Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p><strong>Executive Sum</strong><strong>mary:</strong>  Rapidly rising interest rates present a challenge for credit to generate positive total returns. Unfortunately, the upward sloping sawtooth pattern of rising US interest rates ended the month on an upswing. Credit spreads needed to compress by as much to generate positive total returns. Only a small handful of Asia’s US$-denominated bank bonds (x-Japan) managed to generate positive total returns during the month of March. This was concentrated in a select sweet spot.</p><p>Long duration, low investment grade rated, and high BB rated bonds led tightening over the month. Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in March, as in February. One differentiating factor between March and February is the concentration amongst Thai- and South Korean-headquartered banks during March; however, these institutions are also the largest issuers of longer duration bank paper in Asia. As such, we see this as more of a duration, than a country story.</p><p>From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had an outstanding month with each of the +100 bonds that we track tightening during the month. Global monetary accommodation is in large part responsible for this spread compression. Credit fundamentals have yet to catch-up. Continued tightening, however, cannot be ruled out as credit tourists crowd-in and markets melt-up. Unfortunately for most, the recent tightening did not exceed the speed with which interest rates rose.</p><p>Q1 2021 was a tough quarter for real money asset managers. We anticipate that US interest rates will continue to climb higher and may even accelerate their upward trajectory. If the trend is your friend and longer duration bonds continue to outperform, the risk is that of buying a bond which either has a higher level of volatility or is fully priced. With South Korean long-dated Senior Unsecured notes trading just north of 100 basis points (bps), it is hard to imagine these notes continuing to compress faster than interest rates. Asset managers may need to consider more subordinated, higher yielding notes to generate positive total returns over the near term. Investors will likely be pushed towards lower rated Additional Tier 1 (AT1) bonds in April / May to achieve positive total returns. Security selection may become more important.</p>

Executive Summary:  Rapidly rising interest rates present a challenge for credit to generate positive total returns. Unfortunately, the upward sloping sawtooth pattern of rising US interest rates ended the month on an upswing. Credit spreads needed to compress by as much to generate positive total returns. Only a small handful of Asia’s US$-denominated bank bonds (x-Japan) managed to generate positive total returns during the month of March. This was concentrated in a select sweet spot.Long duration, low investment grade rated, and high BB rated bonds led tightening over the month. Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in March, as in February. One differentiating factor between March and February is the concentration amongst Thai- and South Korean-headquartered banks during March; however, these institutions are also the largest issuers of longer duration bank paper in Asia. As such, we see this as more of a duration, than a country story.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had an outstanding month with each of the +100 bonds that we track tightening during the month. Global monetary accommodation is in large part responsible for this spread compression. Credit fundamentals have yet to catch-up. Continued tightening, however, cannot be ruled out as credit tourists crowd-in and markets melt-up. Unfortunately for most, the recent tightening did not exceed the speed with which interest rates rose.Q1 2021 was a tough quarter for real money asset managers. We anticipate that US interest rates will continue to climb higher and may even accelerate their upward trajectory. If the trend is your friend and longer duration bonds continue to outperform, the risk is that of buying a bond which either has a higher level of volatility or is fully priced. With South Korean long-dated Senior Unsecured notes trading just north of 100 basis points (bps), it is hard to imagine these notes continuing to compress faster than interest rates. Asset managers may need to consider more subordinated, higher yielding notes to generate positive total returns over the near term. Investors will likely be pushed towards lower rated Additional Tier 1 (AT1) bonds in April / May to achieve positive total returns. Security selection may become more important.

