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

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

*Improved Operating Performance: ICICI Bank (ICICIBC.IN/IBN.US) [ICICI] reported FY 4Q21 earnings of INR 44.0 bn, decreasing INR 5.4 bn (10.9%) linked quarter. Excluding gains, FY 4Q21 core operating results increased INR 2.5 bn (6.5%) over the same period. In our view, ICICI’s results were of higher quality than last quarter; and*Credit Improvement Coming: With NCOs of INR 42.2 bn, we find that net new NPLs actually continued to increase - up INR 34.9 bn or at a decelerated pace of 33.1% on an annualized basis. With credit quality continuing to breakdown at ICICI and virtually every financial institution in India, we find that ICICI – like its competitors, is still short on reserves to the tune of INR 229 bn or four quarters of PBT.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

<a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a>’s decision to <a href="https://www.citigroup.com/citi/investor/data/qer121.pdf?ieNocache=351" target="_blank" rel="noopener">withdraw</a>  from consumer banking in 13 geographies, including India, and focus instead on corporate/institutional banking, is a lesson in missed opportunities, at least in the case of India. Citi India was the pioneer in consumer banking, in products such as mortgages and credit cards, but it flourished when there were only government banks. The post-1991 entry of the new private banks in India which concentrated on the retail and corporate customers of foreign banks, and the post-Lehman crisis in 2008, heralded the decline of foreign banks in India. The present market capitalisation of the new private banks, and their significant footfall in retail banking in India, highlight the missed opportunity by foreign banks like Citi. The Reserve Bank of India (RBI) provided the foreign banks an opportunity from <a href="https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR936SC1113.pdf" target="_blank" rel="noopener">2013</a>  to set up Indian subsidiaries which could unfetter their network shackles and expand their branches, which is necessary for consumer banking, but the foreign banks preferred not to get tied down by the other regulatory and social commitments. Instead they focused on hiring direct sales agents to grow their consumer book. Although Citi developed a premium retail clientele franchise, the lack of a broader retail network and intense competition impeded their growth in retail. They preferred to remain focused on the corporate portfolio where, using their global balance sheet, creating structured products and handling treasury and foreign exchange transactions, they managed a lucrative business. Citi’s 5% market share in credit cards remains the jewel in its retail consumer franchise in India, and its monthly credit card spends per customer are at the top of the league, and close to HDFC Bank. Many players are eyeing Citibank’s market share in credit cards and it remains to be seen whether Citi offloads it on a standalone basis, or sells it with its other retail franchise in India, or sells all 13 geographies to a global player.

Citigroup Inc (C US)’s decision to withdraw  from consumer banking in 13 geographies, including India, and focus instead on corporate/institutional banking, is a lesson in missed opportunities, at least in the case of India. Citi India was the pioneer in consumer banking, in products such as mortgages and credit cards, but it flourished when there were only government banks. The post-1991 entry of the new private banks in India which concentrated on the retail and corporate customers of foreign banks, and the post-Lehman crisis in 2008, heralded the decline of foreign banks in India. The present market capitalisation of the new private banks, and their significant footfall in retail banking in India, highlight the missed opportunity by foreign banks like Citi. The Reserve Bank of India (RBI) provided the foreign banks an opportunity from 2013  to set up Indian subsidiaries which could unfetter their network shackles and expand their branches, which is necessary for consumer banking, but the foreign banks preferred not to get tied down by the other regulatory and social commitments. Instead they focused on hiring direct sales agents to grow their consumer book. Although Citi developed a premium retail clientele franchise, the lack of a broader retail network and intense competition impeded their growth in retail. They preferred to remain focused on the corporate portfolio where, using their global balance sheet, creating structured products and handling treasury and foreign exchange transactions, they managed a lucrative business. Citi’s 5% market share in credit cards remains the jewel in its retail consumer franchise in India, and its monthly credit card spends per customer are at the top of the league, and close to HDFC Bank. Many players are eyeing Citibank’s market share in credit cards and it remains to be seen whether Citi offloads it on a standalone basis, or sells it with its other retail franchise in India, or sells all 13 geographies to a global player.   

