Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: The narrative has changed and there is little to stand in the way of further Treasury market strength near term. This should lead to US dollar weakness and may be Emerging Market risk asset supportive. Nonetheless, we suspect that Asia will remain driven by concerns that China is tightening which could constrain investor sentiment in this market.Trading volume-, Treasury issuance- and economic data-risks were no match for short-position unwinding, data reappraisal, and Japanese investor re-entry into the Treasury bond market over the last week. Treasury yields continued their retracement, posting their biggest weekly rally since August. Furthermore, after the worst quarter since 1980, Treasuries have gained around 1% this month, paring 2021 losses to about 3.3%. We may have seen a sell-the-rumor, buy-the-fact market event occur with respect to Treasuries and the better-than-expected March economic data set.The narrative has changed to one that is Treasury bond supportive. Fixed income markets are discounting lower economic growth and price expectations. Scenarios with a declining growth rate may be increasingly discounted in the Treasury markets. With GDP growth anticipated to tail-off over the next few quarters, sustainable wage growth may not materialize. Meanwhile, supply chain bottlenecks and rising producer prices may negatively impact corporate margins rather than consumer wallets. We elaborate on each of these themes within.Against this backdrop, there are limited economic announcements which could impact the Treasury market over the next few weeks. Meanwhile, Japanese investors may find buying US$ denominated bonds attractive after hedging the currency risk. This may be risk asset supportive going forward.  We review this inside.In the bank credit markets, March’s carry trade outperformance continued to unwind as shorter-duration bonds outperformed during the week. All recent higher coupon outperformers experienced large spread declines. Even the Turkish bank credit curve behaved in a manner consistent with other bonds globally, rather than trade at a discount. We identify the winners and losers.In China, while the immediate threat of Credit Armageddon may be lower, the ultimate game plan for China Huarong Asset Management is yet to be known. As such, the market may remain skittish while trading opportunities remain amongst the other asset management companies. Please see: <a href="https://www.smartkarma.com/compose/insight/50463/China%20Huarong:%20Contagion%20Creates%20Opportunity.%20Read%20more:%20https:/skr.ma/SmFJQ" target="_blank" rel="noopener">China Huarong: Contagion Creates Opportunity</a> for more details.US banks set a high bar for performance by announcing stellar investment banking and progressively improving core banking results last week. Then they signaled that they anticipate significantly higher interest rates later this year by hitting the market for record breaking amounts. Middle East- and Asia-headquartered banks may lead the headlines next week. Amongst major European names, only Credit Suisse is scheduled to provide final Q1 results on Tuesday, 20 April. For our thoughts, please see: <a href="https://www.smartkarma.com/compose/insight/50463/Credit%20Suisse:%20Skating%20on%20a%20Thin%20Layer%20of%20Capital.%20Read%20more:%20https:/skr.ma/rGLd5" target="_blank" rel="noopener">Credit Suisse: Skating on a Thin Layer of Capital</a>.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is repricing for lower growth and lower rates over a longer time-period. This should be risk asset supportive as the US dollar finally weakens. The risk is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.