Bank Credit Compass: Positive Total Return Sweet Spot

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

<div><p>Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise over US$500m in its Hong Kong IPO. Its investors include Tencent, GIC and Standard Chartered Bank.</p></div><div><p>Linklogis’ cloud-native solutions optimize the payment cycle of supply chain transactions and digitalize the entire workflow of supply chain finance. As per CIC, Linklogis was the leader among technology solution providers in China in terms of supply chain finance transactions processed over 9M20, accounting for 20.5% market share.</p></div><div><p>Linklogis overall revenue grew by 83% YoY in FY19 and was up another 52% over 9M20. While its core function of Supply Chain finance has been registering strong growth of 64.4% YoY in FY19 and 53.8% in 9M20, revenue from its Emerging solutions was up nearly 6x in FY19 and grew by another 38% over 9M20.</p></div><div><p>We have covered the positive aspects of the deal in our earlier insights, <a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-positives-fast-growing-blockchain-driven-supply-chain-financier" target="_blank" rel="noopener">Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier </a>and <a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-negatives-inconsistent-growth-and-margins-well-funded-competitors" target="_blank" rel="noopener">Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors</a>. In this note, we'll talk about earnings forecast and valuations.</p></div>

Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise over US$500m in its Hong Kong IPO. Its investors include Tencent, GIC and Standard Chartered Bank.Linklogis’ cloud-native solutions optimize the payment cycle of supply chain transactions and digitalize the entire workflow of supply chain finance. As per CIC, Linklogis was the leader among technology solution providers in China in terms of supply chain finance transactions processed over 9M20, accounting for 20.5% market share.Linklogis overall revenue grew by 83% YoY in FY19 and was up another 52% over 9M20. While its core function of Supply Chain finance has been registering strong growth of 64.4% YoY in FY19 and 53.8% in 9M20, revenue from its Emerging solutions was up nearly 6x in FY19 and grew by another 38% over 9M20.We have covered the positive aspects of the deal in our earlier insights, Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier and Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors. In this note, we'll talk about earnings forecast and valuations.

Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation

<p><a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> A2 Senior Unsecured and A3 Tier 2 ratings are on review for downgrade by Moody’s Investors Service. The Additional Tier 1 (AT1) bonds are NOT on review for downgrade. We see this as more a case of Moody’s adjusting its ratings to the market, rather than a market making event. However, negative headline risk could nudge AT1 and Tier 2 bond prices lower. We would buy these dips.</p><p>We believe the agency is mistaken to pre-judge the recent strategic update. Even if HSBC’s profitability suffers, short-term, the firm holds excess capital which it intends to invest in its future, rather than simply return to shareholders. Furthermore, Moody’s is clearly comfortable with HSBC’s lower capital target or it would also put the AT1 rating on review. Placing the Tier 2 rating on review for downgrade while stating that HSBC has a sufficient capital buffer to support its AT1 rating is a non-sequitur. Moody’s Tier 2 ratings are mechanically, rather than fundamentally, driven.</p><p>Once a credit is placed on review for a downgrade, the likelihood of it occurring is greater than 50%. Irrespective, we are not convinced that this deserves to be reflected in the value of HSBC’s Tier 2 notes as this should be driven by the buffer of capital over the Point of Non-Viability. This buffer is enormous at HSBC. In fact, it is higher than that of the Singapore-based banks alongside of which HSBC’s Tier 2 bonds trade. Moody’s review for downgrade may create a buying opportunity in the Tier 2 space.</p>

HSBC Holdings' (HSBA LN) A2 Senior Unsecured and A3 Tier 2 ratings are on review for downgrade by Moody’s Investors Service. The Additional Tier 1 (AT1) bonds are NOT on review for downgrade. We see this as more a case of Moody’s adjusting its ratings to the market, rather than a market making event. However, negative headline risk could nudge AT1 and Tier 2 bond prices lower. We would buy these dips.We believe the agency is mistaken to pre-judge the recent strategic update. Even if HSBC’s profitability suffers, short-term, the firm holds excess capital which it intends to invest in its future, rather than simply return to shareholders. Furthermore, Moody’s is clearly comfortable with HSBC’s lower capital target or it would also put the AT1 rating on review. Placing the Tier 2 rating on review for downgrade while stating that HSBC has a sufficient capital buffer to support its AT1 rating is a non-sequitur. Moody’s Tier 2 ratings are mechanically, rather than fundamentally, driven.Once a credit is placed on review for a downgrade, the likelihood of it occurring is greater than 50%. Irrespective, we are not convinced that this deserves to be reflected in the value of HSBC’s Tier 2 notes as this should be driven by the buffer of capital over the Point of Non-Viability. This buffer is enormous at HSBC. In fact, it is higher than that of the Singapore-based banks alongside of which HSBC’s Tier 2 bonds trade. Moody’s review for downgrade may create a buying opportunity in the Tier 2 space.

