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

*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

Thematic (Sector/Industry)

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.

*Bracing For Even Tougher Times: According to the Reserve Bank of India (RBI), India’s financial sector needs to prepare for even more challenging times given the continued risk of credit deterioration, which remains heightened due to this unrelenting pandemic; and*Open Your Wallets, Indian Financials Need Money: Given the economic uncertainty posed by COVID-19, credit quality in the Indian financial system is likely to present continued economic challenges in 2021. If the RBI is correct, and we believe that it is – although its forecasts appear quite light, FY 2022 will see continued losses and massive levels of capital raised.   

Reserve Bank of India – Continued Bank Waterboarding

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*Results Supported By Premature Provision Cut: State Bank of India (SBIN.IN) [SBI] reported FY 2Q21 results of INR 45.7 bn, increasing INR 3.8 bn (9.2%) linked quarter. Results were even better when we exclude the FY 1Q21 exceptional gain of INR 15.4 bn – increasing INR 19.2 bn or 72.6% linked quarter. Results were driven by three factors: a) net interest income improvement of INR 15.4 bn (5.8%) due primarily to NIM improvement of 8 bp to 2.96%; b) a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics; and c) non-interest income improvement of INR 5.7 bn (7.2%); and* Credit Risk and Weak Cover: By our calculation, we find net new NPL growth of INR 144.0 bn or 44.4% on an annualized basis and that the annualized NCO rate of 66 bp – which are quite troublesome even for an SOE bank. We also find that reserves are light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap.

*Results Supported By Premature Provision Cut: State Bank of India (SBIN.IN) [SBI] reported FY 2Q21 results of INR 45.7 bn, increasing INR 3.8 bn (9.2%) linked quarter. Results were even better when we exclude the FY 1Q21 exceptional gain of INR 15.4 bn – increasing INR 19.2 bn or 72.6% linked quarter. Results were driven by three factors: a) net interest income improvement of INR 15.4 bn (5.8%) due primarily to NIM improvement of 8 bp to 2.96%; b) a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics; and c) non-interest income improvement of INR 5.7 bn (7.2%); and* Credit Risk and Weak Cover: By our calculation, we find net new NPL growth of INR 144.0 bn or 44.4% on an annualized basis and that the annualized NCO rate of 66 bp – which are quite troublesome even for an SOE bank. We also find that reserves are light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – Credit Continues To Fall Off A Cliff

*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.

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)

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

Reserve Bank of India – Continued Bank Waterboarding

RESERVE BANK OF INDIA: India’s financial sector needs to prepare for even more challenging times. If the RBI is correct, FY 2022 will see continued...

Thomas J. Monaco

Axis Bank – Denying Evil

AXIS BANK: Allegations Of Exorbitant Lending To The Questionable SREI Without Verification Lead To Aggressive Denials Of Wrongdoing By Axis.

Thomas J. Monaco

State Bank of India – Credit Continues To Fall Off A Cliff

STATE BANK OF INDIA: Costs Increasing, Credit Deteriorating, Reserve Cover Declining. This Is A Recipe For A Massive Capital Raise.

Thomas J. Monaco

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

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