Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<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> recently issued 4.6% coupon 2030 first call note is beginning to look overbought relative to other banks and relative to its own credit curve. At the same time, returns are likely to be negatively impacted by rising interest rates as the year progresses. As such, we screen for value in HSBC’s Additional Tier 1 (AT1) curve for alternate investment options to achieve greater total returns this year.This is the second insight in a series on HSBC. In the first note, we considered the bank's ability to withstand a material increase in its credit costs and identified potential Covid-19 asset quality sensitivity. Please see <a href="https://www.smartkarma.com/insights/hsbc-capital-forbearance-and-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:47598" rel="noopener">HSBC: Capital, Forbearance and Covid-19 Sensitivity</a> for more details.In this insight, we determine where the market may be mispricing the bank's credit risk and screen for potential extension risk while considering the liquidity of HSBC's AT1 instruments denominated in US$, Singapore-dollars and Euros.The longer the duration of the bond, the greater the price impact from a parallel shift in the yield curve. In theory, credit spreads should remain unchanged, to strengthen, as the economy recovers, and rates rise. In practice, this depends on the spread level per unit of duration along the credit curve. This accounts for the forward-looking nature of the market with respect to perceived credit risk. With an effective duration of 7.85 years and a relatively low credit risk premium, the 2030 callable AT1 note could suffer a lower total return than all other HSBC AT1s, as the yield curve steepens.Concurrently, given HSBC's Common Equity Tier 1 (CET1) capital buffer of approximately 370 basis points, the 10-year note trades tight relative to banks with higher CET1 buffers. In fact, <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS Group's (UBSG VX)</a> recently issued 4 3/8% coupon 2031 callable bond currently looks better value relative to each bank’s respective capital buffers.Taken together, we find better value elsewhere along HSBC’s AT1 curve.

HSBC Holdings' (HSBA LN) recently issued 4.6% coupon 2030 first call note is beginning to look overbought relative to other banks and relative to its own credit curve. At the same time, returns are likely to be negatively impacted by rising interest rates as the year progresses. As such, we screen for value in HSBC’s Additional Tier 1 (AT1) curve for alternate investment options to achieve greater total returns this year.This is the second insight in a series on HSBC. In the first note, we considered the bank's ability to withstand a material increase in its credit costs and identified potential Covid-19 asset quality sensitivity. Please see HSBC: Capital, Forbearance and Covid-19 Sensitivity for more details.In this insight, we determine where the market may be mispricing the bank's credit risk and screen for potential extension risk while considering the liquidity of HSBC's AT1 instruments denominated in US$, Singapore-dollars and Euros.The longer the duration of the bond, the greater the price impact from a parallel shift in the yield curve. In theory, credit spreads should remain unchanged, to strengthen, as the economy recovers, and rates rise. In practice, this depends on the spread level per unit of duration along the credit curve. This accounts for the forward-looking nature of the market with respect to perceived credit risk. With an effective duration of 7.85 years and a relatively low credit risk premium, the 2030 callable AT1 note could suffer a lower total return than all other HSBC AT1s, as the yield curve steepens.Concurrently, given HSBC's Common Equity Tier 1 (CET1) capital buffer of approximately 370 basis points, the 10-year note trades tight relative to banks with higher CET1 buffers. In fact, UBS Group's (UBSG VX) recently issued 4 3/8% coupon 2031 callable bond currently looks better value relative to each bank’s respective capital buffers.Taken together, we find better value elsewhere along HSBC’s AT1 curve.

HSBC: AT1 Positioning for Greater Total Returns

We screen for value in <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered' s  (StanLn)</a> Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit versus a Sovereign CDS Portfolio</a> as well as <a href="https://www.smartkarma.com/insights/standard-chartered-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:47266" rel="noopener">Capital, Forbearance and CDS</a> for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

We screen for value in Standard Chartered' s  (StanLn) Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: Standard Chartered Credit versus a Sovereign CDS Portfolio as well as Capital, Forbearance and CDS for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

Standard Chartered: Screening for AT1 Value, Post-Covid-19

We screen for value in <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> AT1 curve within a post-COVID-19 economic operating environment. This is the final installment of a series of linked insights on BNP. Please see: <a href="https://www.smartkarma.com/insights/bnp-paribas-personal-finance-and-global-markets-sensitivity" target="_blank" data-smartkarma-citation="insights:46672" rel="noopener">Personal Finance and Global Markets Sensitivity</a> and<a href="https://www.smartkarma.com/insights/bnp-paribas-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:46684" rel="noopener"> Capital, Forbearance and CDS</a> for background on BNP.First we assess whether BNP has the capacity to absorb losses from its COVID-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing BNP’s credit risk while considering the liquidity of these instruments.BNP’s AT1 curve is relatively steep and offers value for duration driven investors. However, the question is whether investors should be reaching for duration at this point in the Covid-19 economic cycle. Consistent with the current fad of rear-view mirror method of investing, BNP’s longer duration AT1 bonds appear overbought relative to their credit risk and alternative credit instruments. Medium duration AT1 bonds offer a bigger pick-up in credit spread terms, while providing better protection against an unexpected increase in inflation and interest rates, which would be negative for long duration assets. We think it best to pass on BNP’s Legacy Tier 1 bond.

