Specialist in Indian Banking and Economic Research

Hemindra Hazari

Despite reporting a 36% yoy fall in 3QFY2021 net profits and being <a href="https://www.bloombergquint.com/quarterly-earnings/axis-bank-q3-results-net-profit-falls-36-on-higher-provisions" target="_blank" rel="noopener">below</a> consensus estimates, <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a> 's share price on January 28, 2021 closed 6% up, while the Nifty-50 declined by 1%. The strong and positive response to the bank’s results was surprising, as Axis Bank declined to voluntarily disclose its 30+ days past due loans, a critical indicator which the bank had disclosed in its 2QFY2021 results conference <a href="https://www.axisbank.com/docs/default-source/call-transcript/q2fy21-earnings-call-transcript.pdf" target="_blank" rel="noopener">call</a>. The 30+ days past due loans serves as a benchmark to analysts to estimate future non-performing loans and incremental credit costs, especially at a time when past trends for credit costs may not hold on account of the unprecedented Covid-19 related lockdown, which severely curtailed economic activity. Even though 30+ day past loans is not a mandatory disclosure, once the senior management of a bank takes a decision to voluntarily disclose the indicator in a certain quarter, thereafter, from a transparency perspective, the bank would be well advised to continue to disclose the number. By failing to voluntarily disclose the 30+ day past due loans in the 3QFY2021, there would be a valid apprehension that the lack of disclosure is because of a sharp deterioration in the indicator, which the bank was uncomfortable in revealing to the market.It is commendable that banks like <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> and <a href="https://www.smartkarma.com/entities/bank-of-baroda" target="_blank" data-smartkarma-citation="entities:545:1" rel="noopener">Bank Of Baroda (BOB IN)</a> (BOB), which reported 3QFY2021 results on January 27, voluntarily disclosed the 30+ days past due loans in their analyst presentation, despite the number revealing a significant deterioration in asset quality as compared with 2QFY2021. The equity market severely punished their share prices on January 28, with Yes Bank falling by 4% and BOB by 10% on January 28.Participants in the capital market such as shareholders, business media and analysts need to publicly call out companies (in this case banks) which cease to voluntarily disclose critical data points that were earlier disclosed, as its sudden absence in all likelihood indicates a negative development which the company does not want to share with stakeholders.

Despite reporting a 36% yoy fall in 3QFY2021 net profits and being below consensus estimates, Axis Bank Ltd (AXSB IN) 's share price on January 28, 2021 closed 6% up, while the Nifty-50 declined by 1%. The strong and positive response to the bank’s results was surprising, as Axis Bank declined to voluntarily disclose its 30+ days past due loans, a critical indicator which the bank had disclosed in its 2QFY2021 results conference call. The 30+ days past due loans serves as a benchmark to analysts to estimate future non-performing loans and incremental credit costs, especially at a time when past trends for credit costs may not hold on account of the unprecedented Covid-19 related lockdown, which severely curtailed economic activity. Even though 30+ day past loans is not a mandatory disclosure, once the senior management of a bank takes a decision to voluntarily disclose the indicator in a certain quarter, thereafter, from a transparency perspective, the bank would be well advised to continue to disclose the number. By failing to voluntarily disclose the 30+ day past due loans in the 3QFY2021, there would be a valid apprehension that the lack of disclosure is because of a sharp deterioration in the indicator, which the bank was uncomfortable in revealing to the market.It is commendable that banks like Yes Bank (YES IN) and Bank Of Baroda (BOB IN) (BOB), which reported 3QFY2021 results on January 27, voluntarily disclosed the 30+ days past due loans in their analyst presentation, despite the number revealing a significant deterioration in asset quality as compared with 2QFY2021. The equity market severely punished their share prices on January 28, with Yes Bank falling by 4% and BOB by 10% on January 28.Participants in the capital market such as shareholders, business media and analysts need to publicly call out companies (in this case banks) which cease to voluntarily disclose critical data points that were earlier disclosed, as its sudden absence in all likelihood indicates a negative development which the company does not want to share with stakeholders. 

