Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: <a href="https://www.smartkarma.com/entities/banco-santander-sa" target="_blank" data-smartkarma-citation="entities:21296:1" rel="noopener">Banco Santander (SAN SM)</a> is one of the few institutions which did not engage in loan loss reserve releases this quarter. It did not even release reserves for the sake of appearance, as occurred at <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>. As regards credit quality, unfortunately, there is more than meets the eye and it is not spectacular. However, we believe that this is priced into the bank’s Additional Tier 1 (AT1) notes.The big issue for Santander is Brazil. Santander is essentially a Brazilian bank, headquartered in Madrid. Brazil contributes the largest amount of pre-provision profits amongst the bank’s well diversified franchise. Notably, the bank effectively managed to achieve an overall similar revenue result in the first quarter of this year as in last year, despite Brazil’s contribution declining by 16% year-on-year. This speaks to the diversification benefits inherent in the firm’s franchise. We believe this is undervalued by the market.Santander may face continuing revenue challenges in Brazil this year if the country is unable to tame its Coronavirus outbreaks. However, this appears to already be priced into Santander’s AT1 bonds.Santander’s longest dated AT1 bond trades 30 bps higher than the spread on <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group's (CSGN VX)</a> similar first call note, despite being higher rated and having an effective capital buffer which is greater than 200bps higher, relative to their respective risk-weighted assets. Santander’s longest-dated AT1 note also trades almost 100bps higher than <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered's (STAN LN)</a> similar first call bond. Again, this is despite being higher rated and having a similar capital buffer. As such, we see more upside and recommend that investors overweight Santander’s AT1 notes.

Executive Summary: Banco Santander (SAN SM) is one of the few institutions which did not engage in loan loss reserve releases this quarter. It did not even release reserves for the sake of appearance, as occurred at HSBC Holdings (HSBA LN). As regards credit quality, unfortunately, there is more than meets the eye and it is not spectacular. However, we believe that this is priced into the bank’s Additional Tier 1 (AT1) notes.The big issue for Santander is Brazil. Santander is essentially a Brazilian bank, headquartered in Madrid. Brazil contributes the largest amount of pre-provision profits amongst the bank’s well diversified franchise. Notably, the bank effectively managed to achieve an overall similar revenue result in the first quarter of this year as in last year, despite Brazil’s contribution declining by 16% year-on-year. This speaks to the diversification benefits inherent in the firm’s franchise. We believe this is undervalued by the market.Santander may face continuing revenue challenges in Brazil this year if the country is unable to tame its Coronavirus outbreaks. However, this appears to already be priced into Santander’s AT1 bonds.Santander’s longest dated AT1 bond trades 30 bps higher than the spread on Credit Suisse Group's (CSGN VX) similar first call note, despite being higher rated and having an effective capital buffer which is greater than 200bps higher, relative to their respective risk-weighted assets. Santander’s longest-dated AT1 note also trades almost 100bps higher than Standard Chartered's (STAN LN) similar first call bond. Again, this is despite being higher rated and having a similar capital buffer. As such, we see more upside and recommend that investors overweight Santander’s AT1 notes.

Asia’s high yield market underperformed as risk sentiment in both Asia and the US retreated. US spreads came under pressure following a deluge of deals over the last few weeks and as U.S. jobless claims unexpectedly jumped during the week. Asia’s performance erased wider losses earlier in the week on US-China trade concerns following news that the US cancelled higher level trade talks. Regional actions such as systemic liquidity injections by the People’s Bank of China as well as unchanged policy interest rates in Indonesia and the Philippines limited spread widening.Concurrently, in rate markets, despite treasury bond market disappointment on what was not said in the Fed’s recent meeting minutes, namely expectations regarding the Fed’s bond buying programme, the US Treasury curve flattened slightly over the week as yields fell faster in the longer-end. Curve steepening is generally associated with increased bank net interest income from maturity transformation. Curve flattening suggests the opposite. Over the next week, the market will be looking for more direction on the path of US monetary policy when Chairman Jerome Powell speaks at the Kansas City Fed’s annual symposium on Aug. 27.In-line with reduced risk tolerance in Asia, only four bond spreads tightened for every one that widened during the week as Senior Unsecured bonds outperformed more Subordinated securities. Among those bonds that underperformed,  India’s non-bank finance companies (NBFCs) widened despite the extension and expansion of a partial state guarantee on NBFC-issued bonds and commercial paper that are purchased by India's public-sector banks.Amongst those bonds that outperformed, in addition to increased risk-aversion, debt issuance positively affected spreads on several bonds. <a href="https://www.smartkarma.com/entities/rizal-commercial-banking-corp" target="_blank" data-smartkarma-citation="entities:23143:1" rel="noopener">Rizal Commercial Bank's (RCB PM)</a> inaugural Additional Tier 1 (AT1) bond and <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> Tier II local currency issuance may have positively impacted the spreads of several bonds. SBIIN’s issuance of a Basel III compliant Tier II bond in the local market likely had a positive impact on the issuers’ US$-denominated credit curve. In Rizal’s case, the Ba3 rated bond priced at a level which may have pushed spreads tighter on <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank's (TMB TB)</a> similarly rated AT1 bond. We believe the Rizal bond was priced too tight; however, we think this issuance may benefit spreads on Rizal’s 2024 Senior Unsecured debt. For more on this, please see <a href="https://www.smartkarma.com/insights/rizal-commercial-bank-s-inaugural-at1-bond-caveat-emptor" target="_blank" data-smartkarma-citation="insights:42437" rel="noopener">Rizal Commercial Bank’s Inaugural AT1 Bond: Caveat Emptor</a>. Market Outlook Risks remain for this market. These include rising U.S.-China geo-political tensions, resurgent Coronavirus activity, the global growth outlook, and the outcome of the US election. In this background, concerns are being voiced on the potentially unsettling bond market impact from a successful coronavirus vaccine. We expect the Fed’s moves to have a more lasing affect. In addition, as we move through the US election, downward moves in US Treasury rates may occur, given potential investor uncertainty on policy direction, post-election. One cannot rule out a return to negative short-term US$ interest rates, as occurred in mid-March. Fortunately for credit investors, the Fed’s powder remains very dry with respect to utilizing its Secondary Corporate Credit Facility and this programme was recently extended to year-end.Inside: In this weekly, we review global credit index levels, interest rates 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.

