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.. On October 5th, the Supreme Court required additional information on the case; and   *Further Clarification Expected October 13th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on October 13th – and are hopeful that this will be the final hearing.

* 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.. On October 5th, the Supreme Court required additional information on the case; and   *Further Clarification Expected October 13th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on October 13th – and are hopeful that this will be the final hearing.  

Reserve Bank of India - No Good Deed Goes Unpunished

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. <a href="https://www.smartkarma.com/entities/bank-of-china-ltd" target="_blank" data-smartkarma-citation="entities:24574:1" rel="noopener">Bank Of China (BCHINA)</a>AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC's (H) (1398 HK)</a> new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that <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> new issue bond will tighten by at least 10bps relatively quickly. 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 on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. Bank Of China (BCHINA)AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect ICBC's (H) (1398 HK) new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that HSBC Holdings' (HSBA LN) new issue bond will tighten by at least 10bps relatively quickly. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk Sentiment Returns as Markets Ignore FOMC Disappointment

India Financials

Saumya Agarwal

Capital is King, more so in times of crisis and uncertainty. With the pandemic showing no signs of abating, Banks have been conserving capital to withstand any potential adverse impact. Higher the ‘Excess capital’ (i.e. capital over and above the regulatory threshold), greater will be the capital cushion available to Banks to absorb any potential losses.Our analysis suggests Top Indian Banks hold more than Rs 8Trillion of “Excess capital”. However,  Banks will have to set aside around Rs 500 Billion for the last tranche of Capital Conservation Buffer (CCB), which kicks-in from September 30, 2020.

Capital is King, more so in times of crisis and uncertainty. With the pandemic showing no signs of abating, Banks have been conserving capital to withstand any potential adverse impact. Higher the ‘Excess capital’ (i.e. capital over and above the regulatory threshold), greater will be the capital cushion available to Banks to absorb any potential losses.Our analysis suggests Top Indian Banks hold more than Rs 8Trillion of “Excess capital”. However,  Banks will have to set aside around Rs 500 Billion for the last tranche of Capital Conservation Buffer (CCB), which kicks-in from September 30, 2020.

Capital Is King: Top Indian Banks Hold ~Rs 8 Trillion of Excess Capital

Equity Bottom-Up

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

* 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*Further Clarification Expected September 28th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on September 28th.

* 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*Further Clarification Expected September 28th.  The Supreme Court, however, stated that it is inclined to waive interest on interest payments for loans under moratorium loans; and that it will need to study the potential relief measures put forth by the RBI and government and take appropriate action. In the meantime, the Supreme Court has each to file all related documents decisions related to interest/moratoriums with the Court over next couple of weeks. We expect further clarity at the next hearing on September 28th. 

Reserve Bank of India – Toothless Tiger

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)

Reserve Bank of India - No Good Deed Goes Unpunished

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing...

Thomas J. Monaco

Bank Credit Weekly: Risk Sentiment Returns as Markets Ignore FOMC Disappointment

The lack of shock and awe outcome from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income...

Hank Calenti, CFA

Capital Is King: Top Indian Banks Hold ~Rs 8 Trillion of Excess Capital

Capital is King, more so in times of crisis and uncertainty. With the pandemic showing no signs of abating, Banks have been conserving capital to...

Saumya Agarwal

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on...

Thomas J. Monaco

Reserve Bank of India – Toothless Tiger

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing...

Thomas J. Monaco

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52-week Range

Market Cap (USDm)

P/E

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