Axis Bank Stops Sharing 30+ Days Past Due Data: When Sudden Silence Tells a Tale

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES Bank's (YesIn)</a> solvency is set to be tested again by large, and growing Covid-19 related delinquencies. Credit quality looks set to crater unless restructuring efforts are significantly expanded.Loans overdue between 30-to-90 days more than quadrupled between Sept and Dec. following the lifting of the loan repayment moratorium by the Reserve Bank of India in August. Perhaps this was to be expected; however, given this large Covid-19 related delinquency trend, overdue loan growth at a fraction of this rate going forward could seriously compromise the institution.Given that YES Bank has already pierced the point-of-non-viability once in the last 12 months, the question for credit investors is the sufficiency of capital and earnings available to absorb additional losses. To assess this, we stress YES Bank’s solvency buffer via several Covid-19 coverage scenarios. This simulation delivers surprising, yet very preliminary results. To undertake this exercise, we answer three questions:<ol>
<li>How much of YesIn’s credit portfolio is at risk from Coronavirus contagion?</li>
<li>What is a sufficient coverage level for YesIn’s Covid-19 related delinquencies over time?</li>
<li>What is the sufficiency of YES Bank’s real recurrent earnings power?</li>
</ol>Please see our companion report, <a href="https://www.smartkarma.com/insights/yes-bank-q3-results-recurrent-earnings-power-at-one-third-pre-provision-income" target="_blank" data-smartkarma-citation="insights:47484" rel="noopener">YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income</a>, for how we derive the bank’s real recurrent earnings power.Despite the recent sell-off which offers greater credit spread opportunity, we remain comfortable with our Underweight recommendation on YES Bank’s 3.75% 2023 Senior Unsecured bond. The bond is now two price points lower than when we recommended an Underweight position. Since we are yet to see the depth of distress within YES Bank’s rapidly expanded overdue loan category, now is not the time to overweight YES Bank risk.

YES Bank's (YesIn) solvency is set to be tested again by large, and growing Covid-19 related delinquencies. Credit quality looks set to crater unless restructuring efforts are significantly expanded.Loans overdue between 30-to-90 days more than quadrupled between Sept and Dec. following the lifting of the loan repayment moratorium by the Reserve Bank of India in August. Perhaps this was to be expected; however, given this large Covid-19 related delinquency trend, overdue loan growth at a fraction of this rate going forward could seriously compromise the institution.Given that YES Bank has already pierced the point-of-non-viability once in the last 12 months, the question for credit investors is the sufficiency of capital and earnings available to absorb additional losses. To assess this, we stress YES Bank’s solvency buffer via several Covid-19 coverage scenarios. This simulation delivers surprising, yet very preliminary results. To undertake this exercise, we answer three questions:
How much of YesIn’s credit portfolio is at risk from Coronavirus contagion?
What is a sufficient coverage level for YesIn’s Covid-19 related delinquencies over time?
What is the sufficiency of YES Bank’s real recurrent earnings power?
Please see our companion report, YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income, for how we derive the bank’s real recurrent earnings power.Despite the recent sell-off which offers greater credit spread opportunity, we remain comfortable with our Underweight recommendation on YES Bank’s 3.75% 2023 Senior Unsecured bond. The bond is now two price points lower than when we recommended an Underweight position. Since we are yet to see the depth of distress within YES Bank’s rapidly expanded overdue loan category, now is not the time to overweight YES Bank risk.

YES Bank Solvency Simulation with Covid-19 Coverage Scenarios

The means to an end matters for credit investors. Although net income may remain unchanged, operating pre-provision profits can be inflated by moving income up the P&amp;L statement. Unadjusted, this inflates recurrent earnings power.In our opinion, <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES Bank's (</a><a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES IN</a>)<a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener"></a> interest and non-interest income are inflated relative to more conservative accounting standards. This overstates operating profits and makes cross-border comparisons difficult.  Recoveries on the principal of loans previously written-down are recognized as non-interest revenues rather than offset against new loss provisions or recognized as non-recurrent earnings. Also, interest recovered appears to be written back immediately within non-interest revenue rather than accreted over the life of the rescheduled loan or booked as a gain from the sale of assets, as the case may be. These actions inflate operating revenues, efficiency ratios, and operating pre-provisions profits. Furthermore, the firm is recognizing interest income on loans overdue more than 90 days and not classified as non-performing as per India’s Supreme Court order of 3 Sept 2020. In addition to inflating pre-provision profits and efficiency ratios, this also materially increases net interest margins. This confluence meaningfully inflates YES Bank’s pre-provision income. Adjusted for these items, recurrent earnings power is one-third reported pre-provision profits. In fact, recoveries and standstill interest represent 41% of YES Bank’s total income, versus only as much as 14% at <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a>. YES Bank has a much lower loss absorption ability from continuing operations than meets the eye. This can have negative solvency implications, long-term, if left untreated.

