Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Surprisingly strong US non-farm payroll results on Friday may push yields higher as we start the week. Thereafter, rising Covid-19 cases and vaccine distribution issues may impinge on market sentiment, generating bouts of Treasury buying, a higher US dollar and a risk-off environment in general. These are opportunities to restock and reconsider risk-asset allocations.In a holiday shortened trading week, US Treasury yields had a relatively mild reaction to President Biden’s announced US$2.25 trillion infrastructure investment proposal. The US bond market was not open when March’s initial non-farm payroll (NFP) figures were announced on Friday. The NFP numbers suggest that the US economy is about to run hot. This should stoke reflation concerns as near term growth expectations rise.Covid-19 travel restrictions increased in Ontario, Canada as well as the entirety of France for the month of April. Meanwhile, the Philippines extended Covid-19 related restrictions in Manlla for an additional week through Sunday, 11 April.Amongst Asia EM banks, Philippine bank equity continued their underperformance with the recent lock-down announcements, while China’s banks remained relatively unchanged following year-end result disclosures. Philippine bank shares are lagging their peers in Asia.China’s Banking and Insurance Regulatory Commission (CBIRC) outlined its proposals for additional capital buffers that would apply to domestically significant financial institutions. S&amp;P estimates that the largest banks need to issue as much as 6.5 trillion-yuan ($990 billion) in total loss-absorbing capacity (TLAC) debt capital by 2024 in order to meet Basel TLAC guidelines. We should see a build-up of this debt capital over the next few years with a material portion in non-local currency instruments. In Europe, Monday’s announcement by <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse (CSGN VX)</a> that losses from exiting Archegos Capital Management could be “highly significant and material” had a materially adverse impact on investor sentiment regarding the firm. We noted in late February that CS’ risk tolerance exceeded that of its peers while its risk management appeared to have challenges. We were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $94. Please see <a href="https://www.smartkarma.com/compose/insight/49970/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a> for more details.In Asia, long duration Subordinated, and Additional Tier 1 (AT1) bank bonds outperformed as Treasury notes sold-off slightly during the week. Concurrently, the belly of the European bank debt curve outperformed as these bonds narrowed by more than weakness in five-year Treasury’s.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Executive Summary: Surprisingly strong US non-farm payroll results on Friday may push yields higher as we start the week. Thereafter, rising Covid-19 cases and vaccine distribution issues may impinge on market sentiment, generating bouts of Treasury buying, a higher US dollar and a risk-off environment in general. These are opportunities to restock and reconsider risk-asset allocations.In a holiday shortened trading week, US Treasury yields had a relatively mild reaction to President Biden’s announced US$2.25 trillion infrastructure investment proposal. The US bond market was not open when March’s initial non-farm payroll (NFP) figures were announced on Friday. The NFP numbers suggest that the US economy is about to run hot. This should stoke reflation concerns as near term growth expectations rise.Covid-19 travel restrictions increased in Ontario, Canada as well as the entirety of France for the month of April. Meanwhile, the Philippines extended Covid-19 related restrictions in Manlla for an additional week through Sunday, 11 April.Amongst Asia EM banks, Philippine bank equity continued their underperformance with the recent lock-down announcements, while China’s banks remained relatively unchanged following year-end result disclosures. Philippine bank shares are lagging their peers in Asia.China’s Banking and Insurance Regulatory Commission (CBIRC) outlined its proposals for additional capital buffers that would apply to domestically significant financial institutions. S&amp;P estimates that the largest banks need to issue as much as 6.5 trillion-yuan ($990 billion) in total loss-absorbing capacity (TLAC) debt capital by 2024 in order to meet Basel TLAC guidelines. We should see a build-up of this debt capital over the next few years with a material portion in non-local currency instruments. In Europe, Monday’s announcement by Credit Suisse (CSGN VX) that losses from exiting Archegos Capital Management could be “highly significant and material” had a materially adverse impact on investor sentiment regarding the firm. We noted in late February that CS’ risk tolerance exceeded that of its peers while its risk management appeared to have challenges. We were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $94. Please see Credit Suisse: Where There’s Smoke, There’s a Capital Raise for more details.In Asia, long duration Subordinated, and Additional Tier 1 (AT1) bank bonds outperformed as Treasury notes sold-off slightly during the week. Concurrently, the belly of the European bank debt curve outperformed as these bonds narrowed by more than weakness in five-year Treasury’s.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Bank Credit Weekly: Employment Numbers Confirm a Hot US Economy

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

China Construction Bank H / Equity Bottom-Up

*Hefty Expense Load In 4Q20: China Construction Bank (939.HK) [CCB] reported 4Q20 results of CNY 65.2 bn, declining CNY 3.0 bn or 4.4% linked quarter. On an operating basis, core earnings declined CNY 4.8 bn (7.5%) linked quarter to CNY 59.1 bn. Results weakness can be attributed to a massive increase in operating expenses and higher taxes; and *Credit Risk Rising: CCB’s While the stated NPL increase in not alarming on its face, the level of net new NPLs – inclusive of NCOs of CNY 27.3 bn – amounted to CNY 32.5 bn or increasing 50.9% on an annualized basis. We also believe that there will be an impact from WMPs. CCB's Non-standard credit asset faced some impact in LGFV and infrastructure. However, when one considers the continued high level break-down in credit quality, reserves would appear to be incredibly light – in the neighborhood of CNY 300 bn which amounts to nearly a year of pre-tax results at CCB.

