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

*Result Beat On Unwarranted Provision Reduction: Federal Bank (FB.IN) posted FY 3Q21 bottom-line results of INR 4.0 bn, exhibiting linked quarter improvement of INR 965 mn (31.4%). Two factors drove the bottom-line – one legitimate, the latter simply ridiculous: a) net interest income improved INR 571 mn (4.1%) tracking both loan growth of INR 26.0 bn (2.1%) and NIM improvement of 10 bp to 3.00%; and b) a drop of INR 1.7 bn (29.0%) in its loss provision despite an annualized net new problem loan increase of over 67%; and*Reserve Cover Is Shallow: If we look at coverage of total problem loans, which includes the restructured book, coverage amounts to just 59.0% versus 57.7% at FY 2Q21. Although we are encouraged by the linked quarter improvement, we do feel that reserve cover is quite light by close to INR 50.0 bn – nearly three years of bottom-line performance.

*Result Beat On Unwarranted Provision Reduction: Federal Bank (FB.IN) posted FY 3Q21 bottom-line results of INR 4.0 bn, exhibiting linked quarter improvement of INR 965 mn (31.4%). Two factors drove the bottom-line – one legitimate, the latter simply ridiculous: a) net interest income improved INR 571 mn (4.1%) tracking both loan growth of INR 26.0 bn (2.1%) and NIM improvement of 10 bp to 3.00%; and b) a drop of INR 1.7 bn (29.0%) in its loss provision despite an annualized net new problem loan increase of over 67%; and*Reserve Cover Is Shallow: If we look at coverage of total problem loans, which includes the restructured book, coverage amounts to just 59.0% versus 57.7% at FY 2Q21. Although we are encouraged by the linked quarter improvement, we do feel that reserve cover is quite light by close to INR 50.0 bn – nearly three years of bottom-line performance.    

*Provision Unnecessarily Lowered: Bajaj Finance (BAF.IN) [Bajaj] posted FY 3Q21 results of INR 11.5 bn, improving INR 1.8 bn (18.8%) linked quarter.  FY 3Q21 results were driven primarily by an INR 4.0 bn (20.5%) drop in the loss provision, despite a 123.4% linked quarter increase in gross NPLs;  and*Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn at FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x  - representing nearly three years of PBT and over 50% of shareholder’s equity. Bajaj has actually lowered its loss provision guidance to between INR 59.25-59.75 bn for FY 2021 versus INR 60-63 bn earlier.

*Provision Unnecessarily Lowered: Bajaj Finance (BAF.IN) [Bajaj] posted FY 3Q21 results of INR 11.5 bn, improving INR 1.8 bn (18.8%) linked quarter.  FY 3Q21 results were driven primarily by an INR 4.0 bn (20.5%) drop in the loss provision, despite a 123.4% linked quarter increase in gross NPLs;  and*Credit Challenges Far From Over With: The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 23.0 bn at FY 3Q21 – increasing at 520% on an annualized basis. By our calculation, reserves need to increase INR 177 bn or nearly 8x  - representing nearly three years of PBT and over 50% of shareholder’s equity. Bajaj has actually lowered its loss provision guidance to between INR 59.25-59.75 bn for FY 2021 versus INR 60-63 bn earlier.

*NIM Driven Bottom-line: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 3Q21 operating results of INR 2.9 bn, increasing INR 260 mn (9.8%) linked quarter. Much of LTFH’s strength during the quarter was attributed to net interest income growth of INR 2.1 bn (15.8%) associated with improving cost of funds (down 72 bp linked quarter) on liquidity improvement.*Credit Risk Challenges: While LTFH would like to have the investment community believe that it has turned the corner with credit, that notion is patently false. Inclusive of INR 12.8 mn in NCOs, we calculate a continued acceleration of net new NPL growth to 101% on an annualized basis – which is troubling. We calculate that reserves need a boost close to INR 80 bn or nearly five years of pre-tax earnings; and   *Banking License May Be Out of Reach: LTFH's Tier-1 ratio was 17.8% at FY 3Q21. However, if our reserve shortfall analysis is correct, LTFH’s stated Tier 1 capital ratio will be quite challenged, leaving it short of the Reserve Bank of India’s (RBI) plan for larger NBFCs to become banks.

