Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank (KBANK TB)</a> issued an AT1 bond, following the successful placement two weeks ago by <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBL TB)</a>. We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see <a href="https://www.smartkarma.com/insights/thai-bank-capital-constraints-debt-capital-issuance-needs-and-potential-impacts" target="_blank" data-smartkarma-citation="insights:43884" rel="noopener">Thai Bank Capital Constraints and Debt Issuance Needs</a> as well as <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, Kasikornbank (KBANK TB) issued an AT1 bond, following the successful placement two weeks ago by Bangkok Bank (BBL TB). We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see Thai Bank Capital Constraints and Debt Issuance Needs as well as Thai Bank Capital and Chronic COVID-19 Sensitivity.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

Approximately one-year ago, India-headquartered <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> began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

Approximately one-year ago, India-headquartered Yes Bank (YES IN) began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

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

Thematic (Sector/Industry)

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.. On October 5th, the Supreme Court required additional information on the case; and   *Further Clarification Expected October 13th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on October 13th – and are hopeful that this will be the final hearing.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.. On October 5th, the Supreme Court required additional information on the case; and   *Further Clarification Expected October 13th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on October 13th – and are hopeful that this will be the final hearing.  

Reserve Bank of India - No Good Deed Goes Unpunished

Equity Bottom-Up

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st; and*Further Clarification Expected September 28th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on September 28th.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st; and*Further Clarification Expected September 28th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on September 28th. 

Reserve Bank of India – Toothless Tiger

India

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Indusind Bank (IIB IN)

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

A concise must-read on US$-risk sentiment derived from equity markets, rates, issuance, dollar levels and capital flows to frame near term Asia...

Hank Calenti, CFA

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary,...

Hank Calenti, CFA

Reserve Bank of India - No Good Deed Goes Unpunished

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing...

Thomas J. Monaco

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on...

Thomas J. Monaco

Reserve Bank of India – Toothless Tiger

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)