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

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.   

HDFC Bank – Story Appears Different From Reality

India Financials

Saumya Agarwal

Thematic (Sector/Industry)

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure due to multiple factors playing out such as Moratorium, the Supreme Court interim order and the Restructuring framework. How well placed are Indian Banks to ride the current stress cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure due to multiple factors playing out such as Moratorium, the Supreme Court interim order and the Restructuring framework. How well placed are Indian Banks to ride the current stress cycle?

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

*Banks’ Insurance Investment Restrictions On The Way: Although not confirmed, the Reserve Bank of India (RBI) is contemplating limiting bank ownership in insurance companies to a maximum 20% stake. The RBI is apparently growing uncomfortable with the higher ownership in insurers due to their higher capital requirements.  Instead, the RBI would prefer that its constituent banks focus on their core business; and*RBI Has More Important Things To Concern Itself With: Given where we are in the credit cycle – with annualized net new NPL growth in many instances exceeding 100% and banks already insolvent, it would appear that the RBI has better things to concern itself over rather than a bank’s low absolute investment in insurance companies – investments which are posting positive results unlike most core businesses of the Indian commercial banks.

*Banks’ Insurance Investment Restrictions On The Way: Although not confirmed, the Reserve Bank of India (RBI) is contemplating limiting bank ownership in insurance companies to a maximum 20% stake. The RBI is apparently growing uncomfortable with the higher ownership in insurers due to their higher capital requirements.  Instead, the RBI would prefer that its constituent banks focus on their core business; and*RBI Has More Important Things To Concern Itself With: Given where we are in the credit cycle – with annualized net new NPL growth in many instances exceeding 100% and banks already insolvent, it would appear that the RBI has better things to concern itself over rather than a bank’s low absolute investment in insurance companies – investments which are posting positive results unlike most core businesses of the Indian commercial banks.  

Reserve Bank of India – Idle Hands Are The Devil’s Workshop

Specialist in Indian Banking and Economic Research

Hemindra Hazari

The capital markets continue to reward private sector banks with rich valuations, benefitting shareholders. But larger stakeholders such as bank customers are registering a steep increase in complaints to the banks’ ombudsman. For the year July 1, 2019 to June 30, 2020, customer <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51095" target="_blank" rel="noopener">complaints</a> (per branch and per 1,000 accounts) in the entire banking industry rose, but the complaint rate for private sector banks increased significantly, and remain higher than the industry. In FY2020 (July-June), while the disposal rate for complaints for the industry was 92.4%, it has been coming down from 96.5% in FY2018. It is likely that the Covid19 pandemic and the severe lockdown in India inconvenienced banking customers, resulting in a rise in industry complaints. It is also possible that since private sector banks are concentrated in urban India and have a younger customer age profile more familiar with digital operations their customers find it easier to file complaints digitally but, nevertheless, stakeholders should be concerned about the alarming rise in complaints for the much fancied private sector banks.  It is unfortunate, though not surprising, that sell-side research regularly highlights the high CASA (current and saving account deposits), substantial fee income and other positive features of private sector banks, but steadfastly refuses to even acknowledge the growing customer complaints, which are a creditable documentation of customer dis-satisfaction with the banking services. Since few customers are motivated and informed enough to register a complaint, such complaints are the tip of the iceberg of customer dissatisfaction. In banking, customers by number are much larger stakeholders than shareholders, and when customer complaints report not just a sharp increase but also a rising trend, it needs to be highlighted by the sell-side, business media, credit rating agencies and the banking regulator.Customer dis-satisfaction at the private sector banks is a highly relevant issue as the general perception is that customer service is superior to the government banks which this data contradicts. Furthermore, if banks such as HDFC Bank and Kotak Mahindra Bank continue to report higher customer complaints and since the customer profile is common to all new generation private sector banks there is a concern that their customers can shift to other private sector banks offering better customer service.Pressure must be brought on senior management of banks to address this issue. Merely focusing on superior profitability enriching valuations, and ignoring the rise in customer complaints, can undermine any business model over the medium term, and shareholders need to take cognisance of such an important issue.

