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

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Despites the paeans of self-praise in annual reports, exposé after exposé by the media reveal the abysmal state of corporate governance in private financial capital. The latest in these revelations by ET Prime is how Yes Bank <a href="https://economictimes.indiatimes.com/prime/corporate-governance/cbi-files-avantha-entities-used-inr500-crore-yes-bank-loan-to-repay-edelweiss-ncds-abfl-loan/primearticleshow/84380524.cms" target="_blank" rel="noopener">disbursed</a> a Rs 5.12 bn loan to Oyster Buildwell, an Avantha (Thapar) group shell company which had less than Rs 50 mn in capital and negligible income at end December 2017/early January 2018. While the then founder-Chief Executive Officer (CEO), Rana Kapoor, has been rightly held responsible for the collapse of <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>  (subsequently revived by a State Bank of India-led group), and is currently a guest of the state, what has gone largely unnoticed is how members of the then board of directors were equally culpable and have gotten away scot free. More alarming is the case of <a href="https://www.linkedin.com/in/agraashish/?originalSubdomain=in" target="_blank" rel="noopener">Ashish Agarwal</a>, the Chief Risk Officer (CRO) and also responsible for corporate loans for more than a decade (March 2009 to May 2020), who appraised and approved all the dubious corporate loans (including Oyster Buildwell) which ultimately brought the bank to its knees: he was <a href="https://www.yesbank.in/media/press-releases/yes-bank-announces-appointment-of-mr-maheshwar-sahu-and-mr-anil-jagga-as-additional-directors" target="_blank" rel="noopener">rewarded</a> by the board of directors in January 2019 for his “track record” and put forward as a possible successor to Rana Kapoor, by elevating him to the post of executive director. When the Reserve Bank of India (RBI) rightly rejected his candidature, he continued in the all-important CRO post till May 2020, whereupon he was put in charge of wholesale and corporate lending. That an individual who approved a series of dubious high-risk corporate loans not only survived but was rewarded under the new ownership and management, when he should have been removed, is indicative of all that is wrong in private financial capital today and in Yes Bank in particular.  What is equally shocking is that the RBI's extreme leniency in its annual inspections of Yes Bank, when it reviewed large loans given to shell companies having marginal equity and income and dubious security provided by third parties, as revealed in the Oyster Buildwell case. Such loans -- euphemistically and mistakenly referred to by the current management as “asset backed financing” -- were in reality high-risk loans, which no experienced commercial banker should have undertaken.  It is on account of these rare media scoops that the public becomes aware of the brazen incompetence/complicity of the board of directors and key senior executives, and the negligence of the banking regulator in not taking action at the relevant time, thereby putting public deposits at risk.In Yes Bank’s case, stakeholders should demand accountability and punishment of the then board of directors (including independent directors) who were complicit, and key executives like the then CRO, who blindly condoned reckless lending and approved poor quality loans. The RBI belatedly acted by ending Kapoor’s term as CEO on January 31, 2019, even though Vishal Goyal, the UBS sell-side analyst, <a href="https://economictimes.indiatimes.com/markets/stocks/news/yes-bank-shares-fall-after-ubs-downgrades-the-lender-to-sell/articleshow/47996134.cms?from=mdr" target="_blank" rel="noopener">first</a>  highlighted concerns of poor quality loans in July 2015, and this analyst kept blowing the whistle from <a href="https://hemindrahazari.com/2020/03/10/how-independent-research-found-a-fatal-flaw-with-yes-bank/" target="_blank" rel="noopener">May 2017</a> onwards. This shows how lethargically the banking regulator responded, despite having access to all the inside information rightly denied to sell-side analysts. The Oyster Buildwell loan lucidly reveals how all prudent norms of lending were thrown to the winds, and how the then CRO was rewarded by the then owners of Yes Bank, as well as later by the new owners.

Despites the paeans of self-praise in annual reports, exposé after exposé by the media reveal the abysmal state of corporate governance in private financial capital. The latest in these revelations by ET Prime is how Yes Bank disbursed a Rs 5.12 bn loan to Oyster Buildwell, an Avantha (Thapar) group shell company which had less than Rs 50 mn in capital and negligible income at end December 2017/early January 2018. While the then founder-Chief Executive Officer (CEO), Rana Kapoor, has been rightly held responsible for the collapse of Yes Bank (YES IN)  (subsequently revived by a State Bank of India-led group), and is currently a guest of the state, what has gone largely unnoticed is how members of the then board of directors were equally culpable and have gotten away scot free. More alarming is the case of Ashish Agarwal, the Chief Risk Officer (CRO) and also responsible for corporate loans for more than a decade (March 2009 to May 2020), who appraised and approved all the dubious corporate loans (including Oyster Buildwell) which ultimately brought the bank to its knees: he was rewarded by the board of directors in January 2019 for his “track record” and put forward as a possible successor to Rana Kapoor, by elevating him to the post of executive director. When the Reserve Bank of India (RBI) rightly rejected his candidature, he continued in the all-important CRO post till May 2020, whereupon he was put in charge of wholesale and corporate lending. That an individual who approved a series of dubious high-risk corporate loans not only survived but was rewarded under the new ownership and management, when he should have been removed, is indicative of all that is wrong in private financial capital today and in Yes Bank in particular.  What is equally shocking is that the RBI's extreme leniency in its annual inspections of Yes Bank, when it reviewed large loans given to shell companies having marginal equity and income and dubious security provided by third parties, as revealed in the Oyster Buildwell case. Such loans -- euphemistically and mistakenly referred to by the current management as “asset backed financing” -- were in reality high-risk loans, which no experienced commercial banker should have undertaken.  It is on account of these rare media scoops that the public becomes aware of the brazen incompetence/complicity of the board of directors and key senior executives, and the negligence of the banking regulator in not taking action at the relevant time, thereby putting public deposits at risk.In Yes Bank’s case, stakeholders should demand accountability and punishment of the then board of directors (including independent directors) who were complicit, and key executives like the then CRO, who blindly condoned reckless lending and approved poor quality loans. The RBI belatedly acted by ending Kapoor’s term as CEO on January 31, 2019, even though Vishal Goyal, the UBS sell-side analyst, first  highlighted concerns of poor quality loans in July 2015, and this analyst kept blowing the whistle from May 2017 onwards. This shows how lethargically the banking regulator responded, despite having access to all the inside information rightly denied to sell-side analysts. The Oyster Buildwell loan lucidly reveals how all prudent norms of lending were thrown to the winds, and how the then CRO was rewarded by the then owners of Yes Bank, as well as later by the new owners. 

