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

Exports (+6% YoY) and industrial output (+0.2% YoY) resumed growing in September 2020, GST revenues were up 4% YoY that month and accelerated to 10% YoY growth in October 2020. We expect real GDP to expand 3% YoY in Oct-Dec 2020 and accelerate to 8% YoY in Jan-Mar 2021 (aided by a low-base effect, especially for March 2020); so real GDP will contract about 3% in FY2020/21 (much better than the IMF estimate of -10.5%) and expand over 10% in 2021/22 . With WPI inflation extremely low (as fuel prices are down YoY) and CPI inflation high (because of supply disruptions), corporate profitability is likely to be improving after the collapse in March-July. We recommend being Overweight India equities.  
India's exports grew 6% YoY in September 2020, and the long industrial recession ended in September, with industrial output expanding 0.2% YoY led by good growth in consumer non-durables (+4.1% YoY) and consumer durables (+2.8% YoY), and modest growth in infrastructure goods (+0.7% YoY). Reflecting the strength of farm incomes (and the positive impact of the on-going reforms to agricultural pricing and distribution), tractor sales expanded 31.2% YoY in 3Q 2020. Responding to the labour reforms, the pace of relocation of manufacturing FDI from China to India is gaining pace, with notable new investments from German and Japanese companies -- likely to gain further momentum in the period ahead. That GST revenues were up 4% YoY in September and 10% YoY in October 2020 is clinching evidence of the acceleration in economic activity. The "stimulus 3.0" announced on 12 November will boost employment and exports, and provide a modest spur to additional bank lending. 
Reflecting the relative sluggishness of domestic demand (with bank credit growing an anaemic 5.1% YoY in October 2020), imports declined far more than exports (even in April-August 2020), and the current account surplus widened from 0.1% of GDP in Jan-Mar 2020 to 3.9% of GDP in Apr-Jun 2020. Although imports contracted less in Jul-Sep 2020, the still-low trade deficit that quarter will ensure a current account surplus of 3.5% of GDP for 3Q 2020 (calendar year) and a full-year current account surplus of over 2% of GDP (close to the all-time high of FY2003/04). Given the healthy external balance, there is ample room for the RBI to ease monetary policy further. The high headline CPI inflation rate remains the main impediment. Over the next 2 months, the easing of Covid-19 infections across the country (with current new case numbers less than half the mid-September peak) will allow the RBI to cut the policy interest rate a further 100bp to an all-time low by March 2021. That should ensure an acceleration of real GDP to 8% YoY in Jan-Mar2021, and to over 10% growth in FY2021/22.

Exports (+6% YoY) and industrial output (+0.2% YoY) resumed growing in September 2020, GST revenues were up 4% YoY that month and accelerated to 10% YoY growth in October 2020. We expect real GDP to expand 3% YoY in Oct-Dec 2020 and accelerate to 8% YoY in Jan-Mar 2021 (aided by a low-base effect, especially for March 2020); so real GDP will contract about 3% in FY2020/21 (much better than the IMF estimate of -10.5%) and expand over 10% in 2021/22 . With WPI inflation extremely low (as fuel prices are down YoY) and CPI inflation high (because of supply disruptions), corporate profitability is likely to be improving after the collapse in March-July. We recommend being Overweight India equities.  
India's exports grew 6% YoY in September 2020, and the long industrial recession ended in September, with industrial output expanding 0.2% YoY led by good growth in consumer non-durables (+4.1% YoY) and consumer durables (+2.8% YoY), and modest growth in infrastructure goods (+0.7% YoY). Reflecting the strength of farm incomes (and the positive impact of the on-going reforms to agricultural pricing and distribution), tractor sales expanded 31.2% YoY in 3Q 2020. Responding to the labour reforms, the pace of relocation of manufacturing FDI from China to India is gaining pace, with notable new investments from German and Japanese companies -- likely to gain further momentum in the period ahead. That GST revenues were up 4% YoY in September and 10% YoY in October 2020 is clinching evidence of the acceleration in economic activity. The "stimulus 3.0" announced on 12 November will boost employment and exports, and provide a modest spur to additional bank lending. 
Reflecting the relative sluggishness of domestic demand (with bank credit growing an anaemic 5.1% YoY in October 2020), imports declined far more than exports (even in April-August 2020), and the current account surplus widened from 0.1% of GDP in Jan-Mar 2020 to 3.9% of GDP in Apr-Jun 2020. Although imports contracted less in Jul-Sep 2020, the still-low trade deficit that quarter will ensure a current account surplus of 3.5% of GDP for 3Q 2020 (calendar year) and a full-year current account surplus of over 2% of GDP (close to the all-time high of FY2003/04). Given the healthy external balance, there is ample room for the RBI to ease monetary policy further. The high headline CPI inflation rate remains the main impediment. Over the next 2 months, the easing of Covid-19 infections across the country (with current new case numbers less than half the mid-September peak) will allow the RBI to cut the policy interest rate a further 100bp to an all-time low by March 2021. That should ensure an acceleration of real GDP to 8% YoY in Jan-Mar2021, and to over 10% growth in FY2021/22.    