The means to an end matters for credit investors. Although net income may remain unchanged, operating pre-provision profits can be inflated by moving income up the P&amp;L statement. Unadjusted, this inflates recurrent earnings power.In our opinion, YES Bank's (YES IN) interest and non-interest income are inflated relative to more conservative accounting standards. This overstates operating profits and makes cross-border comparisons difficult.  Recoveries on the principal of loans previously written-down are recognized as non-interest revenues rather than offset against new loss provisions or recognized as non-recurrent earnings. Also, interest recovered appears to be written back immediately within non-interest revenue rather than accreted over the life of the rescheduled loan or booked as a gain from the sale of assets, as the case may be. These actions inflate operating revenues, efficiency ratios, and operating pre-provisions profits. Furthermore, the firm is recognizing interest income on loans overdue more than 90 days and not classified as non-performing as per India’s Supreme Court order of 3 Sept 2020. In addition to inflating pre-provision profits and efficiency ratios, this also materially increases net interest margins. This confluence meaningfully inflates YES Bank’s pre-provision income. Adjusted for these items, recurrent earnings power is one-third reported pre-provision profits. In fact, recoveries and standstill interest represent 41% of YES Bank’s total income, versus only as much as 14% at Axis Bank Ltd (AXSB IN). YES Bank has a much lower loss absorption ability from continuing operations than meets the eye. This can have negative solvency implications, long-term, if left untreated.

YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income

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

*Weakened Results: Kotak Mahindra Bank (KMB.IN) [KMB] reported FY 3Q21 results of INR 18.5 bn, declining INR 3.3 bn (15.2%) linked quarter. Results were challenged by two factors: a) an INR 2.3 bn (62.5%) increase in loss provisions which still appears light given the continued and accelerated breakdown in credit quality; and b) an INR 1.9 bn (9.2%) increase in costs led by a 14.0% increase in other operating expenses; and*Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarter of stated PBT.

*Weakened Results: Kotak Mahindra Bank (KMB.IN) [KMB] reported FY 3Q21 results of INR 18.5 bn, declining INR 3.3 bn (15.2%) linked quarter. Results were challenged by two factors: a) an INR 2.3 bn (62.5%) increase in loss provisions which still appears light given the continued and accelerated breakdown in credit quality; and b) an INR 1.9 bn (9.2%) increase in costs led by a 14.0% increase in other operating expenses; and*Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarter of stated PBT.

Kotak Mahindra Bank – Credit Falling Off Of A Cliff

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue.

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue. 

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)

YES Bank Solvency Simulation with Covid-19 Coverage Scenarios

Earnings power is not sufficient to achieve material Covid-19 reserve coverage. Expect material capital erosion. Solvency is delinquency dependent....

Hank Calenti, CFA

YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income

YES Bank’s recurrent earnings power is 1/3’rd pre-provision income. Loss absorption ability is much lower than meets the eye. Negative solvency...

Hank Calenti, CFA

Kotak Mahindra Bank – Credit Falling Off Of A Cliff

KOTAK MAHINDRA BANK: KMB reported FY 3Q21 linked quarter results decline of 15.2%, driven primarily by a 62.5% increase in provisions which still...

Thomas J. Monaco

State Bank of India – On The Hook

STATE BANK OF INDIA: Yes Bank reported FY 3Q21 core operating losses INR 3.8 mn. Net new problem loan annualized growth rate of 99.5% and reserve...

Thomas J. Monaco

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Axis Bank Stops Sharing 30+ Days Past Due Data: When Sudden Silence Tells a Tale

When a bank, after earlier disclosing an indicator, fails to disclose it in future, it alerts stakeholders to the fact that it may be hiding a...

Hemindra Hazari

YES Bank Solvency Simulation with Covid-19 Coverage Scenarios

Earnings power is not sufficient to achieve material Covid-19 reserve coverage. Expect material capital erosion. Solvency is delinquency dependent....

Hank Calenti, CFA

YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income

YES Bank’s recurrent earnings power is 1/3’rd pre-provision income. Loss absorption ability is much lower than meets the eye. Negative solvency...

Hank Calenti, CFA

Kotak Mahindra Bank – Credit Falling Off Of A Cliff

KOTAK MAHINDRA BANK: KMB reported FY 3Q21 linked quarter results decline of 15.2%, driven primarily by a 62.5% increase in provisions which still...

Thomas J. Monaco

State Bank of India – On The Hook

STATE BANK OF INDIA: Yes Bank reported FY 3Q21 core operating losses INR 3.8 mn. Net new problem loan annualized growth rate of 99.5% and reserve...

Thomas J. Monaco