Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Light trading volumes, an issuance holiday and technical asset purchase expectations flattened the US Treasury curve during the week. Bank credit largely underperformed in what appeared to be a carry-trade unwind. All recent higher coupon outperformers experienced large spread declines. We do not expect this to continue as US growth and inflation expectations rise.We think this past week was an aberration, owing to thin markets, a lack of conviction pre-earnings season and concerns on the virus versus vaccine front. There is clear volume-, issuance- and data-risk for the market to contend with next week. We outline these within.Furthermore, we anticipate that market sentiment will revert to concerns regarding possible over-heating in the US economy, which in turn, would lead to a return of Treasury yield curve steepening. The sweet spot of long duration, low investment grade and BB rated bonds would revisit the market. This is a repositioning opportunity. Please see <a href="https://www.smartkarma.com/compose/insight/50207/Bank%20Credit%20Compass:%20Positive%20Total%20Return%20Sweet%20Spot.%20Read%20more:%20https:/skr.ma/2gzmu" target="_blank" rel="noopener">Bank Credit Compass: Positive Total Return Sweet Spot</a> for more details.US banks kick off the season with reports from JPMorgan Chase, Goldman Sachs and Wells Fargo on Wednesday, 14 April. Although trading revenues may be flat on a full-year basis over 2021, Q1 results could see these rise 10 to 15% year-on-year. Credit costs are anticipated to remain low with loan loss releases continuing although loan growth may still be missing. Net interest margins could remain depressed while interest revenue growth remains challenged.The Fed recently announced that it will remove dividend restrictions and allow US banks to restart share buy-backs from 30 June in those firms which pass the currently ongoing stress tests. As such, we anticipate a lot of talk, but no action, regarding this announcement in earnings teleconferences. Please see <a href="https://www.smartkarma.com/compose/insight/50207/US%20Banks%20and%20the%20SLR%20Situation:%20Overweight%20JPM%20Tier%201%20Securities.%20Read%20more:%20https:/skr.ma/g6CCF" target="_blank" rel="noopener">US Banks and the SLR Situation: Overweight JPM Tier 1 Securities</a> for our views on JPMorgan and its capital situation. Results for this year's test will be released by July 1.In Europe, we saw another market sensitive announcement from <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> last week. The firm outlined the likely impact from losses sustained in liquidating positions related to Archegos Capital Management. We do not see that press release as a reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than one-half the charges related to Archegos and this could result in the suspension of coupons on CS’ Contingent Capital securities. This leaves little room for maneuver. We continue to believe that Credit Suisse needs to enhance its capital base. Its CoCos may lag the market until the layer of capital is strengthened. Please see <a href="https://www.smartkarma.com/compose/insight/50207/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> and <a href="https://www.smartkarma.com/compose/insight/50207/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.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: Light trading volumes, an issuance holiday and technical asset purchase expectations flattened the US Treasury curve during the week. Bank credit largely underperformed in what appeared to be a carry-trade unwind. All recent higher coupon outperformers experienced large spread declines. We do not expect this to continue as US growth and inflation expectations rise.We think this past week was an aberration, owing to thin markets, a lack of conviction pre-earnings season and concerns on the virus versus vaccine front. There is clear volume-, issuance- and data-risk for the market to contend with next week. We outline these within.Furthermore, we anticipate that market sentiment will revert to concerns regarding possible over-heating in the US economy, which in turn, would lead to a return of Treasury yield curve steepening. The sweet spot of long duration, low investment grade and BB rated bonds would revisit the market. This is a repositioning opportunity. Please see Bank Credit Compass: Positive Total Return Sweet Spot for more details.US banks kick off the season with reports from JPMorgan Chase, Goldman Sachs and Wells Fargo on Wednesday, 14 April. Although trading revenues may be flat on a full-year basis over 2021, Q1 results could see these rise 10 to 15% year-on-year. Credit costs are anticipated to remain low with loan loss releases continuing although loan growth may still be missing. Net interest margins could remain depressed while interest revenue growth remains challenged.The Fed recently announced that it will remove dividend restrictions and allow US banks to restart share buy-backs from 30 June in those firms which pass the currently ongoing stress tests. As such, we anticipate a lot of talk, but no action, regarding this announcement in earnings teleconferences. Please see US Banks and the SLR Situation: Overweight JPM Tier 1 Securities for our views on JPMorgan and its capital situation. Results for this year's test will be released by July 1.In Europe, we saw another market sensitive announcement from Credit Suisse (CSGN VX) last week. The firm outlined the likely impact from losses sustained in liquidating positions related to Archegos Capital Management. We do not see that press release as a reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than one-half the charges related to Archegos and this could result in the suspension of coupons on CS’ Contingent Capital securities. This leaves little room for maneuver. We continue to believe that Credit Suisse needs to enhance its capital base. Its CoCos may lag the market until the layer of capital is strengthened. Please see Credit Suisse: Skating on a Thin Layer of Capital and Credit Suisse: Where There’s Smoke, There’s a Capital Raise for more details.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: Repositioning Opportunity from Carry-Trade Unwind as the Treasury Curve Flattens

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

It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. Market Outlook: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.

It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. Market Outlook: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.

Bank Credit Weekly: Inflation, the Next Market Challenge or Opportunity?

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

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.

*Positive Spin: HDFC Bank (HDFCB.IN) {HDFCB] management held a call with a competitor, where a positive spin was placed on nearly every aspect of its business. HDFCB highlighted lending had reached pre-COVID-19 levels during December and is attributed to pent-up demand. Management also contends that its NIM should remain in the guided range of 4.0%-4.5% given the improving loan mix and the reduction in excess liquidity; and
*Credit Still Breaking Down Ex-Supreme Court Ruling: On an apples-to-apples basis, we find that HDFCB’s stated gross NPLs increased 18.1% linked quarter. Inclusive of NCOs of INR 34 bn, however, we calculate that net new NPLs actually increased INR 65 bn or 151% on an annualized basis. Provisions barely cover NCOs – down from 2.4x in FY 3Q21. We would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues give HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 328 bn or over a year of core operating results based on FY 3Q21 results.   

HDFC Bank – Story Appears Different From Reality

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

During last year it was not about intrinsic economic or bank health. There was a filter applied to the analysis. With its removal now, we believe that inherent malaise for India corporates will become clear again.

During last year it was not about intrinsic economic or bank health. There was a filter applied to the analysis. With its removal now, we believe that inherent malaise for India corporates will become clear again.

India

Bank of Baroda owns and operates commercial banks in India.  The Group's banks provide the traditional forms of banking services, including CD's, Credit Card services and a variety of car loans, in addition to gold banking and a range of insurance services.  The Group also owns IBU International Finance Limited, an international banking company in Hong Kong.

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Bank Of Baroda (BOB IN)

Bank Credit Weekly: Repositioning Opportunity from Carry-Trade Unwind as the Treasury Curve Flattens

A confluence of thin volumes, trading holidays and technicals flattened the US rate curve. Bank credit underperformed in a carry-trade unwind. This...

Hank Calenti, CFA

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

Bank Credit Weekly: Inflation, the Next Market Challenge or Opportunity?

The recent back-up in US rates may be an opportunity to reload in some Emerging Markets. A US inflation spike is the next hurdle. EM High Yield,...

Hank Calenti, CFA

HDFC Bank – Story Appears Different From Reality

HDFC BANK: HDFCB recently put a positive spin on nearly every aspect of its business. However, credit quality and provision realities are far...

Thomas J. Monaco

India Banks – Remove The Filter

India's banks are not seeing a major decline in provisions like others. We wonder if inherent India corporate risk is now coming through more...

Daniel Tabbush

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