Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.<a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBLTB)</a> 5% coupon and <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (BNKEA)</a> 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFLIN)</a> 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank's (ICICIBC IN)</a> and <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank's (CBKIN)</a> debt curve sold off while <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank of India's (SBIIN)</a> notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see <a href="https://www.smartkarma.com/insights/bank-credit-compass-regime-change-may-limit-the-annual-january-bounce" target="_blank" data-smartkarma-citation="insights:46712" rel="noopener">Bank Credit Compass: Regime Change May Limit the Annual January Bounce</a>. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.Bangkok Bank's (BBLTB) 5% coupon and Bank of East Asia's (BNKEA) 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. Indiabulls Housing Finance's (IHFLIN) 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. ICICI Bank's (ICICIBC IN) and Canara Bank's (CBKIN) debt curve sold off while State Bank of India's (SBIIN) notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see Bank Credit Compass: Regime Change May Limit the Annual January Bounce. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

HK/China Equity Long-Short

Osbert Tang, CFA

Quantitative Analysis

Our "Buy the Worst" strategy intended to beat the Hang Seng Index in 2020, as laid out in <a href="https://www.smartkarma.com/insights/buy-the-worst-a-simple-strategy-to-beat-the-hang-seng-index-in-2020-and-the-years-to-come" target="_blank" data-smartkarma-citation="insights:35427" rel="noopener">"Buy the Worst" - A Simple Strategy to Beat the Hang Seng Index in 2020 and the Years to Come?</a>, did not work out well. The portfolio of the five worst performing Index constituents in 2019 registered an average of 26.1% plunge in share price YTD, sharply underperformed the 5.8% decline in HSI. In our view, this is primarily due to the COVID-19 pandemic which hit the old economy stocks (which all five are) hardest. As for this year, as of 29 Dec, the five worst-performing HSI stocks YTD are <a href="https://www.smartkarma.com/entities/citic-ltd" target="_blank" data-smartkarma-citation="entities:20590:1" rel="noopener">Citic Ltd (267 HK)</a> (again!), <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a>, <a href="https://www.smartkarma.com/entities/aac-technologies-holdings-inc" target="_blank" data-smartkarma-citation="entities:6544:1" rel="noopener">AAC Technologies Holdings (2018 HK)</a> and <a href="https://www.smartkarma.com/entities/china-unicom-hong-kong-ltd" target="_blank" data-smartkarma-citation="entities:1016:1" rel="noopener">China Unicom Hong Kong (762 HK)</a>. While they do not look likely to outperform the Index in next year from their business exposure, we highlight that a rotation into old economy stocks as COVID-19 vaccines help to open up global economic recovery is a potential wild card.

Our "Buy the Worst" strategy intended to beat the Hang Seng Index in 2020, as laid out in "Buy the Worst" - A Simple Strategy to Beat the Hang Seng Index in 2020 and the Years to Come?, did not work out well. The portfolio of the five worst performing Index constituents in 2019 registered an average of 26.1% plunge in share price YTD, sharply underperformed the 5.8% decline in HSI. In our view, this is primarily due to the COVID-19 pandemic which hit the old economy stocks (which all five are) hardest. As for this year, as of 29 Dec, the five worst-performing HSI stocks YTD are Citic Ltd (267 HK) (again!), China Overseas Land &amp; Investment Ltd (688 HK), CNOOC Ltd (883 HK), AAC Technologies Holdings (2018 HK) and China Unicom Hong Kong (762 HK). While they do not look likely to outperform the Index in next year from their business exposure, we highlight that a rotation into old economy stocks as COVID-19 vaccines help to open up global economic recovery is a potential wild card.  

A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021?

<a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> credit costs were artificially engineered lower during 2020, like most banks globally, via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped BNP report positive results despite the ongoing health crisis. Lack of Covid-19 loan loss reserve coverage also inflated BNP’s capital ratios. This impact may unwind over time.While BNP’s Covid-19 restructured loan amounts were less significant than at other financial institutions, they were material relative to the loss absorption ability of the bank. As such, by applying loan loss reserve rates for Stage 2 and Stage 3 loans to unprovided Covid-19 relief amounts, we derive a potential range of BNP’s real economic Common Equity Tier 1 ratio without EBA asset quality forbearance. The impact is significant. Covid-19 relief provided was largest in lending to small and medium sized enterprises (SME), relative to the amount of loans outstanding. Over 25% of SME lending was subject to some form of Covid-19 relief assistance. SME lending is the area to keep an eye on for potential deterioration in BNP’s capital ratios.Against this artificially engineered credit cost background, BNP’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next three years. From a hedging perspective, since we anticipate a deterioration in the credit profiles of major financial institutions over the next year, buying CDS protection may be worthwhile. However, we would rather own <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> 1-year CDS protection as cheap insurance.