Executive Summary: The narrative has changed and there is little to stand in the way of further Treasury market strength near term. This should lead to US dollar weakness and may be Emerging Market risk asset supportive. Nonetheless, we suspect that Asia will remain driven by concerns that China is tightening which could constrain investor sentiment in this market.Trading volume-, Treasury issuance- and economic data-risks were no match for short-position unwinding, data reappraisal, and Japanese investor re-entry into the Treasury bond market over the last week. Treasury yields continued their retracement, posting their biggest weekly rally since August. Furthermore, after the worst quarter since 1980, Treasuries have gained around 1% this month, paring 2021 losses to about 3.3%. We may have seen a sell-the-rumor, buy-the-fact market event occur with respect to Treasuries and the better-than-expected March economic data set.The narrative has changed to one that is Treasury bond supportive. Fixed income markets are discounting lower economic growth and price expectations. Scenarios with a declining growth rate may be increasingly discounted in the Treasury markets. With GDP growth anticipated to tail-off over the next few quarters, sustainable wage growth may not materialize. Meanwhile, supply chain bottlenecks and rising producer prices may negatively impact corporate margins rather than consumer wallets. We elaborate on each of these themes within.Against this backdrop, there are limited economic announcements which could impact the Treasury market over the next few weeks. Meanwhile, Japanese investors may find buying US$ denominated bonds attractive after hedging the currency risk. This may be risk asset supportive going forward.  We review this inside.In the bank credit markets, March’s carry trade outperformance continued to unwind as shorter-duration bonds outperformed during the week. All recent higher coupon outperformers experienced large spread declines. Even the Turkish bank credit curve behaved in a manner consistent with other bonds globally, rather than trade at a discount. We identify the winners and losers.In China, while the immediate threat of Credit Armageddon may be lower, the ultimate game plan for China Huarong Asset Management is yet to be known. As such, the market may remain skittish while trading opportunities remain amongst the other asset management companies. Please see: China Huarong: Contagion Creates Opportunity for more details.US banks set a high bar for performance by announcing stellar investment banking and progressively improving core banking results last week. Then they signaled that they anticipate significantly higher interest rates later this year by hitting the market for record breaking amounts. Middle East- and Asia-headquartered banks may lead the headlines next week. Amongst major European names, only Credit Suisse is scheduled to provide final Q1 results on Tuesday, 20 April. For our thoughts, please see: Credit Suisse: Skating on a Thin Layer of Capital.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is repricing for lower growth and lower rates over a longer time-period. This should be risk asset supportive as the US dollar finally weakens. The risk is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.  

Bank Credit Weekly: Narrative Change Pushes Carry-Trade Unwind as Treasuries Rally

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

EURO STOXX 50 Price EUR / Technical Analysis

Our intermediate-term outlook remains constructive with major support levels holding on the broad global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE). Still, we continue to see some reason for caution as various market dynamics have deteriorated, leading us to a more neutral outlook in the near-term.

Our intermediate-term outlook remains constructive with major support levels holding on the broad global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE). Still, we continue to see some reason for caution as various market dynamics have deteriorated, leading us to a more neutral outlook in the near-term.

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">Kb Financial Group (105560 KS)</a> 
KB Financial combines a diversified operational profile (with increasing non-banking revenue streams), robust fundamental trends, with a low valuation and benign capital return potential in a market which has shown resilience and recovery this year, helped by existing Pandemic protocols.
Results are satisfactory given the low-margin environment. Our PH Score™ shows that the bank is making headway. The top-line shows vibrant growth of non-interest Income, which offsets a flat Net Interest Income result, slightly better Efficiency, while Liquidity (driven by core Deposits), Provisioning, and headline Asset Quality (as opposed to “reported investment of impaired Loans”) are improving somewhat. Capital Adequacy reveals some erosion, as does NIM, but still remains better than the system average. The bottom-line was impacted lower by modestly higher Credit Costs as elsewhere on a YoY basis though LLPs climbed this quarter while banks in other jurisdictions took lower costs QoQ. Comprehensive Income and Net Profit still showed moderate progression YoY which in today’s context is encouraging.
KB Financial targets a DPR to 30% in the medium term versus 26% at FY19. Korean bank DPR’s are low. In addition, KB Financial may pay dividends on a semi-annual basis in the future. Last year, the Group cancelled 8% of its total treasury shares. There may be more share buybacks and treasury share cancellations in 2021. With M&amp;A on the backburner, the Group will focus on integration of its existing asset base, freeing up space for dividends and share buybacks.
Earlier this year, The Carlyle Group invested in KRW240 billion worth of zero-coupon exchangeable bonds issued by KB Financial Group. Assuming the exchange price for the exchangeable bonds was a fair reflection of the KB Financial's intrinsic value, this transaction was a “no-brainer” for existing or new equity investors. There was no dilution for existing shareholders either as KB Financial set aside treasury shares for the exchange of shares as part of the deal.
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For such a solid, diversified, franchise, with enhanced capital returns ahead, valuations still appeal: a FV of 6%, a PBV of 0.45x, an Earnings Yield of 19.3%, a Dividend Yield of 4.8%, and a TRR (Total Return Ratio) of 2.85x. A PH Score™ of 8.5 is top quartile globally. According to our VFM (Valuation, Fundamentals, Valuation) model, KB Financial resides in the top decile globally, from over 1400 banks.
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Kb Financial Group (105560 KS) 
KB Financial combines a diversified operational profile (with increasing non-banking revenue streams), robust fundamental trends, with a low valuation and benign capital return potential in a market which has shown resilience and recovery this year, helped by existing Pandemic protocols.
Results are satisfactory given the low-margin environment. Our PH Score™ shows that the bank is making headway. The top-line shows vibrant growth of non-interest Income, which offsets a flat Net Interest Income result, slightly better Efficiency, while Liquidity (driven by core Deposits), Provisioning, and headline Asset Quality (as opposed to “reported investment of impaired Loans”) are improving somewhat. Capital Adequacy reveals some erosion, as does NIM, but still remains better than the system average. The bottom-line was impacted lower by modestly higher Credit Costs as elsewhere on a YoY basis though LLPs climbed this quarter while banks in other jurisdictions took lower costs QoQ. Comprehensive Income and Net Profit still showed moderate progression YoY which in today’s context is encouraging.
KB Financial targets a DPR to 30% in the medium term versus 26% at FY19. Korean bank DPR’s are low. In addition, KB Financial may pay dividends on a semi-annual basis in the future. Last year, the Group cancelled 8% of its total treasury shares. There may be more share buybacks and treasury share cancellations in 2021. With M&amp;A on the backburner, the Group will focus on integration of its existing asset base, freeing up space for dividends and share buybacks.
Earlier this year, The Carlyle Group invested in KRW240 billion worth of zero-coupon exchangeable bonds issued by KB Financial Group. Assuming the exchange price for the exchangeable bonds was a fair reflection of the KB Financial's intrinsic value, this transaction was a “no-brainer” for existing or new equity investors. There was no dilution for existing shareholders either as KB Financial set aside treasury shares for the exchange of shares as part of the deal.

