Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p>Stronger than expected US employment data combined with uncertainty surrounding the Fed’s next steps to drive broader credit markets wider by weekend, although financials remained better bid. Taperless tantrums may be repeated over the near term but financials may be less impacted.</p><p>While US CCC-rated bonds and Asia High Yield sold-off, almost all European contingent capital and Asia High Yield bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Investors grabbed longer duration Additional Tier 1 (AT1) bonds as the week progressed, on economic strength expectations, while lower duration Senior Unsecured bonds outperformed on rising interest rate expectations. Friday’s non-farm report generated concerns on European growth in a rising rate environment. Queue central bank assurances that they will respond to rising rates over the next few weeks.</p><p>Despite higher spreads available in more moderate duration AT1 notes, Europe's outperformers were almost exclusively long duration bonds. This outperformance is a very bullish signal. However, we are not convinced that this should apply to each of these institutions.  Please see <a href="https://www.smartkarma.com/insights/credit-suisse-greensill-sows-reputation-risks-underweight-cs-bonds" target="_blank" data-smartkarma-citation="insights:48839" rel="noopener">Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds</a> for further details.</p><p>Financials remain the sweet spot in Asia credit. Levered to the economy and rising rates, this is the place to be at this point in the market cycle.  Performance attributes varied amongst the various bank credit classes in Asia. Risk-on sentiment drove higher risk AT1 and less subordinated Tier 2 bonds tighter. Meanwhile duration concerns drove investors to target higher spreads per unit of duration in BBB-rated and High Yield Senior Unsecured notes. Taken together, this performance outcome is likely evidence of the melt-up in spreads that we anticipated several weeks ago. Please see <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" data-smartkarma-citation="insights:48133" rel="noopener">Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position</a> for more details.</p><p>Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.</p><p><strong>Market Outlook</strong>: The Fed will likely Twist before it Tapers, but the timing of both remain uncertain as real long term interest rates remain negative. In the interim, global treasury markets may remain unsettled. 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 IEM) friendly; however, a strong US economic rebound should benefit EM and European financials. Short duration in investment grade financials combined with high credit spreads in High Yield financials and more subordinated debt may remain the way forward.</p>

Stronger than expected US employment data combined with uncertainty surrounding the Fed’s next steps to drive broader credit markets wider by weekend, although financials remained better bid. Taperless tantrums may be repeated over the near term but financials may be less impacted.While US CCC-rated bonds and Asia High Yield sold-off, almost all European contingent capital and Asia High Yield bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Investors grabbed longer duration Additional Tier 1 (AT1) bonds as the week progressed, on economic strength expectations, while lower duration Senior Unsecured bonds outperformed on rising interest rate expectations. Friday’s non-farm report generated concerns on European growth in a rising rate environment. Queue central bank assurances that they will respond to rising rates over the next few weeks.Despite higher spreads available in more moderate duration AT1 notes, Europe's outperformers were almost exclusively long duration bonds. This outperformance is a very bullish signal. However, we are not convinced that this should apply to each of these institutions.  Please see Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds for further details.Financials remain the sweet spot in Asia credit. Levered to the economy and rising rates, this is the place to be at this point in the market cycle.  Performance attributes varied amongst the various bank credit classes in Asia. Risk-on sentiment drove higher risk AT1 and less subordinated Tier 2 bonds tighter. Meanwhile duration concerns drove investors to target higher spreads per unit of duration in BBB-rated and High Yield Senior Unsecured notes. Taken together, this performance outcome is likely evidence of the melt-up in spreads that we anticipated several weeks ago. Please see Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position for more details.Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.Market Outlook: The Fed will likely Twist before it Tapers, but the timing of both remain uncertain as real long term interest rates remain negative. In the interim, global treasury markets may remain unsettled. 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 IEM) friendly; however, a strong US economic rebound should benefit EM and European financials. Short duration in investment grade financials combined with high credit spreads in High Yield financials and more subordinated debt may remain the way forward.