We screen for value in BNP Paribas' (BNP FP) AT1 curve within a post-COVID-19 economic operating environment. This is the final installment of a series of linked insights on BNP. Please see: Personal Finance and Global Markets Sensitivity and Capital, Forbearance and CDS for background on BNP.First we assess whether BNP has the capacity to absorb losses from its COVID-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing BNP’s credit risk while considering the liquidity of these instruments.BNP’s AT1 curve is relatively steep and offers value for duration driven investors. However, the question is whether investors should be reaching for duration at this point in the Covid-19 economic cycle. Consistent with the current fad of rear-view mirror method of investing, BNP’s longer duration AT1 bonds appear overbought relative to their credit risk and alternative credit instruments. Medium duration AT1 bonds offer a bigger pick-up in credit spread terms, while providing better protection against an unexpected increase in inflation and interest rates, which would be negative for long duration assets. We think it best to pass on BNP’s Legacy Tier 1 bond.

BNP Paribas: Screening for AT1 Value, Post-Covid-19

<a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> credit costs were artificially engineered lower during 2020, like most banks globally, via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped BNP report positive results despite the ongoing health crisis. Lack of Covid-19 loan loss reserve coverage also inflated BNP’s capital ratios. This impact may unwind over time.While BNP’s Covid-19 restructured loan amounts were less significant than at other financial institutions, they were material relative to the loss absorption ability of the bank. As such, by applying loan loss reserve rates for Stage 2 and Stage 3 loans to unprovided Covid-19 relief amounts, we derive a potential range of BNP’s real economic Common Equity Tier 1 ratio without EBA asset quality forbearance. The impact is significant. Covid-19 relief provided was largest in lending to small and medium sized enterprises (SME), relative to the amount of loans outstanding. Over 25% of SME lending was subject to some form of Covid-19 relief assistance. SME lending is the area to keep an eye on for potential deterioration in BNP’s capital ratios.Against this artificially engineered credit cost background, BNP’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next three years. From a hedging perspective, since we anticipate a deterioration in the credit profiles of major financial institutions over the next year, buying CDS protection may be worthwhile. However, we would rather own <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> 1-year CDS protection as cheap insurance.

BNP Paribas' (BNP FP) credit costs were artificially engineered lower during 2020, like most banks globally, via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped BNP report positive results despite the ongoing health crisis. Lack of Covid-19 loan loss reserve coverage also inflated BNP’s capital ratios. This impact may unwind over time.While BNP’s Covid-19 restructured loan amounts were less significant than at other financial institutions, they were material relative to the loss absorption ability of the bank. As such, by applying loan loss reserve rates for Stage 2 and Stage 3 loans to unprovided Covid-19 relief amounts, we derive a potential range of BNP’s real economic Common Equity Tier 1 ratio without EBA asset quality forbearance. The impact is significant. Covid-19 relief provided was largest in lending to small and medium sized enterprises (SME), relative to the amount of loans outstanding. Over 25% of SME lending was subject to some form of Covid-19 relief assistance. SME lending is the area to keep an eye on for potential deterioration in BNP’s capital ratios.Against this artificially engineered credit cost background, BNP’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next three years. From a hedging perspective, since we anticipate a deterioration in the credit profiles of major financial institutions over the next year, buying CDS protection may be worthwhile. However, we would rather own HSBC Holdings' (HSBA LN) 1-year CDS protection as cheap insurance.