For such a solid, diversified, franchise, with enhanced capital returns ahead, valuations still appeal: a FV of 6%, a PBV of 0.45x, an Earnings Yield of 19.3%, a Dividend Yield of 4.8%, and a TRR (Total Return Ratio) of 2.85x. A PH Score™ of 8.5 is top quartile globally. According to our VFM (Valuation, Fundamentals, Valuation) model, KB Financial resides in the top decile globally, from over 1400 banks.


2021 High Conviction - KB Financial Group: Buy Ahead of Initiatives to Galvanise Shareholder Value

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

In last Tuesday’s Compass (10/27/20) we noted the S&amp;P 500’s break below 3425 short-term support opened the door for potential visits to 3325 and 3200. Support at 3325 was violated by Wednesday, however the 3200-3230 level has held and remains important support moving forward.  In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican Banks, Banks, Southwest, and Investment Banking &amp; Brokerage, Mid-Cap

In last Tuesday’s Compass (10/27/20) we noted the S&amp;P 500’s break below 3425 short-term support opened the door for potential visits to 3325 and 3200. Support at 3325 was violated by Wednesday, however the 3200-3230 level has held and remains important support moving forward.  In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican Banks, Banks, Southwest, and Investment Banking &amp; Brokerage, Mid-Cap

U.S. Equity Strategy: Markets Bouncing off Key Support

South Korea

KB Financial Group Inc. (the "Company"), in accordance with Financial Holding Companies Act, was established on September 29, 2008, through stock transfer with the former shareholders of its subsidiaries including Kookmin Bank in order to provide management services and financing to associated companies. The headquarters are located at Seoul, Korea

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KB Financial (105560 KS)

Bank Credit Weekly: Narrative Change Pushes Carry-Trade Unwind as Treasuries Rally

The narrative has changed. There is little to stand in the way of further Treasury market strength near term. This should lead to US$ weakness and...

Hank Calenti, CFA

Major Breakout For EURO STOXX 50

Our intermediate-term outlook remains constructive with major support levels holding on the broad global indexes (MSCI ACWI, ACWI ex-US, EM, and...

Vermilion Research

2021 High Conviction - KB Financial Group: Buy Ahead of Initiatives to Galvanise Shareholder Value

KB Financial Group combines positive fundamental trends with capital return potential in a market which shows resilience and recovery.

Paul Hollingworth

Bullish Inflections Around The World

In this report we outline key technical levels across markets and highlight actionable ideas within our Financials & Energy Sectors.

Vermilion Research

U.S. Equity Strategy: Markets Bouncing off Key Support

In today’s report we highlight attractive Groups and stocks within Financials: Asian Banks, Puerto Rican banks, Banks, Southwest, and Investment...

Vermilion Research

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