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

* 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.

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

Turbo-charged by a 34% surge in public investment, a widening privatization and asset monetization program, and a credible mechanism for cleaning up banks' bad assets, India's real GDP is likely to grow 13.5% in FY2021/22. With a labour market as flexible as any in Asia, corporate taxes as low as Singapore for new manufacturers, production-linked incentives, efficiency gains from privatization, and steadily-greater lending by cleaned-up banks, real GDP will grow 10% annually over the decade ahead. Stay Overweight India. 
India's economy received a fillip from the Budget for FY2021/22, which contained a 34.5% YoY increase in public investment (particularly infrastructure), a wider focus on privatization of government-owned companies (including 3 banks and an insurer) as part of a radical agenda that includes monetization of the government's other assets and land (via the the creation of Infrastructure Investment Trusts), and steps to work out banks' bad loan problems via an asset reconstruction company (for government-owned banks) that would take over, manage and then sell the bad loans on the market.  
This fiscal year's deficit is projected to be 9.5% of GDP, although this number includes more transparent accounting, particularly by bringing food subsidies back onto the government's books (rather than onto those of the Food Corporation of India). Even with that transparency, though, the actual deficit is unlikely to be larger than 8% of GDP -- and GDP likely to be higher than the government has forecast. With the big boost to public investment, the successful vaccine rollout, labour-market reforms, production-linked incentives, broad-based and widening privatization program, and mechanisms to unclog bank lending, we expect real GDP to grow 13.5% in FY2021/22, with CPI inflation averaging 4% YoY, which will allow policy rates to decline. Given the buoyancy in tax revenues, we expect the fiscal deficit to moderate to 4.5% of GDP next fiscal year, and a virtuous circle of lower interest rates and more crowding in of private investment. 
While FY2021/22 will see the completion of eight big-ticket strategic sales of public enterprises (SCI, BPCL, ConCor, Air India, IDBI, two banks and an insurer) and one large IPO (of LIC), privatizations and asset monetization will mark the medium-term roll-out of "minimum government, maximum governance", as the government steadily withdraws from running businesses, turning them over instead to the dynamism of entrepreneurial India and FDI. A rationally cleaned-up banking system will be positioned also to fund new lending, while FDI and domestic investment help the reformed Indian economy capture an increasing share of global value chains (GVCs) fleeing China for safer shores. We expect real GDP growth of 10% annually over the 2021-30 decade, transforming India into a high-middle-income economy by the end of the decade. EPS growth too will reflect the economy's growth. Stay solidly Overweight India.

Turbo-charged by a 34% surge in public investment, a widening privatization and asset monetization program, and a credible mechanism for cleaning up banks' bad assets, India's real GDP is likely to grow 13.5% in FY2021/22. With a labour market as flexible as any in Asia, corporate taxes as low as Singapore for new manufacturers, production-linked incentives, efficiency gains from privatization, and steadily-greater lending by cleaned-up banks, real GDP will grow 10% annually over the decade ahead. Stay Overweight India. 
India's economy received a fillip from the Budget for FY2021/22, which contained a 34.5% YoY increase in public investment (particularly infrastructure), a wider focus on privatization of government-owned companies (including 3 banks and an insurer) as part of a radical agenda that includes monetization of the government's other assets and land (via the the creation of Infrastructure Investment Trusts), and steps to work out banks' bad loan problems via an asset reconstruction company (for government-owned banks) that would take over, manage and then sell the bad loans on the market.  
This fiscal year's deficit is projected to be 9.5% of GDP, although this number includes more transparent accounting, particularly by bringing food subsidies back onto the government's books (rather than onto those of the Food Corporation of India). Even with that transparency, though, the actual deficit is unlikely to be larger than 8% of GDP -- and GDP likely to be higher than the government has forecast. With the big boost to public investment, the successful vaccine rollout, labour-market reforms, production-linked incentives, broad-based and widening privatization program, and mechanisms to unclog bank lending, we expect real GDP to grow 13.5% in FY2021/22, with CPI inflation averaging 4% YoY, which will allow policy rates to decline. Given the buoyancy in tax revenues, we expect the fiscal deficit to moderate to 4.5% of GDP next fiscal year, and a virtuous circle of lower interest rates and more crowding in of private investment. 
While FY2021/22 will see the completion of eight big-ticket strategic sales of public enterprises (SCI, BPCL, ConCor, Air India, IDBI, two banks and an insurer) and one large IPO (of LIC), privatizations and asset monetization will mark the medium-term roll-out of "minimum government, maximum governance", as the government steadily withdraws from running businesses, turning them over instead to the dynamism of entrepreneurial India and FDI. A rationally cleaned-up banking system will be positioned also to fund new lending, while FDI and domestic investment help the reformed Indian economy capture an increasing share of global value chains (GVCs) fleeing China for safer shores. We expect real GDP growth of 10% annually over the 2021-30 decade, transforming India into a high-middle-income economy by the end of the decade. EPS growth too will reflect the economy's growth. Stay solidly Overweight India.  

