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

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

*In-Line Results: Bajaj Finance (BAF.IN) [Bajaj] reported FY 2Q21 results of INR 9.6 bn - essentially in-line with FY 1Q21 results. While in line on a linked quarter basis, we do note improvement in the NIM by 70 bp to 9.9% which drove the INR 1.1 bn (3.3%) increase in net interest income;*Credit Risk Increasing: On a linked quarter basis, we found that gross NPAs actually declined INR 5.2 bn (26.9%)  - primarily on account of FY 2Q21 NCOs of INR 20.5 bn which appear to have accelerated again. Credit remains weak with net new NPAs of INR 15.3 or an alarming 434.1% annualized increase. Loss reserves also remain light in the neighbourhood of INR 66.4 bn by our calculation or over five quarter of pre-tax results; and*Lowered Guidance: For AUM, Bajaj expects AUM growth during FY 2021 of just between 6%-7% - well below previous guidance of 10-12%. Several other headwinds over the near-term are also worrisome, including: 1) the elevated payment-bounce rate; and 2) the lack of clarity surrounding the flexi loan book.

Thematic (Sector/Industry)

*HFC Harmonization With NBFCs: The Reserve Bank of India (RBI) had initially published a draft proposal for changes in regulations for Housing Finance Companies (HFC) in June 2020, seeking commentary from stakeholders by July 15, 2020; and*Final Regulatory Changes: After stakeholder review, there is essentially one key change to the draft proposal mandating a higher 60% of total assets be “qualifying housing finance assets” and that a minimum of 50% of total assets be housing loans. The RBI has indicated that other differences between HFC and NBFC regulations will be eliminated over a period of two years.

*HFC Harmonization With NBFCs: The Reserve Bank of India (RBI) had initially published a draft proposal for changes in regulations for Housing Finance Companies (HFC) in June 2020, seeking commentary from stakeholders by July 15, 2020; and*Final Regulatory Changes: After stakeholder review, there is essentially one key change to the draft proposal mandating a higher 60% of total assets be “qualifying housing finance assets” and that a minimum of 50% of total assets be housing loans. The RBI has indicated that other differences between HFC and NBFC regulations will be eliminated over a period of two years.

Reserve Bank of India  - Final HFC Changes

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> and <a href="https://www.smartkarma.com/entities/kb-capital-co-ltd" target="_blank" data-smartkarma-citation="entities:3646:1" rel="noopener">KB Capital (021960 KS)</a> were the only financial institutions to access global capital market during the week. The <a href="https://www.smartkarma.com/entities/fbn-holdings-plc" target="_blank" data-smartkarma-citation="entities:27846:1" rel="noopener">First Bank of Nigeria (FBNH NL)</a> brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the <a href="https://www.smartkarma.com/entities/commercial-bank-of-dubai" target="_blank" data-smartkarma-citation="entities:29706:1" rel="noopener">Commercial Bank of Dubai's (CBD UH)</a> recently issued AT1 bond. For our thoughts on this security, please see: <a href="https://www.smartkarma.com/insights/commercial-bank-of-dubai-vs-bank-of-east-asia-a-tale-of-two-at1s-in-covid-19-uncertainty" target="_blank" data-smartkarma-citation="insights:44387" rel="noopener">Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty</a>.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBL TB)</a> notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> and <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>, respectively. As the week closed, <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the Sumitomo Mitsui Financial Group (8316 JP) and KB Capital (021960 KS) were the only financial institutions to access global capital market during the week. The First Bank of Nigeria (FBNH NL) brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the Commercial Bank of Dubai's (CBD UH) recently issued AT1 bond. For our thoughts on this security, please see: Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, Bangkok Bank's (BBL TB) notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see Bangkok Bank’s New AT1 – Overweight on Relative Value and Thai Bank Capital and Chronic COVID-19 Sensitivity, respectively. As the week closed, Yes Bank (YES IN) reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter of core operating results.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter of core operating results.   

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">India Bank Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a> for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies.

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank (YES IN) to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in India Bank Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies. 

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

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)

Bajaj Finance – Removing The Lipstick

BAJAJ FINANCE: Results Would Suggest That Credit Portfolio Risk Has Significantly Deteriorated, and That Reserves Need Buttressing By Over Five...

Thomas J. Monaco

Reserve Bank of India - Final HFC Changes

RESERVE BANK OF INDIA - Final Housing Finance and Non-Bank Financial Company Rule Harmonization Regulations Now Set With Stricter Rules.

Thomas J. Monaco

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

A must-read on US$-risk sentiment derived from high yield and equity markets, interest rates, dollar levels, capital flows and issuance to frame...

Hank Calenti, CFA

HDFC Bank – Not A Great Quarter

HDFC Bank: Improved Bottom-line Clouded By Supreme Court Ruling On Credit Quality Calculations. Reserve Cover Lower Than On/Off Balance Sheet Risk...

Thomas J. Monaco

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

In this 2'nd insight in our Yes Bank Deposit Run Anniversary Series, we apply Yes Bank deposit flight rates to derive “Yes-Stressed” LCRs at India...

Hank Calenti, CFA

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