Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

While <a href="https://www.smartkarma.com/entities/bank-of-hangzhou-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:27215:1">Bank of Hangzhou Co Ltd (600926 CH)</a> may tick the boxes for fundamental progression and valuation, we remain on the sidelines.The bank does not look expensive. Shares trade at a Franchise Valuation of 7%, a P/Book of 0.87x, a Total Return Ratio of 1.85x, and an Earnings Yield of 12%. Our value-quality gauge, the PH Score™, is a highly respectable 8.5, revealing generally benign trends.However, risks may outweigh opportunity. Concerns and caveats are a high Debt/Equity ratio, rapidly rising "Loss Loans", softening Liquidity, and Capital Adequacy slippage (below 8.5% CET1 threshold prior to recent issuance). The lender shares with other banks in China a strategy to expand credit growth aggressively in a cooling economy which flatters the low problem loan ratio. Unlike other lenders in China, one might see less asset quality perturbation given that "Substandard" and "Doubtful" loan buckets seem to be more under control than elsewhere, SMLs are decreasing fast, and impaired loans net of reserves declined by 35% YoY, in US$. However, the price for this is a sharp increase in "Loss" loans (stage 2 migration into stage 3) and consequently higher credit costs and provisioning requirements.What puzzles us though is the paltry low single-digit YoY increase in Interest Income given the forceful double-digit expansion of pass credit. That's about US$100mm approximately of Interest Income gained over 12 months on US$8bn of additional credit.For investors looking for Chinese bank exposure, recent results underline the solid progression underway at the SOEs - Bank of China to a lesser extent, though it still remains lowly rated. Given the adverse news surrounding Baosheng Bank and lately <a href="https://www.smartkarma.com/entities/bank-of-jinzhou-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:21014:1">Bank Of Jinzhou (416 HK)</a>, it of course makes sense to be cautious though potential opportunities can be missed. We have pinpointed recently our issues with <a href="https://www.smartkarma.com/entities/bank-of-tianjin-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:22648:1">Bank Of Tianjin (1578 HK)</a> and <a href="https://www.smartkarma.com/entities/bank-of-jiujiang-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:23745:1">Bank Of Jiujiang (6190 HK)</a> though <a href="https://www.smartkarma.com/entities/jiangsu-jiangyin-rural-com-a" target="_blank" rel="noopener" data-smartkarma-citation="entities:27217:1">Jiangsu Jiangyin Rural Com-A (002807 CH)</a> strikes us as interesting.<a href="https://www.smartkarma.com/entities/commonwealth-bank-of-australia" target="_blank" rel="noopener" data-smartkarma-citation="entities:14:1">Commonwealth Bank Of Australia (CBA AU)</a> is the main shareholder of Bank of Hangzhou. Other supportive investors include Invesco and Blackrock. A private placement of around US$1bn in July raised Hongshi Holdings equity stake to 12%. This came fast on the back of a &gt;US$1bn bond issue. The dividend was cut last year- no doubt due to capital constraints. Management is clearly addressing a capital shortfall that marks other lenders such as <a href="https://www.smartkarma.com/entities/huaxia-bank-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9142:1">Huaxia Bank Co Ltd A (600015 CH)</a>, <a href="https://www.smartkarma.com/entities/bank-of-nanjing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:683:1">Bank Of Nanjing Co Ltd A (601009 CH), </a><a href="https://www.smartkarma.com/entities/huishang-bank-corp-ltd-h" target="_blank" rel="noopener" data-smartkarma-citation="entities:652:1">Huishang Bank Corp Ltd H (3698 HK)</a> and <a href="https://www.smartkarma.com/entities/bank-of-jiangsu-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:27216:1">Bank of Jiangsu Co Ltd (600919 CH)</a> for example. This may well be a structural problem.

While Bank of Hangzhou Co Ltd (600926 CH) may tick the boxes for fundamental progression and valuation, we remain on the sidelines.The bank does not look expensive. Shares trade at a Franchise Valuation of 7%, a P/Book of 0.87x, a Total Return Ratio of 1.85x, and an Earnings Yield of 12%. Our value-quality gauge, the PH Score™, is a highly respectable 8.5, revealing generally benign trends.However, risks may outweigh opportunity. Concerns and caveats are a high Debt/Equity ratio, rapidly rising "Loss Loans", softening Liquidity, and Capital Adequacy slippage (below 8.5% CET1 threshold prior to recent issuance). The lender shares with other banks in China a strategy to expand credit growth aggressively in a cooling economy which flatters the low problem loan ratio. Unlike other lenders in China, one might see less asset quality perturbation given that "Substandard" and "Doubtful" loan buckets seem to be more under control than elsewhere, SMLs are decreasing fast, and impaired loans net of reserves declined by 35% YoY, in US$. However, the price for this is a sharp increase in "Loss" loans (stage 2 migration into stage 3) and consequently higher credit costs and provisioning requirements.What puzzles us though is the paltry low single-digit YoY increase in Interest Income given the forceful double-digit expansion of pass credit. That's about US$100mm approximately of Interest Income gained over 12 months on US$8bn of additional credit.For investors looking for Chinese bank exposure, recent results underline the solid progression underway at the SOEs - Bank of China to a lesser extent, though it still remains lowly rated. Given the adverse news surrounding Baosheng Bank and lately Bank Of Jinzhou (416 HK), it of course makes sense to be cautious though potential opportunities can be missed. We have pinpointed recently our issues with Bank Of Tianjin (1578 HK) and Bank Of Jiujiang (6190 HK) though Jiangsu Jiangyin Rural Com-A (002807 CH) strikes us as interesting.Commonwealth Bank Of Australia (CBA AU) is the main shareholder of Bank of Hangzhou. Other supportive investors include Invesco and Blackrock. A private placement of around US$1bn in July raised Hongshi Holdings equity stake to 12%. This came fast on the back of a &gt;US$1bn bond issue. The dividend was cut last year- no doubt due to capital constraints. Management is clearly addressing a capital shortfall that marks other lenders such as Huaxia Bank Co Ltd A (600015 CH), Bank Of Nanjing Co Ltd A (601009 CH), Huishang Bank Corp Ltd H (3698 HK) and Bank of Jiangsu Co Ltd (600919 CH) for example. This may well be a structural problem.

