Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

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

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance.

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance. 

Bank of America – Driven Entirely By Credit

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Thematic (Sector/Industry)

After dropping steadily for the last 3 years, HK-listed China banks are finally starting to move higher led by <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> and <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a>.The suspension of <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a>'s IPO and the subsequent restrictions placed on Fintech (or Techfin) players gave the banks a shot in the arm. The economic recovery in China and the recent pre-announcement of better than consensus results by <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> have got investor attention.<a href="https://www.smartkarma.com/profiles/steven-holden" target="_blank" data-smartkarma-citation="accounts:1337" rel="noopener">Steven Holden</a> has highlighted the shift out of Banking stocks pre- and post COVID by active managers with holdings close to the lowest on record.With the China economy stabilizing and growing and reporting better than expected GDP numbers today, there could be a further move into Banking stocks pushing them higher.

After dropping steadily for the last 3 years, HK-listed China banks are finally starting to move higher led by China Merchants Bank H (3968 HK) and Postal Savings Bank of China (1658 HK).The suspension of Ant Group (6688 HK)'s IPO and the subsequent restrictions placed on Fintech (or Techfin) players gave the banks a shot in the arm. The economic recovery in China and the recent pre-announcement of better than consensus results by China Merchants Bank H (3968 HK) have got investor attention.Steven Holden has highlighted the shift out of Banking stocks pre- and post COVID by active managers with holdings close to the lowest on record.With the China economy stabilizing and growing and reporting better than expected GDP numbers today, there could be a further move into Banking stocks pushing them higher.

China Merchants Bank H / Equity Bottom-Up

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] announced a poor set of preliminary 4Q20 results, with net profit declining CNY 6.1 bn (22.7%) on a linked quarter basis – this, despite having its tax rate decline 790 bp to 15.6% over the period; and*Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. We note a potential net new NPL increase of CNY 11.4 bn linked quarter for a whopping annualized increase in NPLs of 80.4%. Trouble is brewing in paradise.

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] announced a poor set of preliminary 4Q20 results, with net profit declining CNY 6.1 bn (22.7%) on a linked quarter basis – this, despite having its tax rate decline 790 bp to 15.6% over the period; and*Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. We note a potential net new NPL increase of CNY 11.4 bn linked quarter for a whopping annualized increase in NPLs of 80.4%. Trouble is brewing in paradise.  

China Merchants Bank – Massive 4Q20 Charge-Offs

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>Regulatory pressure is driving Ant Group to place its financial operations into a holding company which would be subject to bank-like regulation, as Chinese regulators seek increasing oversight of the fast growth in consumer and SMB debt</li>
<li>Furthermore, and more importantly, press reports indicate that regulators are pushing for Chinese FinTech giants to share their consumer credit data with state entities, to enhance the centralized “big data” repository at the PBoC</li>
<li>The planned launch of the PBoC’s digital currency - the e-yuan – is intended to try to level the playing field between electronic payments leaders Alipay (Ant) and WeChat pay (Tencent) and the bank system, as well as giving the state a powerful tool for digital financial surveillance</li>
<li>For Ant, more bank-like regulation of credit would imply higher capital requirement for its credit operations as well as slower loan growth, with the sharing of Ant Group’s many terabytes of data with the authorities also potentially detracting from Ant Group’s “big data” edge and, by extension, valuation</li>
<li>We take a preliminary stab at a revised SOTP valuation range – despite the lack of clear regulatory parameters so far – of USD130-160bn for Ant Group, a far cry from the market’s estimated USD250bn+ valuation in 4Q20</li>
<li>We see further upside potential in the near term for Chinese SOE banks, as regulators begin to level the regulatory playing filed with FinTech; it is also time, in our view, to look again at <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, 33% shareholder in Ant Group</li>
<li>Risks to our negative view on Ant Group include a less aggressive implementation of regulatory rules on Chinese FinTech, and only limited disclosure on its “big data” lake</li>
</ul>


Regulatory pressure is driving Ant Group to place its financial operations into a holding company which would be subject to bank-like regulation, as Chinese regulators seek increasing oversight of the fast growth in consumer and SMB debt
Furthermore, and more importantly, press reports indicate that regulators are pushing for Chinese FinTech giants to share their consumer credit data with state entities, to enhance the centralized “big data” repository at the PBoC
The planned launch of the PBoC’s digital currency - the e-yuan – is intended to try to level the playing field between electronic payments leaders Alipay (Ant) and WeChat pay (Tencent) and the bank system, as well as giving the state a powerful tool for digital financial surveillance
For Ant, more bank-like regulation of credit would imply higher capital requirement for its credit operations as well as slower loan growth, with the sharing of Ant Group’s many terabytes of data with the authorities also potentially detracting from Ant Group’s “big data” edge and, by extension, valuation
We take a preliminary stab at a revised SOTP valuation range – despite the lack of clear regulatory parameters so far – of USD130-160bn for Ant Group, a far cry from the market’s estimated USD250bn+ valuation in 4Q20
We see further upside potential in the near term for Chinese SOE banks, as regulators begin to level the regulatory playing filed with FinTech; it is also time, in our view, to look again at Alibaba Group (BABA US), 33% shareholder in Ant Group
Risks to our negative view on Ant Group include a less aggressive implementation of regulatory rules on Chinese FinTech, and only limited disclosure on its “big data” lake


Ant Group: Regulatory Pressures Drive the State’s “big Data” Grab, and a Revised SOTP Valuation

China

Industrial and Commercial Bank of China Limited provides banking services. The Company offers deposits, loans, fund underwriting, foreign currency settlement, and other services. Industrial and Commercial Bank of China provides its services to individuals, enterprises, and other clients.

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ICBC (H) (1398 HK)

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Credit tourists may vacate if economic growth and real credit fundaments are not delivered. The gap between credit spreads and fundamentals is...

Hank Calenti, CFA

Bank of America – Driven Entirely By Credit

BANK OF AMERICA: BAC's 4Q20 bottom-line of USD 5.2 bn increased 17.3% driven by a USD 1.3 bn reduction in provisions. NPLs increased 8.2%, as did...

Thomas J. Monaco

China Banks: Moving On Up

The recovery in the Chinese economy, the changes to fintech rules, the better than expected results, the low valuations and the extreme positioning...

Brian Freitas

China Merchants Bank – Massive 4Q20 Charge-Offs

CHINA MERCHANTS BANK: CMB announced a poor set of preliminary 4Q20 results, as profit declined 22.7% QOQ. Credit risk has substantially increased...

Thomas J. Monaco

Ant Group: Regulatory Pressures Drive the State’s “big Data” Grab, and a Revised SOTP Valuation

Ant Group is under great state focus and under pressure to share its many terabytes of "big data" with PBoC, hurting its SOTP valuation; yet,...

Victor Galliano

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