Asia’s high yield market underperformed as risk sentiment in both Asia and the US retreated. US spreads came under pressure following a deluge of deals over the last few weeks and as U.S. jobless claims unexpectedly jumped during the week. Asia’s performance erased wider losses earlier in the week on US-China trade concerns following news that the US cancelled higher level trade talks. Regional actions such as systemic liquidity injections by the People’s Bank of China as well as unchanged policy interest rates in Indonesia and the Philippines limited spread widening.Concurrently, in rate markets, despite treasury bond market disappointment on what was not said in the Fed’s recent meeting minutes, namely expectations regarding the Fed’s bond buying programme, the US Treasury curve flattened slightly over the week as yields fell faster in the longer-end. Curve steepening is generally associated with increased bank net interest income from maturity transformation. Curve flattening suggests the opposite. Over the next week, the market will be looking for more direction on the path of US monetary policy when Chairman Jerome Powell speaks at the Kansas City Fed’s annual symposium on Aug. 27.In-line with reduced risk tolerance in Asia, only four bond spreads tightened for every one that widened during the week as Senior Unsecured bonds outperformed more Subordinated securities. Among those bonds that underperformed,  India’s non-bank finance companies (NBFCs) widened despite the extension and expansion of a partial state guarantee on NBFC-issued bonds and commercial paper that are purchased by India's public-sector banks.Amongst those bonds that outperformed, in addition to increased risk-aversion, debt issuance positively affected spreads on several bonds. Rizal Commercial Bank's (RCB PM) inaugural Additional Tier 1 (AT1) bond and State Bank Of India's (SBIIN) Tier II local currency issuance may have positively impacted the spreads of several bonds. SBIIN’s issuance of a Basel III compliant Tier II bond in the local market likely had a positive impact on the issuers’ US$-denominated credit curve. In Rizal’s case, the Ba3 rated bond priced at a level which may have pushed spreads tighter on TMB Bank's (TMB TB) similarly rated AT1 bond. We believe the Rizal bond was priced too tight; however, we think this issuance may benefit spreads on Rizal’s 2024 Senior Unsecured debt. For more on this, please see Rizal Commercial Bank’s Inaugural AT1 Bond: Caveat Emptor. Market Outlook Risks remain for this market. These include rising U.S.-China geo-political tensions, resurgent Coronavirus activity, the global growth outlook, and the outcome of the US election. In this background, concerns are being voiced on the potentially unsettling bond market impact from a successful coronavirus vaccine. We expect the Fed’s moves to have a more lasing affect. In addition, as we move through the US election, downward moves in US Treasury rates may occur, given potential investor uncertainty on policy direction, post-election. One cannot rule out a return to negative short-term US$ interest rates, as occurred in mid-March. Fortunately for credit investors, the Fed’s powder remains very dry with respect to utilizing its Secondary Corporate Credit Facility and this programme was recently extended to year-end.Inside: In this weekly, we review global credit index levels, interest rates 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 Sentiment Retreats in Asia and US HY Markets

Spain

Banco Santander S.A. attracts deposits and offers retail, commercial and private banking, and asset management services. The Bank offers consumer credit, mortgage loans, lease financing, factoring, mutual funds, pension funds, insurance, commercial credit, investment banking services, structured finance, and advice on mergers and acquisitions.

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Banco Santander (SAN US)

Banco Santander: Undervalued AT1

Santander’s AT1 is undervalued. There is considerably more upside from these securities than at other globally diversified, and EM-centric,...

Hank Calenti, CFA

Bank Credit Weekly: Risk Sentiment Retreats in Asia and US HY Markets

Asia’s high yield market underperformed as risk sentiment in both Asia and the US retreated. US spreads came under pressure following a deluge of...

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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