Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. <a href="https://www.smartkarma.com/entities/vietnam-prosperity-jsc-bank" target="_blank" data-smartkarma-citation="entities:26914:1" rel="noopener">Vietnam Prosperity Bank (VPB VN)</a> and <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance (IIFL IN)</a>, a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, 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> complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-move-to-overweight-the-capital-inefficient-securities-from-buy" target="_blank" data-smartkarma-citation="insights:45652" rel="noopener">Move to Overweight the Capital Inefficient Securities, from Buy</a> for more details. In addition, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank Public (BBL TB)</a> continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank (TMB TB)</a> widened 2bps. Please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> for our views. Finally, amongst Asia-centric banks, certain <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. 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.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. Vietnam Prosperity Bank (VPB VN) and IIFL Finance (IIFL IN), a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the Bank of East Asia (BNKEA) complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see Move to Overweight the Capital Inefficient Securities, from Buy for more details. In addition, Bangkok Bank Public (BBL TB) continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while TMB Bank (TMB TB) widened 2bps. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views. Finally, amongst Asia-centric banks, certain Standard Chartered (STAN LN) bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

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

Thematic (Sector/Industry)

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme. 

Reserve Bank of India – The Fun Never Stops

In this, the third of several short insights in our Yes Bank Deposit Run Anniversary Series, we incorporate deposits that are not captured in Liquidity Coverage Ratio (LCR) reports to clear the miasma of really occurred at <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a>.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank. One major assumption is that only deposits which may be withdrawn on demand, or within the next 30 days are at risk of deposit flight. Only these deposits are captured in the LCR report. As such, we incorporate deposits that are not captured in LCR reports and compare these missing deposits to deposit costs. We then assess the “Missing Deposit” adjusted LCR ratio at each US$-issuing bank to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a> for more details.In our second insight on this matter, we adjusted LCR assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank to derive “Yes-stressed” resultant LCRs for each institution. We then assessed this Yes-Stressed LCR relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-yes-stressed-deposit-flight-simulation" target="_blank" data-smartkarma-citation="insights:44213" rel="noopener">Yes-Stressed Deposit Flight Simulation</a> for more details. In follow-up insights we further stress the reported LCRs for possible Covid-19 related payment delinquencies and then combined these elements for apocalypse scenario analysis.

In this, the third of several short insights in our Yes Bank Deposit Run Anniversary Series, we incorporate deposits that are not captured in Liquidity Coverage Ratio (LCR) reports to clear the miasma of really occurred at Yes Bank (YES IN).LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank. One major assumption is that only deposits which may be withdrawn on demand, or within the next 30 days are at risk of deposit flight. Only these deposits are captured in the LCR report. As such, we incorporate deposits that are not captured in LCR reports and compare these missing deposits to deposit costs. We then assess the “Missing Deposit” adjusted LCR ratio at each US$-issuing bank to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see Stable Deposits and Costs 1-Year After the Yes Bank Silent Run for more details.In our second insight on this matter, we adjusted LCR assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank to derive “Yes-stressed” resultant LCRs for each institution. We then assessed this Yes-Stressed LCR relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see Yes-Stressed Deposit Flight Simulation for more details. In follow-up insights we further stress the reported LCRs for possible Covid-19 related payment delinquencies and then combined these elements for apocalypse scenario analysis.

India-Headquartered Banks: Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run

Equity Bottom-Up

Indiabulls Housing Finance / Equity Bottom-Up

*Solid Quarter: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 2Q21 results of INR 7.1 bn, increasing INR 4.4 bn (160.0%) linked quarter. Much of the linked quarter improvement can be attributed to net interest income growth of INR 4.7 bn (64.8%) resultant of INR 135.0 bn (14.5%) loan growth, NIM improvement of 137 bp (by our calculation) of 137 bp to 4.49%, and a buyback of bonds reducing debt by 9%; and*Credit Improving:During FY 2Q21, stated Stage 3 NPLs improved INR 4.3 bn (21.1%), declining 68 bp over the period to 1.52%.  Reinforcing this improvement, we find that net new NPLs were negative by a whopping INR 13.0 bn or over 100% on an annualized basis.