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div>In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal. We also recap our earlier ideas and recommend exiting a position where there are gains and the price ratio is near a turning point.</div><div>These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.</div><div>
These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.
Over the last couple of months, our pair trades have returned 2.54% on average.
</div>

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal. We also recap our earlier ideas and recommend exiting a position where there are gains and the price ratio is near a turning point.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.
These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.
Over the last couple of months, our pair trades have returned 2.54% on average.


*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*Earnings Miss: HDFC Bank (HDFCB.IN) [HDFCB] released a weak FY 4Q21 balance sheet update several weeks back, following it up with an even more disappointing FY 4Q21 bottom-line result of INR 81.9  bn - declining INR 5.7 bn (6.5%) on a linked quarter basis. The earnings disappointment came from both an increase in loss provisions and costs; and*Credit Challenged Still: Restructured loans did increase INR 10 bn (19.8%) linked quarter to INR 65 bn or 0.6% of loans. Inclusive of NCOs of INR 49.0 bn during the quarter, 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.  We would be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.   

Thematic (Sector/Industry)

*Cutting Your Nose To Spite Your Face: Despite the favorable Reserve Bank of India (RBI) ruling and the clarity that it may bring to bank classification of NPLs and interest charges, the fact is that Indian financial sector credit quality remains amongst the worst in Asia and globally. In fact, we would go as far to state that the breakdown in net new NPLs remains by far the worst in the world at well over 100% annualized growth at FY 3Q21. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those woes to the woodpile of Indian NPLs; and*Killing Me Softly: Following the Supreme Court decision on extending the compound interest relief to loansin excess of INR 20 mn and lifting of standstill on NPL classifications, the RBI has added insult to injury by notifying lenders that they will bear the impact of the compound interest waiver, without any visibility on whether or not this waiver will be reimbursed by or shared with the government. Non-bank Financial Companies (NBFC) have large borrowing from banks and could – as a result of the RBI’s utter incompetence – become net beneficiaries of this new guideline.

*Cutting Your Nose To Spite Your Face: Despite the favorable Reserve Bank of India (RBI) ruling and the clarity that it may bring to bank classification of NPLs and interest charges, the fact is that Indian financial sector credit quality remains amongst the worst in Asia and globally. In fact, we would go as far to state that the breakdown in net new NPLs remains by far the worst in the world at well over 100% annualized growth at FY 3Q21. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those woes to the woodpile of Indian NPLs; and*Killing Me Softly: Following the Supreme Court decision on extending the compound interest relief to loansin excess of INR 20 mn and lifting of standstill on NPL classifications, the RBI has added insult to injury by notifying lenders that they will bear the impact of the compound interest waiver, without any visibility on whether or not this waiver will be reimbursed by or shared with the government. Non-bank Financial Companies (NBFC) have large borrowing from banks and could – as a result of the RBI’s utter incompetence – become net beneficiaries of this new guideline.

Reserve Bank of India – Thanks For Nothing

India

Kotak Mahindra Bank Limited is a full service commercial bank. The Bank offers a wide range of products and services such as personal, commercial, and corporate banking services, including deposit accounts, loans, and investments. Kotak Mahindra Bank serves customers in India.

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Kotak Mahindra Bank (KMB IN)

ICICI Bank – Much Better

ICICI BANK: ICICI reported a 6.5% linked quarter improvement in FY 4Q21 operating results. Credit weakness is still there, but the breakdown in net...

Thomas J. Monaco

While Citi Slept

Citi's decision to withdraw from consumer banking in 13 geographies, including India, and focus on corp./institutional banking, is a lesson in...

Hemindra Hazari

Pair Trading Ideas - Asian Financials

We highlight potential trades among liquid large cap Asian financial stocks that are correlated and exhibit mean reversion. We recommend closing...

Brian Freitas

HDFC Bank – Big Credit Disappointment

HDFC BANK: HDFCB released a disappointing FY 4Q21 bottom-line, declining 6.5% QOQ, due higher provisions and costs. Net new NPLs increased 130.4%...

Thomas J. Monaco

Reserve Bank of India – Thanks For Nothing

RESERVE BANK OF INDIA: Following the Supreme Court decision, the RBI has added insult to injury by telling the banks to bear the impact of the...

Thomas J. Monaco

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