*NIM Driven Bottom-line: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 3Q21 operating results of INR 2.9 bn, increasing INR 260 mn (9.8%) linked quarter. Much of LTFH’s strength during the quarter was attributed to net interest income growth of INR 2.1 bn (15.8%) associated with improving cost of funds (down 72 bp linked quarter) on liquidity improvement.*Credit Risk Challenges: While LTFH would like to have the investment community believe that it has turned the corner with credit, that notion is patently false. Inclusive of INR 12.8 mn in NCOs, we calculate a continued acceleration of net new NPL growth to 101% on an annualized basis – which is troubling. We calculate that reserves need a boost close to INR 80 bn or nearly five years of pre-tax earnings; and   *Banking License May Be Out of Reach: LTFH's Tier-1 ratio was 17.8% at FY 3Q21. However, if our reserve shortfall analysis is correct, LTFH’s stated Tier 1 capital ratio will be quite challenged, leaving it short of the Reserve Bank of India’s (RBI) plan for larger NBFCs to become banks.

L&T Finance Holdings – Credit Risk Jeopardizes Bank License

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Indian Railway Finance Corporation / Equity Capital Markets

Indian Railway Finance Corporation (IRFC) aims to raise around US$630m via selling new and existing shares in its Indian IPO.IRFC is the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas capital markets. Its primary business is financing the acquisition of rolling stock assets and project assets of the Indian railways and lending to other entities under the Ministry of Railways.IRFC’s AUM has grown by 25-32% over FY18-FY20, while disbursements have been growing at 34-43%. Although revenue growth has lagged AUM growth since at least FY18 as its net interest margin had been under pressure due to the rising cost of funds and fluctuation margin set by the Ministry of Railways. We have covered the above and other points in our previous note: <ul><li dir="ltr"><a href="https://www.smartkarma.com/insights/indian-railway-finance-pre-ipo-low-risk-low-margin-business" target="_blank" rel="noopener">Indian Railway Finance Pre-IPO - Low risk, low margin business</a></li></ul>In this note, we'll talk about updates for the newly filed DRHP and run the deal through our ECM framework

Indian Railway Finance Corporation (IRFC) aims to raise around US$630m via selling new and existing shares in its Indian IPO.IRFC is the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas capital markets. Its primary business is financing the acquisition of rolling stock assets and project assets of the Indian railways and lending to other entities under the Ministry of Railways.IRFC’s AUM has grown by 25-32% over FY18-FY20, while disbursements have been growing at 34-43%. Although revenue growth has lagged AUM growth since at least FY18 as its net interest margin had been under pressure due to the rising cost of funds and fluctuation margin set by the Ministry of Railways. We have covered the above and other points in our previous note: Indian Railway Finance Pre-IPO - Low risk, low margin businessIn this note, we'll talk about updates for the newly filed DRHP and run the deal through our ECM framework

Indian Railway Finance IPO - Low Risk, Low Margin, Low Returns

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 3Q21 results of INR 76.5 bn, which increased INR 12.5 bn (16.6%) linked quarter. On a core operating basis, results improved INR 11.5 bn (17.7%) to INR 76.5 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 stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis; and*Reserve Cover Needs Improvement: At this time, 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.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 3Q21 results of INR 76.5 bn, which increased INR 12.5 bn (16.6%) linked quarter. On a core operating basis, results improved INR 11.5 bn (17.7%) to INR 76.5 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 stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis; and*Reserve Cover Needs Improvement: At this time, 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 – Credit Remains A Serious Challenge

India

Union Bank of India Limited provides a full range of banking services throughout India. The Company's activities include retail banking, commercial and personal banking, investment management, treasury and NRI services, cash management and assorted ATM facilities. Union Bank has an online tele-banking facility for all its core banking customers.

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Union Bank Of India (UNBK IN)

Federal Bank – Deserving No Credit

FEDERAL BANK: FB FY 3Q21 bottom-line results improved 31.4% linked quarter, as it dropped its provision 29.0% despite its annualized net new...

Thomas J. Monaco

Bajaj Finance – Credit Disaster

BAJAJ FINANCE: BAF FY 3Q21 results increased 18.8% linked quarter, driven by a 20.5% drop in provisions despite a 123.4% increase in NPLs. We...

Thomas J. Monaco

L&T Finance Holdings – Credit Risk Jeopardizes Bank License

L&T FINANCE: LTFH reported a FY 3Q21 result increase of 9.8% linked quarter. Continued acceleration of net new NPL growth and a reserve shortfall...

Thomas J. Monaco

Indian Railway Finance IPO - Low Risk, Low Margin, Low Returns

Indian Railway Finance Corporation (IRFC) aims to raise around US$630m via its Indian IPO. IRFC is the dedicated financing arm of the Indian...

Sumeet Singh

HDFC Bank – Credit Remains A Serious Challenge

HDFC BANK: HDFCB reported FY 3Q21 results increased 16.6% linked quarter. Net new NPLs increased 151% annualized, and reserves are currently short...

Thomas J. Monaco

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