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

*Ssangyong Declares Bankruptcy: Purchased by Mahindra &amp; Mahindra (MM.IN) [M&amp;M] in 2011, the 74.7%-owned SsangYong Motor Company (003620.KS) [Ssangyong] in South Korea filed an application for commencement of the rehabilitation procedure with the Seoul Bankruptcy Court; and*M&amp;M Guarantee: Unfortunately for M&amp;M, it has provided a corporate guarantee on behalf of Ssangyong on loans up to IN 6.8bn. If no new investor steps in, M&amp;M will be required to pay the guarantee.

*Ssangyong Declares Bankruptcy: Purchased by Mahindra &amp; Mahindra (MM.IN) [M&amp;M] in 2011, the 74.7%-owned SsangYong Motor Company (003620.KS) [Ssangyong] in South Korea filed an application for commencement of the rehabilitation procedure with the Seoul Bankruptcy Court; and*M&amp;M Guarantee: Unfortunately for M&amp;M, it has provided a corporate guarantee on behalf of Ssangyong on loans up to IN 6.8bn. If no new investor steps in, M&amp;M will be required to pay the guarantee.

Mahindra & Mahindra – Ssanyong Goes Plotz

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*Management Call Doesn’t Allay Fears: FY 2Q21 results were significantly driven a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics.  We find that reserves were light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. The recent virtual call held by a competitor unfortunately did not allay our concern; and*Other Items Discussed: State Bank of India (SBIN.IN) [SBI] did reiterate its guidance for problem loan formation (slippages and restructuring) at 2.5% of loans outstanding in FY21. While SBI’s CET 1 ratio stood at 10.5% as of FY 2Q21,our calculated loss reserve shortfall would suggest that SBI has further wood to chop in this area.In addition, SBI is confident that it will be able to enhance its digital platform YONO into a more robust and scalable platform.

*Management Call Doesn’t Allay Fears: FY 2Q21 results were significantly driven a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics.  We find that reserves were light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. The recent virtual call held by a competitor unfortunately did not allay our concern; and*Other Items Discussed: State Bank of India (SBIN.IN) [SBI] did reiterate its guidance for problem loan formation (slippages and restructuring) at 2.5% of loans outstanding in FY21. While SBI’s CET 1 ratio stood at 10.5% as of FY 2Q21,our calculated loss reserve shortfall would suggest that SBI has further wood to chop in this area.In addition, SBI is confident that it will be able to enhance its digital platform YONO into a more robust and scalable platform.

State Bank of India – Reserve Shortfall Needs To Be Addressed

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

India has bucked the global trend by growing its total government spending by only 0.4% YoY in April-October 2020. But the economic recovery caused tax revenue to rise 16.9% YoY in October 2020, and the fiscal deficit should consequently decline steadily in the second half of the fiscal year, helping to crowd-in private investment. As supply disruptions ease, CPI inflation should edge below 6% YoY by January 2021, allowing a 50bp reduction in the policy rate to further kick-start a spectacular economic recovery in 2021 (calendar year) to about 15% real GDP growth. India's real GDP contracted 7.5% YoY in July-September 2020, but will likely need to be revised up because the key Services sectors (including public administration, defence, finance and professional services) were reported to have contracted more in July-September than in the "locked-down" quarter of April-June. On the demand side, government consumption spending declined a severe 22.2% YoY in real terms, private consumption declined 11.3% YoY, and investment spending fell 7.4% YoY, but real net exports added 3.5 percentage points to GDP. Notably, nominal exports of goods and services increased during the quarter (and yet the Services contribution to the output side was sharply negative, suggesting serious measurement errors in the latter). But the overall decline in government spending was a notable restraint on GDP during the quarter. Fiscal restraint has meant that India's total government spending (nominal) in April-October 2020 was up just 0.4% YoY. In October 2020, strong gross tax revenue (+16.9% YoY) enabled the fiscal deficit to decline 43% YoY. As the accelerating economy boosts tax revenues in the months ahead, the fiscal deficit will moderate steadily further, allowing some room for even this extraordinarily fiscally-conservative government to ease the reins on government spending. More importantly, as the supply disruptions from transportation bottlenecks ease, we expect CPI inflation to moderate to below 6% YoY by January 2021, allowing a 50bp reduction in policy rates by March 2021 -- thereby kick-starting a strong economic recovery to 8% YoY in Jan-Mar 2021, around 30% YoY in the next quarter and over 10% YoY in the rest of FY2021/22.