BNP Paribas' (BNP FP) credit costs were artificially engineered lower during 2020, like most banks globally, via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped BNP report positive results despite the ongoing health crisis. Lack of Covid-19 loan loss reserve coverage also inflated BNP’s capital ratios. This impact may unwind over time.While BNP’s Covid-19 restructured loan amounts were less significant than at other financial institutions, they were material relative to the loss absorption ability of the bank. As such, by applying loan loss reserve rates for Stage 2 and Stage 3 loans to unprovided Covid-19 relief amounts, we derive a potential range of BNP’s real economic Common Equity Tier 1 ratio without EBA asset quality forbearance. The impact is significant. Covid-19 relief provided was largest in lending to small and medium sized enterprises (SME), relative to the amount of loans outstanding. Over 25% of SME lending was subject to some form of Covid-19 relief assistance. SME lending is the area to keep an eye on for potential deterioration in BNP’s capital ratios.Against this artificially engineered credit cost background, BNP’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next three years. From a hedging perspective, since we anticipate a deterioration in the credit profiles of major financial institutions over the next year, buying CDS protection may be worthwhile. However, we would rather own HSBC Holdings' (HSBA LN) 1-year CDS protection as cheap insurance.

BNP Paribas: Capital, Forbearance and CDS

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFL IN)</a> 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's  (23 HK)</a> 2024 callable AT1 outperformed while <a href="https://www.smartkarma.com/entities/siam-commercial-bank-pub-co" target="_blank" data-smartkarma-citation="entities:214:1" rel="noopener">Siam Commercial Bank's (SCB TB)</a> 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: <a href="https://www.smartkarma.com/insights/bank-credit-weekly-fed-spikes-while-the-ecb-sweetens-the-punch-bowl" target="_blank" data-smartkarma-citation="insights:46524" rel="noopener">Fed Spikes While the ECB Sweetens the Punch Bowl</a>.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, Indiabulls Housing Finance's (IHFL IN) 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, Bank of East Asia's  (23 HK) 2024 callable AT1 outperformed while Siam Commercial Bank's (SCB TB) 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

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

*Poor US Results: In our latest review of HSBC Holdings’ (5.HK/HSBA.LN) [HSBC] US subsidiary, HSBC North America (HSBCNA), we note that fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed 3Q20 results actually were. According to the 3Q20 US regulatory report, HSBCNA reported bottom-line results if USD 160.0 mn, a USD 111.3 mn (228.5%) increase linked quarter. 3Q20 results were driven by two factors: a massive loss provision and tax rate decline; *We Anxiously Await HSBC’s US Departure: According the Financial Times on November 28, 2020, HSBC is considering offloading its entire US retail network - although a full exit from other businesses in the US is unlikely. The recommendation of a US exit is expected to be presented to the board as early as this week, although the Group is scheduled to provide an update on its plans for its French and US businesses in February 2021; and *HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again.

*Poor US Results: In our latest review of HSBC Holdings’ (5.HK/HSBA.LN) [HSBC] US subsidiary, HSBC North America (HSBCNA), we note that fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed 3Q20 results actually were. According to the 3Q20 US regulatory report, HSBCNA reported bottom-line results if USD 160.0 mn, a USD 111.3 mn (228.5%) increase linked quarter. 3Q20 results were driven by two factors: a massive loss provision and tax rate decline; *We Anxiously Await HSBC’s US Departure: According the Financial Times on November 28, 2020, HSBC is considering offloading its entire US retail network - although a full exit from other businesses in the US is unlikely. The recommendation of a US exit is expected to be presented to the board as early as this week, although the Group is scheduled to provide an update on its plans for its French and US businesses in February 2021; and *HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again. 

United Kingdom

HSBC Holdings plc is the holding company for the HSBC Group. The Company provides a variety of international banking and financial services, including retail and corporate banking, trade, trusteeship, securities, custody, capital markets, treasury, private and investment banking, and insurance.  The Group operates worldwide.

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HSBC Holdings (5 HK)

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

Duration desires drove performance over the holiday shortened week. A US Senate leadership change could negatively impact the market as Goldilocks...

Hank Calenti, CFA

A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021?

While our "Buy the Worst" strategy underperformed the HSI sharply YTD, we see extending the strategy into 2021 may catch up as the rotation back to...

Osbert Tang, CFA

BNP Paribas: Capital, Forbearance and CDS

BNPs real economic capital, sans forbearance, may be materially lower than reported. Credit costs were artificially engineered lower, like at most...

Hank Calenti, CFA

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

Asia’s AT1, Subordinated and high yield Senior Unsecured bonds outperformed over the holiday shortened week. Thin markets were directionless, so we...

Hank Calenti, CFA

HSBC Holdings Plc – Cut and Run

HSBC HOLDINGS: HSBCNA fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed...

Thomas J. Monaco

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