*Hefty Expense Load In 4Q20: China Construction Bank (939.HK) [CCB] reported 4Q20 results of CNY 65.2 bn, declining CNY 3.0 bn or 4.4% linked quarter. On an operating basis, core earnings declined CNY 4.8 bn (7.5%) linked quarter to CNY 59.1 bn. Results weakness can be attributed to a massive increase in operating expenses and higher taxes; and *Credit Risk Rising: CCB’s While the stated NPL increase in not alarming on its face, the level of net new NPLs – inclusive of NCOs of CNY 27.3 bn – amounted to CNY 32.5 bn or increasing 50.9% on an annualized basis. We also believe that there will be an impact from WMPs. CCB's Non-standard credit asset faced some impact in LGFV and infrastructure. However, when one considers the continued high level break-down in credit quality, reserves would appear to be incredibly light – in the neighborhood of CNY 300 bn which amounts to nearly a year of pre-tax results at CCB.      

China Construction Bank – Still Chunky NPL Increases

Postal Savings Bank of China C / Equity Bottom-Up

*Excess Provisioning Eats Away At 4Q20 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 4Q20 results of CNY 11.4 bn – decreasing CNY 7.8 bn (40.8%) linked quarter. PSB’s struggles were twofold: loss provisions were too high; and an operating expenses accelerated; and * Credit Quality Risk Peaking: HOH, stated NPLs nominally increased CNY 605 mn or 1.2% to CNY 50.4 bn and amount to 88 bp to total loans – flat linked quarter. The growth in level of net new NPLs was CNY 9.3 bn or decelerating to 18.4% on an annualized basis. PSB’s loss provision increased CNY 2.9 bn (41.1%) linked quarter, almost seeming pointless given the reserve cover of 4.01x (4.03x at 3Q20) and the annualized NCO rate of 61 bp.

*Excess Provisioning Eats Away At 4Q20 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 4Q20 results of CNY 11.4 bn – decreasing CNY 7.8 bn (40.8%) linked quarter. PSB’s struggles were twofold: loss provisions were too high; and an operating expenses accelerated; and * Credit Quality Risk Peaking: HOH, stated NPLs nominally increased CNY 605 mn or 1.2% to CNY 50.4 bn and amount to 88 bp to total loans – flat linked quarter. The growth in level of net new NPLs was CNY 9.3 bn or decelerating to 18.4% on an annualized basis. PSB’s loss provision increased CNY 2.9 bn (41.1%) linked quarter, almost seeming pointless given the reserve cover of 4.01x (4.03x at 3Q20) and the annualized NCO rate of 61 bp.

Postal Savings Bank of China – Excess Provisioning

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 410 bn which amounts to over a year of pre-tax results at ICBC.

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 410 bn which amounts to over a year of pre-tax results at ICBC.   

Industrial and Commercial Bank of China – Troubling Result

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a>, <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a> and <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> announcing results (and dividends) today, 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>, <a href="https://www.smartkarma.com/entities/agricultural-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1120:1" rel="noopener">Agricultural Bank Of China (1288 HK)</a> and <a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank Of China Ltd (H) (3988 HK)</a> announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.With <a href="https://www.smartkarma.com/entities/baidu-inc-a55ca720-5968-48f0-8194-ac94390d065c" target="_blank" data-smartkarma-citation="entities:32212:1" rel="noopener">Baidu (9888 HK)</a> included in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a>. <a href="https://www.smartkarma.com/entities/bilibili-inc-83a27302-cd7d-4e6a-a1de-bcf93eb022c3" target="_blank" data-smartkarma-citation="entities:32215:1" rel="noopener">Bilibili Inc (9626 HK)</a> lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> has already filed papers to list in Hong Kong. Then there are companies like <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (1284375D CH)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a> and <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.

The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With Bank Of Communications Co H (3328 HK), ICBC (H) (1398 HK) and China Construction Bank H (939 HK) announcing results (and dividends) today, and Postal Savings Bank of China (1658 HK), Agricultural Bank Of China (1288 HK) and Bank Of China Ltd (H) (3988 HK) announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.With Baidu (9888 HK) included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the HKEX (388 HK). Bilibili Inc (9626 HK) lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. JD Logistics (JDL HK) has already filed papers to list in Hong Kong. Then there are companies like DiDi Chuxing (1284375D CH), ByteDance (1460967D CH) and Ant Financial Services Group (6688 HK) that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.

HSCEI Dividend Futures: June Index Review, Bank Divs, HFCAA - Sell the 2021/22 Steepener

China

China Construction Bank Corporation provides a comprehensive range of commercial banking products and services to individuals and corporate customers. The Bank's business consists of three principal business segments: corporate banking, personal banking, and treasury operations. China Construction Bank also services infrastructure loans, residential mortgage, and bank cards.