The capital markets continue to reward private sector banks with rich valuations, benefitting shareholders. But larger stakeholders such as bank customers are registering a steep increase in complaints to the banks’ ombudsman. For the year July 1, 2019 to June 30, 2020, customer complaints (per branch and per 1,000 accounts) in the entire banking industry rose, but the complaint rate for private sector banks increased significantly, and remain higher than the industry. In FY2020 (July-June), while the disposal rate for complaints for the industry was 92.4%, it has been coming down from 96.5% in FY2018. It is likely that the Covid19 pandemic and the severe lockdown in India inconvenienced banking customers, resulting in a rise in industry complaints. It is also possible that since private sector banks are concentrated in urban India and have a younger customer age profile more familiar with digital operations their customers find it easier to file complaints digitally but, nevertheless, stakeholders should be concerned about the alarming rise in complaints for the much fancied private sector banks.  It is unfortunate, though not surprising, that sell-side research regularly highlights the high CASA (current and saving account deposits), substantial fee income and other positive features of private sector banks, but steadfastly refuses to even acknowledge the growing customer complaints, which are a creditable documentation of customer dis-satisfaction with the banking services. Since few customers are motivated and informed enough to register a complaint, such complaints are the tip of the iceberg of customer dissatisfaction. In banking, customers by number are much larger stakeholders than shareholders, and when customer complaints report not just a sharp increase but also a rising trend, it needs to be highlighted by the sell-side, business media, credit rating agencies and the banking regulator.Customer dis-satisfaction at the private sector banks is a highly relevant issue as the general perception is that customer service is superior to the government banks which this data contradicts. Furthermore, if banks such as HDFC Bank and Kotak Mahindra Bank continue to report higher customer complaints and since the customer profile is common to all new generation private sector banks there is a concern that their customers can shift to other private sector banks offering better customer service.Pressure must be brought on senior management of banks to address this issue. Merely focusing on superior profitability enriching valuations, and ignoring the rise in customer complaints, can undermine any business model over the medium term, and shareholders need to take cognisance of such an important issue.

Does Customer Satisfaction Matter to the Share Valuations of Private Sector Banks?

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

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.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.

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.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.

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)

HDFC Bank – Story Appears Different From Reality

HDFC BANK: HDFCB recently put a positive spin on nearly every aspect of its business. However, credit quality and provision realities are far...

Thomas J. Monaco

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure . Can...

Saumya Agarwal

Reserve Bank of India – Idle Hands Are The Devil’s Workshop

RESERVE BANK OF INDIA: The RBI is contemplating limiting bank ownership in insurance companies to a maximum 20%. Given where we are in the credit...

Thomas J. Monaco

Pairs Trading Ideas - Asian Financials

We look at liquid and large cap pairs from the financials sector that exhibit mean-reversion and are currently trading at or near an extreme based...

Brian Freitas

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

HDFC Bank – Story Appears Different From Reality

HDFC BANK: HDFCB recently put a positive spin on nearly every aspect of its business. However, credit quality and provision realities are far...

Thomas J. Monaco

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure . Can...

Saumya Agarwal

Reserve Bank of India – Idle Hands Are The Devil’s Workshop

RESERVE BANK OF INDIA: The RBI is contemplating limiting bank ownership in insurance companies to a maximum 20%. Given where we are in the credit...

Thomas J. Monaco

Does Customer Satisfaction Matter to the Share Valuations of Private Sector Banks?

That customer grievances are growing is of less importance when shareholders are being rewarded today. But the durability of a business depends on...

Hemindra Hazari

Pairs Trading Ideas - Asian Financials

We look at liquid and large cap pairs from the financials sector that exhibit mean-reversion and are currently trading at or near an extreme based...

Brian Freitas