Bank Credit Weekly: One Size Does Not Fit All

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>On the 15 January, <a href="https://www.smartkarma.com/entities/guoco-group-ltd" target="_blank" data-smartkarma-citation="entities:5290:1" rel="noopener">Guoco Group Ltd (53 HK)</a> made a <a href="https://links.sgx.com/FileOpen/Offer%20Announcement.ashx?App=Announcement&amp;FileID=645181" target="_blank" rel="noopener">voluntary conditional cash Offer</a> for 70.84%-held <a href="https://www.smartkarma.com/entities/gl-ltd" target="_blank" data-smartkarma-citation="entities:2540:1" rel="noopener">GL Ltd (GLL SP)</a>. The Offer Price of S$0.70/share was a 25% premium to last close and 0.73x P/NAV. The acceptance condition is 90%, including Guoco's stake, although Guoco reserves the right to reduce this to 50%. Save for the acceptance condition, the Offer is unconditional in all other respects.</p>
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<p>This was an underwhelming Offer from the outset, pitching GLL at a level below the COVID drop-off in Feb/March last year. In the <a href="https://links.sgx.com/FileOpen/Revised_Offeree_Circular.ashx?App=Announcement&amp;FileID=648639" target="_blank" rel="noopener">Circular</a>, the IFA agreed and said the Offer was not fair; but hedged its opinion, calling it reasonable. </p>
<p>The <a href="https://sias.org.sg/" target="_blank" data-ved="2ahUKEwjTwoy_vo7vAhXyxosBHROlAVsQFjAAegQIEhAD" rel="noopener"></a>Securities Investors Association (Singapore) (SIAS) has <a href="https://sias.org.sg/latest-updates/letter-to-guocoleisure-holdings-limited-appeal-on-behalf-of-minority-shareholders-of-gl-limited/" target="_blank" rel="noopener">joined the fray</a>, and is also less than enthusiastic with the Offer terms. But how much clout does SIAS have in Singaporean deals?</p>
<p>Shares have closed at or through terms every day since the Offer was announced.</p>
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<p>As always, more below the fold.</p>
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On the 15 January, Guoco Group Ltd (53 HK) made a voluntary conditional cash Offer for 70.84%-held GL Ltd (GLL SP). The Offer Price of S$0.70/share was a 25% premium to last close and 0.73x P/NAV. The acceptance condition is 90%, including Guoco's stake, although Guoco reserves the right to reduce this to 50%. Save for the acceptance condition, the Offer is unconditional in all other respects.


This was an underwhelming Offer from the outset, pitching GLL at a level below the COVID drop-off in Feb/March last year. In the Circular, the IFA agreed and said the Offer was not fair; but hedged its opinion, calling it reasonable. 
The Securities Investors Association (Singapore) (SIAS) has joined the fray, and is also less than enthusiastic with the Offer terms. But how much clout does SIAS have in Singaporean deals?
Shares have closed at or through terms every day since the Offer was announced.


As always, more below the fold.











SIAS Questions GL Limited's Offer: More Bark Than Bite

<p>Asia headquartered banks fared well despite the global tantrum without taper in the Treasury markets. Asia headquartered bond prices fell by less than their benchmark Treasury market notes, resulting in a bout of credit outperformance. Almost all bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Moderate duration, lower risk, bonds continued to outperform, although there were pockets of outperformance in China-headquartered Additional Tier 1 bonds.</p><p>Bonds in the belly of the curve, that is those maturing or callable in five-years, outperformed longer dated notes. Moderate duration bonds led as investors lost faith in an inflation free economic recovery which would cap market rate rises. This is the opposite of last weeks’ performance, wherein even longer-duration note outperformed. That seemed odd given policymakers repeated statements that they would let the US economy run hot at the risk of stoking inflation. The rapid sell-off in US Treasuries during the week is evidence of market jitters regarding eventual inflation expectations.</p><p>The pressure on U.S. Treasuries is largely in-line with what we have been cautioning on since the Senate run-off results in Georgia last month. Friday’s correction at the long end may be tested again.</p><p>Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.</p><p>Given the rate of change over the last two weeks, things are moving fast. We identify potential opportunities within. <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 (SBIN IN)</a> represents one credit curve where better opportunities exist in shorter duration bonds, however, <a href="https://www.smartkarma.com/entities/bank-mandiri-persero-tbk-pt" target="_blank" data-smartkarma-citation="entities:441:1" rel="noopener">Bank Mandiri (BMRI IJ)</a> may offer even better values, as we note within.</p><p><strong>Market Outlook</strong>: This week’s Treasury market tantrum was not induced by Fed tapering, but it is a reminder of what it may look like when the Fed does dial back its asset purchases. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve. Please see our recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" rel="noopener">Bank Macro Manifest</a> and <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" rel="noopener">Bank Credit Strategy</a> notes for more details.</p>