Industrial and Commercial Bank of China Ltd provides a broad range of personal and corporate commercial banking services all over China.  The Bank's businesses include deposit, loan, credit card, fund underwriting and trust, and foreign currency settlement and trading.

China Merchants Bank Co., Ltd. operates as a commercial bank. The Company provides deposits, loans, wealth management, asset custody, finance leasing, investment banking, and other banking services. China Merchants Bank conducts businesses domestically and internationally.

Industrial Bank Co.,Ltd. provides banking services. The Company offers deposits, loans, fund management, foreign currency management, and other services. Industrial Bank provides its services to individuals, enterprises, and other clients.

Postal Savings Bank of China Co., Ltd. provides banking services. The Company offers deposits, loans, fund settlement, and other services. Postal Savings Bank of China provides its services to individuals, enterprises, and other clients.

Bank of Communications Co.,Ltd. provides banking services. The Company offers deposits, loans, domestic settlement, currency trading, and other services. Bank of Communications provides its services to individuals, enterprises, and other clients.

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

China Construction Bank Corporation provides banking services. The Company offers deposits, loans, fund management, foreign exchange, and other services. China Construction Bank provides its services to individuals, enterprises, and other clients.

Postal Savings Bank of China C (601658 CH)

Ping An Bank Co Ltd provides a full range of commercial banking services including RMB and foreign currency deposit, loan, international and domestic settlement, discount, currency trading, letter of credit, bank guarantee, and other related services.

Commonwealth Bank of Australia provides banking, life insurance, and related services for individuals, small businesses and medium sized commercial enterprises. The Bank provides corporate and general banking, international financing, institutional banking and stock broking and funds management such as superannuation product.

National Australia Bank Limited is an international banking group which operates in Australia, New Zealand, Europe, Asia and the United States.  The Group offers banking services, credit and access card facilities, leasing, housing and general finance, international and investment banking, wealth and funds management, life insurance and custodian, trustee and nominee services.

DBS Group Holdings Limited and its subsidiaries provide a variety of financial services.  The Company offers services including mortgage financing, lease and hire purchase financing, nominee and trustee, funds management, corporate advisory and brokerage .  DBS Group also acts as the primary dealer in Singapore government securities.

Oversea-Chinese Banking Corporation Limited offers a comprehensive range of financial services.  The Company's services include deposit-taking, corporate, enterprise and personal lending, international trade financing, investment banking, private banking, treasury, stockbroking, insurance, credit cards, cash management, asset management and other financial and related services.

State Bank of India provides a wide range of banking and financial services to corporate, institutional, commercial, agricultural, industrial and individual customers throughout India.  The Bank also provides international banking to its Indian customers and has operations in other countries.

Sumitomo Mitsui Financial Group, Inc. manages financial operations for its subsidiaries. The Company provides commercial banking and a variety of financial services.

Sumitomo Mitsui Financial Group (8316 JP)

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

Mizuho Financial Group, Inc. provides comprehensive financial services through its subsidiaries. The Group provides variety of financial services such as general banking, securities brokerage, trust banking, and assets management.

Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage, leasing, credit cards, and consumer finance.  The Company operates through physical stores, the Internet and other distribution channels across North America and elsewhere internationally.

PNC Financial Services Group, Inc. is a diversified financial services organization.  The Company provides regional banking, wholesale banking, and asset management services nationally and in the Company's primary regional markets.

Agricultural Bank of China Limited provides a full range of commercial banking services. The Banks services includes RMB and foreign currency deposit, loan, international and domestic settlement, bill discount, currency trading, bank guarantee, and treasury bill underwriting.

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Agricultural Bank Of China (1288 HK)

Bank Credit Weekly: Employment Numbers Confirm a Hot US Economy

Strong US employment figures may push yields higher as we start the week. Thereafter, rising virus versus vaccine issues may impact market...

Hank Calenti, CFA

China Construction Bank – Still Chunky NPL Increases

CHINA CONSTRUCTION BANK: CCB reported a 4Q20 core earnings results decline 7.5% QOQ. Weakness can be attributed to a massive increase in costs and...

Thomas J. Monaco

Postal Savings Bank of China – Excess Provisioning

POSTAL SAVINGS BANK: PSB reported a 40.8% decline in QOQ results, as loss provisioning was too high relative to risk is peaking; and an operating...

Thomas J. Monaco

Industrial and Commercial Bank of China – Troubling Result

ICBC: ICBC reported a 9.2% QOQ increase in 4Q20 results, which is solely attributed to an unjustified and massive linked quarter reduction in loss...

Thomas J. Monaco

HSCEI Dividend Futures: June Index Review, Bank Divs, HFCAA - Sell the 2021/22 Steepener

While the HSCEI 2021 dividend futures are trading near our estimated fair, the HSCEI 2021/22 div steepener is not. We recommend selling the...

Brian Freitas

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