massive loss provision increase of INR 7.9 bn (4.2x) over the period reflecting an increase of 16% in Stage 3 loans; and*Negative Credit Delta: Despite recoveries of INR 400 mn, net new NPLs at LIC skyrocketed to INR 12.6 bn or increasing 62.0% on an annualized basis during the period – quite the change from annualized net new NPL decline of 3.2% in FY 3Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 22 bn to the reserve.

 *Results Down, Credibility Continues To Increase: LIC Housing Finance (LICHF.IN) [LIC] reported FY 4Q21 bottom-line results of 4.0 bn, declining INR 3.5 bn (45.0%) linked quarter. Results were weaker primarily due to a massive loss provision increase of INR 7.9 bn (4.2x) over the period reflecting an increase of 16% in Stage 3 loans; and*Negative Credit Delta: Despite recoveries of INR 400 mn, net new NPLs at LIC skyrocketed to INR 12.6 bn or increasing 62.0% on an annualized basis during the period – quite the change from annualized net new NPL decline of 3.2% in FY 3Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 22 bn to the reserve. 

*Another Awful Result: Punjab National Bank (PNB.IN) [PNB] reported FY 4Q21 net income of INR 5.9 bn, increasing INR 803 mn  (15.9%) linked quarter. Excluding the gains in the consecutive quarters, PNB’s core operating results would have been a negative INR 3.9 bn in FY 4Q21 and negative INR 7.4 bn in FY 3Q21. Not good, but operating losses did moderately decline – or did they? Bizarrely, as gross stated NPLs increased 10.5% linked quarter, PNB in its infinite wisdom decided to cut loss provisions INR 7.5 bn (13.7%) linked quarter which was substantially additive to what appears to be an overstated bottom-line; and*Accelerating Credit Risk Leads to Technical Insolvency: Inclusive of the INR 68 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 167 bn or 70.7% 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 loss reserves are now light by at minimum of INR 1.1 bn  - or approximately 124% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions.

*Another Awful Result: Punjab National Bank (PNB.IN) [PNB] reported FY 4Q21 net income of INR 5.9 bn, increasing INR 803 mn  (15.9%) linked quarter. Excluding the gains in the consecutive quarters, PNB’s core operating results would have been a negative INR 3.9 bn in FY 4Q21 and negative INR 7.4 bn in FY 3Q21. Not good, but operating losses did moderately decline – or did they? Bizarrely, as gross stated NPLs increased 10.5% linked quarter, PNB in its infinite wisdom decided to cut loss provisions INR 7.5 bn (13.7%) linked quarter which was substantially additive to what appears to be an overstated bottom-line; and*Accelerating Credit Risk Leads to Technical Insolvency: Inclusive of the INR 68 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 167 bn or 70.7% 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 loss reserves are now light by at minimum of INR 1.1 bn  - or approximately 124% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions.  

* Flummoxed: A competitor hosted a virtual conference with the management of the State Bank of India (SBIN.IN) [SBI]. To say the call was a disappointment would be an understatement. Nothing meaningful was stated on credit quality, and for some reason management is “comfortable” with capital; and *Reserve Challenges Should Lead To LARGE Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap.

* Flummoxed: A competitor hosted a virtual conference with the management of the State Bank of India (SBIN.IN) [SBI]. To say the call was a disappointment would be an understatement. Nothing meaningful was stated on credit quality, and for some reason management is “comfortable” with capital; and *Reserve Challenges Should Lead To LARGE Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – Lights On, No One Home

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: 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.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Are We Even Looking At The Same Bank As Management: A competitor hosted a recent conference call with the CFO of HDFC Bank (HDFCB.IN) [HDFCB] to give a post-quarter update. On the conference call, however, management instead decided to focus on numerous items not having to do with credit, the elephant in the room. HDFCB management has more than a tendency to put a completely unwarranted positive spin on nearly every aspect of its business  -  completely ignoring the medium-term challenges; and*Watch Your Credit: 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.  By our calculation, loss reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

India

iShares MSCI India ETF is an exchange-traded fund incorporated in the USA. The ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI India Index.

iShares MSCI India ETF (INDA US)

HDFC Bank – Inside Job

HDFC BANK: HDFCB and HDFC’s Boards HDFCB’s purchase of a 4.99% stake in HDFC ERGO in a related party transaction. HDFC’s stake in ERGO will decline...

Thomas J. Monaco

LIC Housing Finance – Hit With A Brick

LIC HOUSING FINANCE: LIC reported a poor FY 4Q21 bottom-line, declining 45.0% linked quarter due to a massive loss provision reflecting a 16%...

Thomas J. Monaco

Punjab National Bank – Cipher

PUNJAB NATIONAL BANK: PNB's operating results were a negative INR 3.9 bn in FY 4Q21. Bizarrely, as gross stated NPLs increased 10.5% linked...

Thomas J. Monaco

State Bank of India – Lights On, No One Home

STATE BANK OF INDIA: A competitor hosted a disappointing call with management. By our calculation, we find that SBI’s reserves are short INR 1.2 tn...

Thomas J. Monaco

HDFC Bank – Rose Colored Glasses

HDFC BANK: A competitor hosted a recent conference call with HDFCB. It chose to focus on numerous items not having to do with credit. The longer...

Thomas J. Monaco