India: Public Investment, Privatization & Bank Reform Set the Stage for Faster Growth

While the Economic Survey garnered headlines for its bold call for aggressive fiscal spending in the period ahead, one remarkable fact was lost in the noise: India's fiscal deficit declined 12.7% YoY in October-December 2020, and was consequently up only 24.3% YoY in Apr-Dec 2020 despite a severe economic recession. This was made possible by ensuring that net tax revenues actually increased 6.35% YoY in Apr-Dec 2020, despite the economic contraction during the period. It was only after it was clear that tax revenues were recovering in Q3 of the fiscal year that government spending began to be ramped up (having declined marginally in Apr-Sep20). In a fuel-scarce economy, consumers of petrol and diesel have borne the brunt of fiscal restraint in a difficult year. Excise duty revenues were up 54% YoY in April-December 2020, almost entirely because of petroleum-related excise duties. Personal income tax revenue soared 25.5% YoY in 3Q (Oct-Dec 2020) and corporate tax revenue increased 34.8% YoY that quarter -- pointing to a clear rebound in middle-class incomes and corporate profits in the last quarter -- which are likely to continue in the Jan-Mar 2021 quarter, especially given that March is usually the biggest month for production, income and government tax revenue -- but March 2020 was when the lockdown began. We continue to expect that the government's forecast of a contraction in real GDP of 7.7% in FY2020/21 is too low: the rebound in the second half of the fiscal year will be substantially positive (not a contraction as the Survey conservatively estimates). Incredible fiscal restraint during the recession has now prepared the way for a powerful rebound in government spending -- permitted by a rebound in tax revenue as the economy recovers. More importantly, privatization revenues (which have performed very poorly again this FY) are likely to play a very big part in the period ahead. Given the strength of equity markets, it is a shame that the government did not make more progress with privatisation in 2020, but that is likely to be a big and genuine theme in the year ahead. We remain bullish on India.

While the Economic Survey garnered headlines for its bold call for aggressive fiscal spending in the period ahead, one remarkable fact was lost in the noise: India's fiscal deficit declined 12.7% YoY in October-December 2020, and was consequently up only 24.3% YoY in Apr-Dec 2020 despite a severe economic recession. This was made possible by ensuring that net tax revenues actually increased 6.35% YoY in Apr-Dec 2020, despite the economic contraction during the period. It was only after it was clear that tax revenues were recovering in Q3 of the fiscal year that government spending began to be ramped up (having declined marginally in Apr-Sep20). In a fuel-scarce economy, consumers of petrol and diesel have borne the brunt of fiscal restraint in a difficult year. Excise duty revenues were up 54% YoY in April-December 2020, almost entirely because of petroleum-related excise duties. Personal income tax revenue soared 25.5% YoY in 3Q (Oct-Dec 2020) and corporate tax revenue increased 34.8% YoY that quarter -- pointing to a clear rebound in middle-class incomes and corporate profits in the last quarter -- which are likely to continue in the Jan-Mar 2021 quarter, especially given that March is usually the biggest month for production, income and government tax revenue -- but March 2020 was when the lockdown began. We continue to expect that the government's forecast of a contraction in real GDP of 7.7% in FY2020/21 is too low: the rebound in the second half of the fiscal year will be substantially positive (not a contraction as the Survey conservatively estimates). Incredible fiscal restraint during the recession has now prepared the way for a powerful rebound in government spending -- permitted by a rebound in tax revenue as the economy recovers. More importantly, privatization revenues (which have performed very poorly again this FY) are likely to play a very big part in the period ahead. Given the strength of equity markets, it is a shame that the government did not make more progress with privatisation in 2020, but that is likely to be a big and genuine theme in the year ahead. We remain bullish on India.  

India: Incredible Fiscal Responsibility Amid the Economic Devastation of Covid

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)

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

India: Public Investment, Privatization & Bank Reform Set the Stage for Faster Growth

Turbocharged by 34% surge in capex, a growing privatization & asset monetization program, & a credible mechanism for cleaning up banks' bad assets,...

Prasenjit K. Basu

India: Incredible Fiscal Responsibility Amid the Economic Devastation of Covid

Excise duty (mainly petrol) was up 54%YoY in Apr-Dec 2020, but rebounding income (+25%YoY) and corporate tax (+35%YoY) revenues in Oct-Dec2020...

Prasenjit K. Basu