Bank of Hangzhou: The Tide Must Reach Its Lowest Before It Turns

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Our outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In additional to highlighting important technical levels across major markets, we reiterate our recommendation to add exposure to global financials, and highlight a number of attractive Financial stocks, with an emphasis on UK and European names.

Our outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In additional to highlighting important technical levels across major markets, we reiterate our recommendation to add exposure to global financials, and highlight a number of attractive Financial stocks, with an emphasis on UK and European names. 

Global Equity Strategy: EU and UK Financial Stocks Are Attractive

China

Bank of Nanjing Co., Ltd. operates commercial banking businesses. The Company offers deposits, loans, settlement, discounting, financial bond issuance, government bond underwriting, bank guarantee, and other related financial services. Bank of Nanjing provides services for enterprises and individuals.

Bank of Beijing Company Ltd. attracts deposits and offers commercial banking services.  The Bank offers short-, medium- and long-term loans, insurance, foreign exchange, international settlement, government bonds, and other products and services.

China Everbright Bank Company Limited provides banking services. The Company offers deposits, loans, domestic settlement, currency trading, and other services. China Everbright Bank provides its services to individuals, enterprises, and other clients.

Bank of Ningbo Company Ltd is a full service commercial bank. The Bank provides personal and small business loans, trade financing, and retail banking services as well as personal savings and checking accounts. Bank of Ningbo is located in China.

China Minsheng Banking Corp., Ltd. operates in commercial banking businesses. The Bank provides deposit, loan, settlement, discount, financial bond issuance, government bond underwriting and trading, letter of credit, bank guarantee, and other related financial services.

Huaxia Bank Co. Ltd. operates banking businesses. The Company offers deposits, loans, settlement, bill discounting, currency trading, bank guarantee, wealth management, and other banking services. Huaxia Bank provides services for enterprises and individuals.

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

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.

Bank of Hangzhou Co.,Ltd offers banking services. The Company offers deposits, loans, settlement, currency trading, credit cards issuing, wealth management, and other banking services. Bank of Hangzhou also operates online banking businesses.

China CITIC Bank Corporation Limited provides banking services. The Company offers deposits, loans, domestic settlement,  currency trading, bank guarantee, and other services. China CITIC Bank provides its services to individuals, enterprises, and other clients.

Hang Seng Bank Limited and its subsidiaries provide banking and related financial services.

CIMB Group Holdings Berhad provides commercial banking and related financial services. The Company and its subsidiaries, operate as a regional universal bank offering a full range of financial products and services, covering corporate and investment banking, consumer banking, treasury, insurance and asset management.

Standard Chartered PLC is an international banking group operating principally in Asia, Africa, and the Middle East. The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

CTBC Financial Holding Company Ltd. is a holding company.  Through its subsidiaries, the Company provides a variety of banking and financial services, including deposit, loan, guarantee, international banking, trust banking, credit card, investment banking, safety deposit box, and Internet banking services.

Punjab National Bank provides financial services such as corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. The Company provides services to domestic conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies.

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.

Public Bank Berhad provides a range of banking and financial services which include leasing and factoring, stock and futures broking, financing for the purchase of licensed public vehicles, and other financial services. The Group's overseas operations include branches in Hong Kong, Sri Lanka, Laos, Cambodia, and Vietnam.

KB Financial Group Inc. (the "Company"), in accordance with Financial Holding Companies Act, was established on September 29, 2008, through stock transfer with the former shareholders of its subsidiaries including Kookmin Bank in order to provide management services and financing to associated companies. The headquarters are located at Seoul, Korea

E.Sun Financial Holding Company Ltd. is a holding company.  Through its subsidiaries, the Company provides banking, brokerage and dealer services.

Mega Financial Holding Co., Ltd. is a holding company.  Through its subsidiaries, the Company accepts deposits, issues financial debentures, provides medium and long term loans to enterprises, as well as provides brokerage, dealer and insurance services.

Mega Financial Holding Co., Ltd (2886 TT)

Bank of Jiangsu Co., Ltd. operates as a commercial bank. The Company offers deposits, loans, gross settlement, investment, wealth management, bill discounting, online banking, and other banking services. Bank of Jiangsu also conducts internet finance businesses.

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Bank of Jiangsu (600919 CH)

Bank of Hangzhou: The Tide Must Reach Its Lowest Before It Turns

While Bank of Hangzhou Co Ltd (600926 CH) may tick the boxes for fundamental progression and valuation, we remain on the sidelines.The bank does...

Paul Hollingworth

Global Equity Strategy: EU and UK Financial Stocks Are Attractive

Our outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward. ...

Vermilion Research

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