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

*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.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

*Poor Quality Result: ICICI Bank (ICICIBC.IN) [ICICI] reported FY 3Q21 earnings of INR 49.4 bn, increasing INR 6.9 bn (16.2%) linked quarter. Excluding gains, FY 3Q21 core operating results increased INR 4.6 bn (12.5%) over the same period. In our view, ICICI’s results were of poor quality; and*Increasing Credit Losses Ahead: With NCOs of INR 16.9 bn, we find that net new NPLs actually continued to increase  - up INR 44.1 bn linked quarter or 43.7% on an annualized basis. Despite to continued increase in NPLs, reserve cover declined in both instances. We find that ICICI –is short on reserves to the tune of INR 286 bn or five quarters of PBT.

ICICI Bank – Lower Provision Despite Increasing Credit Risk

*Results Down, Credibility Continues To Increase: We applaud for LIC Housing Finance (LICHF.IN) [LIC] for having the fortitude to properly manage its balance sheet during this difficult pandemic period. Its now paying off with respect to credit quality, with credit leverage fully anticipated in FY 4Q21.  As for the actual bottom-line, LIC reported FY 3Q21 INR 721.1 crs - declining INR 68.6 crs (8.7%) linked quarter. We fully anticipate bottom-line improvement in FY 4Q21; and*Credit Continues To Mend:  We note that net new NPLs at LIC were negative again as well – declining INR 47.3 crs for an annualized rate of NPL decline of 3.2% (versus a decline of 4.0% in the previous quarter). Reserves are likely where they need to be unlike most other Indian financials who have massive shortfalls.

*Results Down, Credibility Continues To Increase: We applaud for LIC Housing Finance (LICHF.IN) [LIC] for having the fortitude to properly manage its balance sheet during this difficult pandemic period. Its now paying off with respect to credit quality, with credit leverage fully anticipated in FY 4Q21.  As for the actual bottom-line, LIC reported FY 3Q21 INR 721.1 crs - declining INR 68.6 crs (8.7%) linked quarter. We fully anticipate bottom-line improvement in FY 4Q21; and*Credit Continues To Mend:  We note that net new NPLs at LIC were negative again as well – declining INR 47.3 crs for an annualized rate of NPL decline of 3.2% (versus a decline of 4.0% in the previous quarter). Reserves are likely where they need to be unlike most other Indian financials who have massive shortfalls.

LIC Housing Finance – This Is How It Should Be Done

*Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.

 *Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.  

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Quantitative Analysis

In this report, we screen for the largest overweight Country/Sectors across Global EM by analysing the allocations of long-only active Emerging Market funds.In part one of the series, we focus on Indian Financials.  We look at where current allocations sit versus history, drill down to find the most widely held stocks in the sector, the key overweight and the key underweight holdings. We find that despite it being the largest overweight holding, Indian Financials exposure is far from excessive, both versus its own history and versus peers.  Furthermore, recent activity points to an increase in exposure among managers.Our Emerging Market fund universe consists of 242 Global Emerging Market active long-only funds, with combined AUM of $450bn.

In this report, we screen for the largest overweight Country/Sectors across Global EM by analysing the allocations of long-only active Emerging Market funds.In part one of the series, we focus on Indian Financials.  We look at where current allocations sit versus history, drill down to find the most widely held stocks in the sector, the key overweight and the key underweight holdings. We find that despite it being the largest overweight holding, Indian Financials exposure is far from excessive, both versus its own history and versus peers.  Furthermore, recent activity points to an increase in exposure among managers.Our Emerging Market fund universe consists of 242 Global Emerging Market active long-only funds, with combined AUM of $450bn. 

Emerging Market Overweights Series.  Part 1:  Indian Financials

India

State Bank of India provides a wide range of banking and financial services to corporate, institutional, commercial, agricultural, industrial and individual customers throughout India.  The Bank also provides international banking to its Indian customers and has operations in other countries.

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State Bank Of India (SBIN IN)

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

ICICI Bank – Lower Provision Despite Increasing Credit Risk

ICICI BANK: ICICI had a linked quarter FY 3Q21 poor quality earnings increase of 16.2%. Net new NPLs increased 43.7% on an annualized basis, and a...

Thomas J. Monaco

LIC Housing Finance – This Is How It Should Be Done

LIC HOUSING FINANCE: We applaud for LIC for properly managing its balance sheet. FY 3Q21 results declined 8.7% linked quarter but expect bottom...

Thomas J. Monaco

Axis Bank – Evil Result

AXIS BANK: Axis reported a 33.8% decline in linked quarter FY 3Q21 results. Given the hefty increase in net new NPLs, results make little sense....

Thomas J. Monaco

Emerging Market Overweights Series. Part 1: Indian Financials

Emerging Market Overweights Series. Part 1: Indian Financials. Analysing the make-up of the overweight in Indian Financial stocks.

Steven Holden

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