HSBC: On Review for Downgrade, Buy the Dips

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

<p>Tier 1 ratios are all the same, however allowance for loan losses (LLR) are vastly different, for the three Singapore banks. This has implications for banks’ relative ability to absorb loan losses and for credit costs during the current year.</p>

Tier 1 ratios are all the same, however allowance for loan losses (LLR) are vastly different, for the three Singapore banks. This has implications for banks’ relative ability to absorb loan losses and for credit costs during the current year.

Singapore Banks – Vast Differences In Provisioning

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.

Equity Bottom-Up

<ul>
<li>We see clear evidence that the <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> super-tanker is turning</li>
<li>Balance sheet strength at YE 2020, with delivery across most plan metrics in 2020 showing commitment</li>
<li>Execution on costs, the digital transformation, sustainably lower cost of risk going forward and the deepened Asia pivot, with an emphasis on Wealth and Personal Banking revenues, should be core drivers of returns</li>
<li>Potential disposals of France retail banking and possibly the US retail operations would also enhance returns and free up “trapped” RWAs</li>
<li>We believe that 2022E consensus ROE estimates are too conservative and that HSBC could potentially be on a c 8% dividend yield over the medium term</li>
<li>Risks to our positive view on HSBC include slower than expected execution on costs, and tougher competition in Asia retail banking, as well as worse than expected credit quality leading to a lower than expected reduction in cost of risk charges</li>
</ul>


We see clear evidence that the HSBC Holdings (HSBA LN) super-tanker is turning
Balance sheet strength at YE 2020, with delivery across most plan metrics in 2020 showing commitment
Execution on costs, the digital transformation, sustainably lower cost of risk going forward and the deepened Asia pivot, with an emphasis on Wealth and Personal Banking revenues, should be core drivers of returns
Potential disposals of France retail banking and possibly the US retail operations would also enhance returns and free up “trapped” RWAs
We believe that 2022E consensus ROE estimates are too conservative and that HSBC could potentially be on a c 8% dividend yield over the medium term
Risks to our positive view on HSBC include slower than expected execution on costs, and tougher competition in Asia retail banking, as well as worse than expected credit quality leading to a lower than expected reduction in cost of risk charges


HSBC (HSBA LN): The Super-Tanker Is Turning

Singapore

United Overseas Bank Limited provides a wide range of financial services including personal financial services, wealth management, private banking, commercial and corporate banking, transaction banking, investment banking, corporate finance, capital market activities, treasury services, futures broking, asset management, venture capital management and insurance.

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UOB (UOB SP)

Bank Credit Compass: Positive Total Return Sweet Spot

The sweet spot for positive total returns seems to be in long duration, low investment grade, and high BB rated bonds. This was concentrated in...

Hank Calenti, CFA

Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation

Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise over US$500m in its Hong Kong IPO. Its investors...

Sumeet Singh

HSBC: On Review for Downgrade, Buy the Dips

The capital buffer over the Point of Non-Viability matters most to Tier 2 investors. Moody’s Tier 2 ratings are mechanically, rather than...

Hank Calenti, CFA

Singapore Banks – Vast Differences In Provisioning

DBS has a higher loan loss allowance/loan ratio than peers, and far more FY20 credit costs vs. FY19 than peers. Its loss absorption, reversal...

Daniel Tabbush

HSBC (HSBA LN): The Super-Tanker Is Turning

Cost gains, digital transformation, lower cost of risk going forward and the deepened Asia pivot on revenue growth, should be core drivers of...

Victor Galliano

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