India has bucked the global trend by growing its total government spending by only 0.4% YoY in April-October 2020. But the economic recovery caused tax revenue to rise 16.9% YoY in October 2020, and the fiscal deficit should consequently decline steadily in the second half of the fiscal year, helping to crowd-in private investment. As supply disruptions ease, CPI inflation should edge below 6% YoY by January 2021, allowing a 50bp reduction in the policy rate to further kick-start a spectacular economic recovery in 2021 (calendar year) to about 15% real GDP growth. India's real GDP contracted 7.5% YoY in July-September 2020, but will likely need to be revised up because the key Services sectors (including public administration, defence, finance and professional services) were reported to have contracted more in July-September than in the "locked-down" quarter of April-June. On the demand side, government consumption spending declined a severe 22.2% YoY in real terms, private consumption declined 11.3% YoY, and investment spending fell 7.4% YoY, but real net exports added 3.5 percentage points to GDP. Notably, nominal exports of goods and services increased during the quarter (and yet the Services contribution to the output side was sharply negative, suggesting serious measurement errors in the latter). But the overall decline in government spending was a notable restraint on GDP during the quarter. Fiscal restraint has meant that India's total government spending (nominal) in April-October 2020 was up just 0.4% YoY. In October 2020, strong gross tax revenue (+16.9% YoY) enabled the fiscal deficit to decline 43% YoY. As the accelerating economy boosts tax revenues in the months ahead, the fiscal deficit will moderate steadily further, allowing some room for even this extraordinarily fiscally-conservative government to ease the reins on government spending. More importantly, as the supply disruptions from transportation bottlenecks ease, we expect CPI inflation to moderate to below 6% YoY by January 2021, allowing a 50bp reduction in policy rates by March 2021 -- thereby kick-starting a strong economic recovery to 8% YoY in Jan-Mar 2021, around 30% YoY in the next quarter and over 10% YoY in the rest of FY2021/22. 

Economic Recovery Is Gaining Momentum, but Monetary Stimulus Would Help

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount 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;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well.

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount 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;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well. 

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)

Mahindra & Mahindra – Ssanyong Goes Plotz

MAHINDRA & MAHINDRA: 75% Owned Ssangyong Motors Declares Bankruptcy, and M&M Is Likely On The Hook For The Credit Guarantees.

Thomas J. Monaco

Axis Bank – Denying Evil

AXIS BANK: Allegations Of Exorbitant Lending To The Questionable SREI Without Verification Lead To Aggressive Denials Of Wrongdoing By Axis.

Thomas J. Monaco

State Bank of India – Reserve Shortfall Needs To Be Addressed

STATE BANK OF INDIA: Recent Call Suggests No Real Progress On Significant Reserve Shortfall, And That Another Capital Raise Not Out Of Question

Thomas J. Monaco

Economic Recovery Is Gaining Momentum, but Monetary Stimulus Would Help

Total govt spending rose just 0.4%YoY in Apr-Oct 2020. But in Oct20, tax revenue surged 17%YoY. The falling fiscal deficit will crowd in private...

Prasenjit K. Basu

DBS Group Holdings – The LVB Cram Down

DBS GROUP HOLDINGS: The LVB Cram-down Raises Significant Questions Over Potential Cost For DBS, Raises Significant Concerns Over Audited Financial...

Thomas J. Monaco