*Solid Quarter: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 2Q21 results of INR 7.1 bn, increasing INR 4.4 bn (160.0%) linked quarter. Much of the linked quarter improvement can be attributed to net interest income growth of INR 4.7 bn (64.8%) resultant of INR 135.0 bn (14.5%) loan growth, NIM improvement of 137 bp (by our calculation) of 137 bp to 4.49%, and a buyback of bonds reducing debt by 9%; and*Credit Improving:During FY 2Q21, stated Stage 3 NPLs improved INR 4.3 bn (21.1%), declining 68 bp over the period to 1.52%.  Reinforcing this improvement, we find that net new NPLs were negative by a whopping INR 13.0 bn or over 100% on an annualized basis. 

IndiaBulls Housing Finance – Rocking and Rolling

*Results Down, Credibility Up: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q21 bottom-line of INR 7.9 bn, declining INR 266 mn (3.3%) on a linked period basis. LIC’s conservatism with respect to provisioning – especially relative to the rest of the Indian financial sector – is quite admirable;*Credit On The Mend: During the period, we note that Stage 3 NPLs declined INR 625 mn (1.1%) to INR 58.8 bn and represent 2.79% of total loans – down 4 bp linked quarter. In addition, we note that net new NPLs at LIC were negative as well – declining INR 586 mn for an annualized rate of NPL decline of 4.0%. Coupled with NCOs of just INR 39 mn  - which amount to just 1 bp of total loans on an annualized basis, we find that reserves improved INR 1.0 bn or 4.0% linked quarter. While we admire LIC’s conservatism relative to peer, we would still be comfortable with reserves being INR 3.3 bn (11.8%) higher. That said, at this pace, LIC should get there within three quarters; and        *Competition Intensifying: Increasing competition could impact profitability, however, with both housing lenders and private banks significantly cutting interest rates.

*Results Down, Credibility Up: LIC Housing Finance (LICHF.IN) [LIC] reported FY 2Q21 bottom-line of INR 7.9 bn, declining INR 266 mn (3.3%) on a linked period basis. LIC’s conservatism with respect to provisioning – especially relative to the rest of the Indian financial sector – is quite admirable;*Credit On The Mend: During the period, we note that Stage 3 NPLs declined INR 625 mn (1.1%) to INR 58.8 bn and represent 2.79% of total loans – down 4 bp linked quarter. In addition, we note that net new NPLs at LIC were negative as well – declining INR 586 mn for an annualized rate of NPL decline of 4.0%. Coupled with NCOs of just INR 39 mn  - which amount to just 1 bp of total loans on an annualized basis, we find that reserves improved INR 1.0 bn or 4.0% linked quarter. While we admire LIC’s conservatism relative to peer, we would still be comfortable with reserves being INR 3.3 bn (11.8%) higher. That said, at this pace, LIC should get there within three quarters; and        *Competition Intensifying: Increasing competition could impact profitability, however, with both housing lenders and private banks significantly cutting interest rates.

LIC Housing Finance – Doing The Right Thing

India

Union Bank of India Limited provides a full range of banking services throughout India. The Company's activities include retail banking, commercial and personal banking, investment management, treasury and NRI services, cash management and assorted ATM facilities. Union Bank has an online tele-banking facility for all its core banking customers.

YES BANK Limited provides banking services. The Bank offers deposits, personal loans, e-banking, trade finance, corporate, and business banking services. YES BANK serves the food and agribusiness, life sciences, healthcare, biotechnology, telecommunications, media, information technology, and infrastructure development industries in India.

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

IDBI Bank Limited provides a range of banking and financial services. The Bank's services include fund-based operations, such as venture capital and fee-based activities, which include merchant banking and debenture trusteeship.