Yes Bank: Why Are the Culpable Still in Place Despite New Ownership?

*Results Down, Credibility Continues To Decrease: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 1Q22 bottom-line results of 1.8 bn, declining INR 890 mn (33.3%) linked quarter. Results were weaker across the board;  and  *Accelerating Negative Credit Delta: Inclusive of NCOs of INR 8.5 bn or 3.62% annualized total loans, we note that net new NPLs skyrocketed INR 12.0 bn or increasing an eye popping 106.7% on an annualized basis during the period. By our calculation, if the large blip in credit continues, LTFH  management ought to think about adding another INR 69 bn plus to the reserve. A hit this large represents over seven years of PBT or 6.3x average equity.

*Results Down, Credibility Continues To Decrease: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 1Q22 bottom-line results of 1.8 bn, declining INR 890 mn (33.3%) linked quarter. Results were weaker across the board;  and  *Accelerating Negative Credit Delta: Inclusive of NCOs of INR 8.5 bn or 3.62% annualized total loans, we note that net new NPLs skyrocketed INR 12.0 bn or increasing an eye popping 106.7% on an annualized basis during the period. By our calculation, if the large blip in credit continues, LTFH  management ought to think about adding another INR 69 bn plus to the reserve. A hit this large represents over seven years of PBT or 6.3x average equity.  

L&T Finance Holdings – Struggling To Survive

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

*Balance Sheet Contraction: Federal Bank (FB.IN) [Federal] provided an investor update for FY 1Q22 ahead of its detailed financial results due sometime later this month. Like HDFC Bank (HDFCB.IN), the highlights related to growth metrics in lending and deposits – both of which are contracting. In our view, this is likely a sign that management has come to the view that it must preserve capital; and*Credit Risk Likely Increased. No information was disclosed about credit quality. Given the acceleration in the increase of net new problem loans increase of 78.4% on an annualized basis at FY 4Q21 (from 67.4% during FY 3Q21) coupled with the challenges of India’s second COVID-19 wave and negative loan growth, it’s a pretty fair bet that credit has worsened. We also found that reserve cover is increasingly light by close to INR 84.5 bn  – nearly five years of bottom-line performance. Perhaps management will do the right thing in FY 1Q22 and reverse the loss provision decline.

Federal Bank – Capital Preservation Mode

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 1Q22 ahead of its official scheduled July 17, 2021 earnings release. Many of the highlights related to growth of lending and deposits; and*Where Have All The Flowers Gone: Nothing was discussed regarding HDFCB’s abysmal credit quality nor its quite suspect insider transaction with HDFC ERGO General Insurance (ERGO). For FY 4Q21, net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome.  We would also be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results.

*No Substance: HDFC Bank (HDFCB.IN) [HDFCB] provided an investor update for FY 1Q22 ahead of its official scheduled July 17, 2021 earnings release. Many of the highlights related to growth of lending and deposits; and*Where Have All The Flowers Gone: Nothing was discussed regarding HDFCB’s abysmal credit quality nor its quite suspect insider transaction with HDFC ERGO General Insurance (ERGO). For FY 4Q21, net new NPLs actually increased INR 49.2 bn or 130.4% on an annualized basis which is quite worrisome.  We would also be more comfortable if HDFCB was a bit more aggressive with its provisions. By our calculation, reserves are currently short by nearly INR 242 bn or nearly a half year of core operating results. 

India

YES BANK Limited provides banking services. The Bank offers deposits, personal loans, e-banking, trade finance, corporate, and business banking services. YES BANK serves the food and agribusiness, life sciences, healthcare, biotechnology, telecommunications, media, information technology, and infrastructure development industries in India.

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Yes Bank (YES IN)

Bajaj Finance – Just BAFfling

BAJAJ FINANCE: Bajaj posted a QOQ FY 1Q22 results decline 25.6% driven by credit weakness in Consumer. Net new NPLs increased at 281% annualized...

Thomas J. Monaco

Yes Bank: Why Are the Culpable Still in Place Despite New Ownership?

The Oyster Buildwell loan reveals how all prudent norms of lending were thrown to the winds, and how the then CRO was rewarded by the then owners...

Hemindra Hazari

L&T Finance Holdings – Struggling To Survive

L&T Finance Holdings: LTFH reported FY 1Q22 bottom-line declined 33.3% QOQ. Results were weak across the board. LTFH's reserve is short INR 69 bn...

Thomas J. Monaco

Federal Bank – Capital Preservation Mode

FEDERAL BANK: Federal recently highlighted FY 1Q22 growth metrics in lending and deposits – both of which are contracting. In our view, it appears...

Thomas J. Monaco

HDFC Bank – Spigots Are Now Off

HDFC BANK: HDFCB provided an investor update for FY 1Q22 ahead of its official scheduled July 17, 2021 earnings release. Highlights related to...

Thomas J. Monaco

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