Asia headquartered banks fared well despite the global tantrum without taper in the Treasury markets. Asia headquartered bond prices fell by less than their benchmark Treasury market notes, resulting in a bout of credit outperformance. Almost all bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Moderate duration, lower risk, bonds continued to outperform, although there were pockets of outperformance in China-headquartered Additional Tier 1 bonds.Bonds in the belly of the curve, that is those maturing or callable in five-years, outperformed longer dated notes. Moderate duration bonds led as investors lost faith in an inflation free economic recovery which would cap market rate rises. This is the opposite of last weeks’ performance, wherein even longer-duration note outperformed. That seemed odd given policymakers repeated statements that they would let the US economy run hot at the risk of stoking inflation. The rapid sell-off in US Treasuries during the week is evidence of market jitters regarding eventual inflation expectations.The pressure on U.S. Treasuries is largely in-line with what we have been cautioning on since the Senate run-off results in Georgia last month. Friday’s correction at the long end may be tested again.Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.Given the rate of change over the last two weeks, things are moving fast. We identify potential opportunities within. State Bank of India (SBIN IN) represents one credit curve where better opportunities exist in shorter duration bonds, however, Bank Mandiri (BMRI IJ) may offer even better values, as we note within.Market Outlook: This week’s Treasury market tantrum was not induced by Fed tapering, but it is a reminder of what it may look like when the Fed does dial back its asset purchases. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve. Please see our recent Bank Macro Manifest and Bank Credit Strategy notes for more details.

Bank Credit Weekly: Asia Credit Outperforms Despite Treasury Tantrum

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

<p><strong><em>*Poor Set Of Results, Which Should Have Been Worse:</em></strong> Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and</p><p><strong><em>*Credit Challenges Are Top Of Mind As Well:</em></strong> STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.     </p>

*Poor Set Of Results, Which Should Have Been Worse: Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and*Credit Challenges Are Top Of Mind As Well: STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.     

<p><strong><em>*Poor Showing: </em></strong>Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and</p><p><strong><em>*Did HSBC Overstate Results?:</em></strong>While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.  </p>

*Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and*Did HSBC Overstate Results?:While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.  

Hang Seng Bank – HSBC Fingerprints All Over This Print

Hong Kong

The Bank of East Asia, Limited and its subsidiaries provide general banking, related financial, business corporate, and investor services.

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Bank of East Asia (23 HK)

Bank Credit Weekly: One Size Does Not Fit All

Performance attributes varied amongst bank credit classes. Short duration in IG financials combined with high credit spreads in HY and more...

Hank Calenti, CFA

SIAS Questions GL Limited's Offer: More Bark Than Bite

The SIAS raises many valid points. GLL looks cheap and why it trades through terms. I like Guoco here, as it trades around a one-year discount to...

David Blennerhassett

Bank Credit Weekly: Asia Credit Outperforms Despite Treasury Tantrum

Global bank bond prices fell by less than their benchmark notes, resulting in a bout of credit outperformance. Given the rate of change, there are...

Hank Calenti, CFA

Standard Chartered - What A Mess

STANDARD CHARTERED: STAN reported 2H20 losses of USD 315 mn, declining 122.5% HOH as it struggled across the board. Negative operating jaws for...

Thomas J. Monaco

Hang Seng Bank – HSBC Fingerprints All Over This Print

HANG SENG BANK: Hang Seng reported both a weak and low quality 2H20 result - declining 17.5% HOH due loan contraction and NIM compression. The...

Thomas J. Monaco

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