Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Additional Tier 1 (AT1) bonds simultaneously issued by <a href="https://www.smartkarma.com/entities/commercial-bank-of-dubai" target="_blank" data-smartkarma-citation="entities:29706:1" rel="noopener">Commercial Bank of Dubai (CBD)</a> and the <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> present a unique opportunity to trade on the macro and micro-economic impacts of the COVID-19 economic environment in the United Arab Emirates and Hong Kong SAR, respectively.  Issued on Monday, 12 October, CBD achieved a 6% coupon while BNKEA managed 5.825%. Both banks are tier 2 entities in their home markets. From our perspective, one, if not both, of these bonds was mispriced in the primary market.Having examined Bank of East Asia’s financial fundamentals in <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Strategic Review to Set AT1 Value</a>, we contrast what we like and dislike regarding CBD with BNKEA. As BNKEA’s AT1 is now trading around the fair value which we projected in <a href="https://www.smartkarma.com/insights/bank-of-east-asia-s-new-at1-likely-coupon-and-curve-impact" target="_blank" data-smartkarma-citation="insights:44112" rel="noopener">Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact</a>, we conclude with suggestions on how to trade this pair as a possible proxy on Dubai versus Hong Kong as well as how to trade CBD relative to other banks headquartered in the United Arab Emirates.Commercial Bank of Dubai – what we dislike:<ul>
<li>Commercial real estate exposure is high.</li>
<li>Legacy asset quality issues still haunt.</li>
</ul><ul><li>Capital buffer is adequate, but inflated by forbearance.</li></ul>Commercial Bank of Dubai – what we like:<ul>
<li>Distributable reserves should enable AT1 payments if capital buffers are depleted.</li>
<li>Ownership and connections suggest strong support.</li>
</ul>

Additional Tier 1 (AT1) bonds simultaneously issued by Commercial Bank of Dubai (CBD) and the Bank of East Asia (BNKEA) present a unique opportunity to trade on the macro and micro-economic impacts of the COVID-19 economic environment in the United Arab Emirates and Hong Kong SAR, respectively.  Issued on Monday, 12 October, CBD achieved a 6% coupon while BNKEA managed 5.825%. Both banks are tier 2 entities in their home markets. From our perspective, one, if not both, of these bonds was mispriced in the primary market.Having examined Bank of East Asia’s financial fundamentals in Strategic Review to Set AT1 Value, we contrast what we like and dislike regarding CBD with BNKEA. As BNKEA’s AT1 is now trading around the fair value which we projected in Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact, we conclude with suggestions on how to trade this pair as a possible proxy on Dubai versus Hong Kong as well as how to trade CBD relative to other banks headquartered in the United Arab Emirates.Commercial Bank of Dubai – what we dislike:
Commercial real estate exposure is high.
Legacy asset quality issues still haunt.
Capital buffer is adequate, but inflated by forbearance.Commercial Bank of Dubai – what we like:
Distributable reserves should enable AT1 payments if capital buffers are depleted.
Ownership and connections suggest strong support.


Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty

Asia’s Additional Tier 1 bonds underperformed as investors shifted into High Yield and X-over rated Senior Unsecured notes. <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group's (3333 HK)</a> attempts to restore investor confidence disappointed and negatively impacted risk sentiment. China’s US$6 billion in issuance also likely absorbed excess US$ liquidity, despite the low yields on offer.   US high yield markets continued to outperform Asia’s, and the relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. Asia’s recent index widening appears to be Evergrande driven and a reduction in this company’s financial distress could have a materially positive impact on Asia’s HY index.In rate markets, US Treasury curve steepening paused as investors digested negative stimulus, vaccine, and Covid-19 news in Europe. US Treasury Secretary Mnuchin affirmed market sentiment that a stimulus package was unlikely to be agreed before the November 3 election. The reaction was limited by expectations that a stimulus agreement will be agreed at some point before the end of the winter. Nonetheless, short-term interest rate futures fell slightly as expectations of increased near-term monetary accommodation combined with limited near-term stimulus growth to lower rising rate expectations.In US equity markets, November futures on the Chicago Board of Options Exchange Volatility Index (VIX) were unchanged week-on-week as election result outcomes continued to point to a less contentious result than anticipated a few weeks ago. Meanwhile the spot VIX Index rose 2 index points on slightly higher perceived downside risks from rising Coronavirus cases in Europe as well as setbacks in stimulus and vaccine developments.Emerging market capital inflows were essentially unchanged during the week as US dollar safe-haven strength returned to the market on weaker economic expectations in Europe and as Brexit negotiations continued to disappoint. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits. More immediately, the Evergrande situation, Brexit negotiation uncertainty and Coronavirus resurgence may offset dollar weakness in safe-haven dollar flight. This may limit EM inflows.Financial institutions issued over US$16 billion in USD and Euros. Amongst Asia-headquartered banks, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> issued an Additional Tier 1 bond while the <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>, <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>, <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Bank (1988 HK)</a>, and <a href="https://www.smartkarma.com/entities/unionbank-of-the-philippines" target="_blank" data-smartkarma-citation="entities:23192:1" rel="noopener">UnionBank of the Philippines (UBP PM)</a> brought Senior Unsecured bonds of various maturities. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-s-new-at1-likely-coupon-and-curve-impact" target="_blank" data-smartkarma-citation="insights:44112" rel="noopener">Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact</a> for our pre-issuance valuation thoughts on BNKEA's new AT1 bond.  Concurrently, China saw interest of over US$27 billion for its bonds. <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> was left off the list of banks arranging China’s sovereign dollar debt sale for the first time since the nation returned with big annual deals in 2017, according to Bloomberg.Market Outlook Time to separate the signals from the noise for bank investors. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Asia’s Additional Tier 1 bonds underperformed as investors shifted into High Yield and X-over rated Senior Unsecured notes. China Evergrande Group's (3333 HK) attempts to restore investor confidence disappointed and negatively impacted risk sentiment. China’s US$6 billion in issuance also likely absorbed excess US$ liquidity, despite the low yields on offer.   US high yield markets continued to outperform Asia’s, and the relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. Asia’s recent index widening appears to be Evergrande driven and a reduction in this company’s financial distress could have a materially positive impact on Asia’s HY index.In rate markets, US Treasury curve steepening paused as investors digested negative stimulus, vaccine, and Covid-19 news in Europe. US Treasury Secretary Mnuchin affirmed market sentiment that a stimulus package was unlikely to be agreed before the November 3 election. The reaction was limited by expectations that a stimulus agreement will be agreed at some point before the end of the winter. Nonetheless, short-term interest rate futures fell slightly as expectations of increased near-term monetary accommodation combined with limited near-term stimulus growth to lower rising rate expectations.In US equity markets, November futures on the Chicago Board of Options Exchange Volatility Index (VIX) were unchanged week-on-week as election result outcomes continued to point to a less contentious result than anticipated a few weeks ago. Meanwhile the spot VIX Index rose 2 index points on slightly higher perceived downside risks from rising Coronavirus cases in Europe as well as setbacks in stimulus and vaccine developments.Emerging market capital inflows were essentially unchanged during the week as US dollar safe-haven strength returned to the market on weaker economic expectations in Europe and as Brexit negotiations continued to disappoint. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits. More immediately, the Evergrande situation, Brexit negotiation uncertainty and Coronavirus resurgence may offset dollar weakness in safe-haven dollar flight. This may limit EM inflows.Financial institutions issued over US$16 billion in USD and Euros. Amongst Asia-headquartered banks, Bank of East Asia (BNKEA) issued an Additional Tier 1 bond while the Agricultural Bank of China (1288 HK), Bank of China Ltd (H) (3988 HK), China Minsheng Bank (1988 HK), and UnionBank of the Philippines (UBP PM) brought Senior Unsecured bonds of various maturities. Please see Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact for our pre-issuance valuation thoughts on BNKEA's new AT1 bond.  Concurrently, China saw interest of over US$27 billion for its bonds. HSBC Holdings (HSBA LN) was left off the list of banks arranging China’s sovereign dollar debt sale for the first time since the nation returned with big annual deals in 2017, according to Bloomberg.Market Outlook Time to separate the signals from the noise for bank investors. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Bank Credit Weekly: Risk Pause as China Evergrande Impacts Asia Sentiment

Debt Capital Markets

We see fair value in a new five-year Additional Tier 1 (AT1) bond from <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> as fully priced with a 5.5% coupon. Pricing at this level could impact BNKEA’s currently outstanding 2024 and 2022 callable AT1 securities.  We re-iterate our recommendation that investors Buy BNKEA’s inefficient capital bonds, including the 2022 callable AT1 note.BNKEA mandated 15 financial institutions to arrange a series of fixed income investor calls commencing on Monday, 12 October. A Reg S offering of a US$D-denominated Basel III-compliant AT1 security may follow. The issue is expected to be rated at Ba2/ BB by Moody’s and S&amp;P, respectively, which is the same level as its currently outstanding AT1 bonds.We believe a five-year note is the most likely outcome following BNKEA’s fixed income roadshow; however, should BNKEA see demand for a longer duration to first call date, we see around an additional 55 basis points in coupon price per additional year to call as needed to capture credit and interest rate levels. For additional background on BNKEA, which forms an integral component of our assessment and recommendation, please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Bank of East Asia: Strategic Review to Set AT1 Value</a>. In this insight we concentrate on deriving the fair value of a new AT1 bond from BNKEA.

We see fair value in a new five-year Additional Tier 1 (AT1) bond from Bank of East Asia (BNKEA) as fully priced with a 5.5% coupon. Pricing at this level could impact BNKEA’s currently outstanding 2024 and 2022 callable AT1 securities.  We re-iterate our recommendation that investors Buy BNKEA’s inefficient capital bonds, including the 2022 callable AT1 note.BNKEA mandated 15 financial institutions to arrange a series of fixed income investor calls commencing on Monday, 12 October. A Reg S offering of a US$D-denominated Basel III-compliant AT1 security may follow. The issue is expected to be rated at Ba2/ BB by Moody’s and S&amp;P, respectively, which is the same level as its currently outstanding AT1 bonds.We believe a five-year note is the most likely outcome following BNKEA’s fixed income roadshow; however, should BNKEA see demand for a longer duration to first call date, we see around an additional 55 basis points in coupon price per additional year to call as needed to capture credit and interest rate levels. For additional background on BNKEA, which forms an integral component of our assessment and recommendation, please see Bank of East Asia: Strategic Review to Set AT1 Value. In this insight we concentrate on deriving the fair value of a new AT1 bond from BNKEA.

Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Last Week in Event SPACE: Vedanta, Evergrande Auto, Cocokara, Leyou, Mitsu Lease/Hitachi Cap

Equity Bottom-Up

Back on the 4 March, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (23 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0304/2020030400035.pdf" target="_blank" rel="noopener">announced</a> a strategic review of its portfolio. The review was supported by Elliott Management, and was viewed as a tentative truce between the two ahead of an expected court date to arbitrate BEA's alleged relationship with two of its key shareholders, Japan’s <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial (8316 JP)</a> and Spain’s <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a>. I discussed this development in <a href="https://skr.ma/f3hfy" target="_blank" rel="noopener">Elliott &amp; BEA: "Fiefdom" On Pause</a>.
Fast forward six and half months and BEA has <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0923/2020092300183.pdf" target="_blank" rel="noopener">decided</a> to initiate a "sale process for BEA Life Limited (“BEA Life”) in order to enhance the value of the Bank’s business, improve its financial position and enable its management team to focus on its core banking operations in Hong Kong and Mainland China".  The announcement was supported by Elliott.
BEA added that it would seek to enter into a "long-term exclusive distribution agreement that will provide an ongoing source of revenue for BEA as a distributor of insurance products through its banking platform."
Reportedly BEA could raise US$500mn-US$600mn from the sale, which is roughly in line with the gross written premiums of HK$4.8bn in 2019; and ~5.5x the net insurance premium of HK$826mn in FY19. 
BEA said it would further identify opportunities to grow its core businesses   - presumably this already formed part of its forward roadmap. 
But does the sale and formation of a so-called bancassurance partnership, make BEA a more attractive company (as a standalone or takeover target); or a less attractive bank as it focuses on is pedestrian traditional banking ops? Or is this simply, just the opening salvo from its ongoing strategy?
As always, more below the fold.

Back on the 4 March, Bank of East Asia (23 HK) announced a strategic review of its portfolio. The review was supported by Elliott Management, and was viewed as a tentative truce between the two ahead of an expected court date to arbitrate BEA's alleged relationship with two of its key shareholders, Japan’s Sumitomo Mitsui Financial (8316 JP) and Spain’s CaixaBank SA (CABK SM). I discussed this development in Elliott &amp; BEA: "Fiefdom" On Pause.
Fast forward six and half months and BEA has decided to initiate a "sale process for BEA Life Limited (“BEA Life”) in order to enhance the value of the Bank’s business, improve its financial position and enable its management team to focus on its core banking operations in Hong Kong and Mainland China".  The announcement was supported by Elliott.
BEA added that it would seek to enter into a "long-term exclusive distribution agreement that will provide an ongoing source of revenue for BEA as a distributor of insurance products through its banking platform."
Reportedly BEA could raise US$500mn-US$600mn from the sale, which is roughly in line with the gross written premiums of HK$4.8bn in 2019; and ~5.5x the net insurance premium of HK$826mn in FY19. 
BEA said it would further identify opportunities to grow its core businesses   - presumably this already formed part of its forward roadmap. 
But does the sale and formation of a so-called bancassurance partnership, make BEA a more attractive company (as a standalone or takeover target); or a less attractive bank as it focuses on is pedestrian traditional banking ops? Or is this simply, just the opening salvo from its ongoing strategy?
As always, more below the fold.

BEA (23 HK): Big Banc Theory And Elliott's Hard Slog

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)

Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty

AT1 bonds simultaneously issued by Commercial Bank of Dubai and the Bank of East Asia present an opportunity to trade the COVID-19 economic impacts...

Hank Calenti, CFA

Bank Credit Weekly: Risk Pause as China Evergrande Impacts Asia Sentiment

A must-read on US$-risk sentiment derived from high yield and equity markets, interest rates, dollar levels, capital flows and issuance to frame...

Hank Calenti, CFA

Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact

Fair value on a new 5-year AT1 bond from Bank of East Asia could be fully priced with a 5.5% coupon. At this level, BNKEA’s currently outstanding...

Hank Calenti, CFA

Last Week in Event SPACE: Vedanta, Evergrande Auto, Cocokara, Leyou, Mitsu Lease/Hitachi Cap

Last Week in Event SPACE ... Plus, other events, CCASS movements and Mood Spins. (This insight covers specific insights & comments...

David Blennerhassett

BEA (23 HK): Big Banc Theory And Elliott's Hard Slog

Just two months before Elliott Management and Bank Of East Asia (23 HK) head back to court to arbitrate on BEA's purported overarching relationship...

David Blennerhassett

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