Indian Overseas Bank operates some 1,429 banking branches in India, as well as six branches in overseas locations.  The Group's banks provide loan and deposit schemes, Internet banking, and a full range of 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.

UCO Bank provides a full range of banking services throughout India. UCO Bank operates over 1,700 banking branches in India, as well as four branches in overseas locations.

Indian Bank is a full service bank owned by the Government of India. The Bank offers a wide range of services including a foreign currency banking unit at Colombo and specialized overseas branches at Chennai, Bangalore, and Mumbai exclusively for handling foreign exchange  transactions arising out of export, import, remittances and non resident Indian business.

Bank of India, through its subsidiaries, provides corporate, commercial, personal banking, retail, rural, and development banking.  The Group specializes its services towards corporate and medium businesses, in addition to upmarket retail customers.

Bank of the Philippine Islands, through its subsidiaries, provides commercial banking services. The Company's products includes ATM, debit card system, credit card, electronic cash card, internet platform and other services.

BDO Unibank Inc provides banking services. The Bank offers saving accounts, investment, loans, credit and debit cards, remittance, insurance, and trade financing services. BDO Unibank serves customers in Philippines.

Bank for Investment and Development of Vietnam provides commercial banking services. The Company offers deposits, personal loans, e-banking, guarantees, and trade finance for customers, corporate, and financial institutions. Bank for Investment also offers foreign exchange, money market, derivatives, and debt market services.

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.

First Financial Holding Co., Ltd. is a holding company.  Through its subsidiaries, the Company accepts deposits, provides loans and discount, letters of credit, and guarantee services, invests in marketable securities, provides securities brokerage and investment services, as well as provides insurance services.

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

Shinkin Central Bank is a central bank for shinkin banks nationwide, operating as a cooperative financial institution.  The Bank has developed businesses in a variety of fields that contribute the shinkin banking industry.  The Bank's services include enhancement of the credit standing, efficient use of shikin bank's surplus funds, and settlement of domestic exchange transaction.

Taiwan Cooperative Financial Holding, through subsidiaries, offers financial services.  The Company offers commercial banking, asset management, bills finance, and securities brokerage services.

Hua Nan Financial Holdings Co., Ltd. is a holding company. Through its subsidiaries, the Company conducts commercial banking, savings, trust, and international banking businesses. In addition, the Group also provides insurance services and acts as a dealer, broker, and underwriter for financial securities.

Hua Nan Financial Holdings Co Ltd. (2880 TT)

PT Bank Negara Indonesia (Persero) Tbk is a state-owned bank that conducts commercial and consumer banking services.

Canara Bank Ltd. provides a full range of banking services throughout India. The Group's activities include retail banking, commercial and personal banking, investment management, treasury & NRI services, cash management and assorted ATM facilities.

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Canara Bank (CBK IN)

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

The risk-wave caught a bid in Asia HY while positive momentum in US Caa-rated credits slowed. We are set-up for buy-the-rumor, sell-the-fact profit...

Hank Calenti, CFA

Reserve Bank of India – The Fun Never Stops

RESERVE BANK OF INDIA: Certain Borrowers Are Dis-Satisfied With "Interest On Interest Waiver" And Proposed Additional Modifications To RBI...

Thomas J. Monaco

India-Headquartered Banks: Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run

Deposits not captured in Liquidity Coverage Ratio reports broke Yes Bank. We stress India-headquartered banks for this miasma in the 3’rd insight...

Hank Calenti, CFA

IndiaBulls Housing Finance – Rocking and Rolling

INDIABULLS HOUSING FINANCE: IndiaBulls posted a solid set of results for FY 2Q21, as net interest income took off on the back of NIM improvement...

Thomas J. Monaco

LIC Housing Finance – Doing The Right Thing

LIC HOUSING FINANCE: Although Results Were Weaker Linked Quarter, They Were Driven By Higher Credit Costs. This Was Unnecessary Given Credit...

Thomas J. Monaco

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