BNP Paribas: Capital, Forbearance and CDS

<a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas (BNP FP)</a> is frequently confused with simply being a French retail or commercial bank with an investment banking business. However, the institution’s non-bank financial services are significant. In fact, BNP’s non-banking Personal Finance division generated higher pre-provision profits and higher credit costs than the other operating divisions of the firm. High margins offer protection, however, in a prolonged or series of economic downturns, the Personal Finance operations could generate meaningful non-performing loans.Nonetheless, BNP’s revenues grew by 0.6% year-on-year in the first nine-months due, in part, to 32% growth in Global Markets, which incorporate the investment banking activities of the firm. Global Markets generated more revenues per unit of risk in 2020 than BNP’s French retail or Corporate Banking activities. It outperformed due to high client activity and fortuitous market volatility. Concurrently, legislated and bank provided Covid-19 relief, juxtaposed with regulatory forbearance, kept credit costs low. This helped BNP have a good health crisis.Despite the potential for outsized losses in the capital markets operations, we believe that the real risk to BNP’s revenues is that central banks are eventually successful at stamping out market volatility while economic activity remains subdued. This could lead to lower capital market, retail and non-bank financial service revenues while delayed credit costs are recognized. BNP would not be alone in suffering from such an outcome, but it may not achieve results like those seen so far in 2020. BNP’s future results are sensitive to Personal Finance and Global Market activities.  In this, the first of several linked insights on European banks that offer interesting credit investing opportunities across the credit continuum, we assess the main drivers of BNPs performance year-to-date. Regulatory forbearance has played a major role in keeping credit costs low. With a new strain of the virus impacting Europe and the original virus reasserting itself across jurisdictions were BNP operates, we anticipate an increase in the rate of delinquency amongst COVID-19 relief borrowers. We assess and identify investing opportunities within follow-up notes on BNP.

BNP Paribas (BNP FP) is frequently confused with simply being a French retail or commercial bank with an investment banking business. However, the institution’s non-bank financial services are significant. In fact, BNP’s non-banking Personal Finance division generated higher pre-provision profits and higher credit costs than the other operating divisions of the firm. High margins offer protection, however, in a prolonged or series of economic downturns, the Personal Finance operations could generate meaningful non-performing loans.Nonetheless, BNP’s revenues grew by 0.6% year-on-year in the first nine-months due, in part, to 32% growth in Global Markets, which incorporate the investment banking activities of the firm. Global Markets generated more revenues per unit of risk in 2020 than BNP’s French retail or Corporate Banking activities. It outperformed due to high client activity and fortuitous market volatility. Concurrently, legislated and bank provided Covid-19 relief, juxtaposed with regulatory forbearance, kept credit costs low. This helped BNP have a good health crisis.Despite the potential for outsized losses in the capital markets operations, we believe that the real risk to BNP’s revenues is that central banks are eventually successful at stamping out market volatility while economic activity remains subdued. This could lead to lower capital market, retail and non-bank financial service revenues while delayed credit costs are recognized. BNP would not be alone in suffering from such an outcome, but it may not achieve results like those seen so far in 2020. BNP’s future results are sensitive to Personal Finance and Global Market activities.  In this, the first of several linked insights on European banks that offer interesting credit investing opportunities across the credit continuum, we assess the main drivers of BNPs performance year-to-date. Regulatory forbearance has played a major role in keeping credit costs low. With a new strain of the virus impacting Europe and the original virus reasserting itself across jurisdictions were BNP operates, we anticipate an increase in the rate of delinquency amongst COVID-19 relief borrowers. We assess and identify investing opportunities within follow-up notes on BNP.

BNP Paribas: Personal Finance and Global Markets Sensitivity

France

BNP Paribas SA attracts deposits and offers commercial, retail, investment, and private and corporate banking services. The Bank also provides asset management and investment advisory services to institutions and individuals in Europe, the United States, Asia, and the emerging markets.

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BNP Paribas (BNPQY US)

HSBC: AT1 Positioning for Greater Total Returns

HSBC’s recently issued AT1 is beginning to look overbought. Returns may be negatively impacted by rising interest rates. We screen for better total...

Hank Calenti, CFA

Standard Chartered: Screening for AT1 Value, Post-Covid-19

We screen for value in StanLn’s AT1 curve, including the S$ bond, within a post-Covid-19 economic environment, and we determine StanLn’s capacity...

Hank Calenti, CFA

BNP Paribas: Screening for AT1 Value, Post-Covid-19

We screen for value in BNP’s AT1 curve, including A$ bonds, within a post-COVID-19 economic environment, and we assess whether BNP has the capacity...

Hank Calenti, CFA

BNP Paribas: Capital, Forbearance and CDS

BNPs real economic capital, sans forbearance, may be materially lower than reported. Credit costs were artificially engineered lower, like at most...

Hank Calenti, CFA

BNP Paribas: Personal Finance and Global Markets Sensitivity

BNP’s future results are sensitive to Personal Finance and Global Market activities. Regulatory forbearance played a major role in keeping credit...

Hank Calenti, CFA

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