India: Strengthening Recovery Will Defy the IMF's Pessimism on FY2020/21 Growth

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

*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”

*Manufactured Improvement: IndusInd Bank (IIB.IB) [IndusInd] reported FY 2Q21 bottom-line results of INR 6.5 bn, improving INR 1.9 bn (40.5%) linked quarter. Like most other banks in India, IndusInd cut its loan loss provision INR 2.9 bn or 13.0% on a linked quarter basis – driving FY2Q21 bottom-line – a bizarre move given the accelerated levels of NPL creation which no doubt will be reversed going forward; and*Credit Weaker, Not Better: You can dress IndusInd up and put as much make-up on as you like but at the end of the day – credit is ugly. NCOs of INR 18.4 bn amount to 3.72% on an annualized basis, while net new NPLs are increasing at a 117.5%. From our vantage point, we find that IndusInd’s reserve needs to be more than tripled with a shortfall of INR 75.7 bn – representing nine quarters of pre-tax results if you believe the FY 2Q21 result wasn’t manufactured – or 17.0% of market cap. This is a problem, as IndusInd’s CET 1 at 14.5% is substantially still lower than the CET 1 ratio of the large private banks (18% on an average).

*Manufactured Improvement: IndusInd Bank (IIB.IB) [IndusInd] reported FY 2Q21 bottom-line results of INR 6.5 bn, improving INR 1.9 bn (40.5%) linked quarter. Like most other banks in India, IndusInd cut its loan loss provision INR 2.9 bn or 13.0% on a linked quarter basis – driving FY2Q21 bottom-line – a bizarre move given the accelerated levels of NPL creation which no doubt will be reversed going forward; and*Credit Weaker, Not Better: You can dress IndusInd up and put as much make-up on as you like but at the end of the day – credit is ugly. NCOs of INR 18.4 bn amount to 3.72% on an annualized basis, while net new NPLs are increasing at a 117.5%. From our vantage point, we find that IndusInd’s reserve needs to be more than tripled with a shortfall of INR 75.7 bn – representing nine quarters of pre-tax results if you believe the FY 2Q21 result wasn’t manufactured – or 17.0% of market cap. This is a problem, as IndusInd’s CET 1 at 14.5% is substantially still lower than the CET 1 ratio of the large private banks (18% on an average).

IndusInd Bank – Now Dealing With Negative Operating Jaws

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)

India: Strengthening Recovery Will Defy the IMF's Pessimism on FY2020/21 Growth

September exports (+6% YoY) and industrial output (+.2% YoY) suggest recovery, and October GST revenue (+10% YoY) an acceleration. CA surplus...

Prasenjit K. Basu

LIC Housing Finance – Doing The Right Thing

LIC HOUSING FINANCE: Although Results Were Weaker Linked Quarter, They Were Driven By Higher Credit Costs. This Was Unnecessary Given Credit...

Thomas J. Monaco

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

STATE BANK OF INDIA: Costs Increasing, Credit Deteriorating, Reserve Cover Declining. This Is A Recipe For A Massive Capital Raise.

Thomas J. Monaco

Housing Development Finance Corp. – “Great Quarter Guys”

HOUSING DEVELOPMENT FINANCE CORP: Positive Operating Jaws Were Just An Outgrowth Of This Well Oiled Machine. Credit Risk Too Substantially...

Thomas J. Monaco

IndusInd Bank – Now Dealing With Negative Operating Jaws

INDUSIND BANK: IndusInd Remains Challenged With Accelerating NPL Formation, And Poor Coverage. However, Negative Operating Jaws Are Now A New Twist.

Thomas J. Monaco