Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

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

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

Equity Bottom-Up

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

JP Morgan & Co. – Good Credit Omen For US and Global Banks

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Thematic (Sector/Industry)

Almost a year ago, on 31 October 2019, the PBOC announced that after years of preparation (by the PBOC's Digital Currency Research Institute (央行数字货币研究所), established in 2017 and tasked with digital currency development and testing with counterparts, three years after the study effort was launched by then-Governor of the PBOC Xiaochuan Zhou in 2014), an official "digital renmimbi" would shortly be released. This "digital currency" is adapted to the world of cashless mobile payments, relevant for China as something like four out of every five payment transactions in China are now made through smartphone payment systems such as <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>'s AliPay and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>'s WeChat Pay according to a May 2020 <a href="https://www.scmp.com/economy/china-economy/article/3083952/what-chinas-cryptocurrency-sovereign-digital-currency-and-why" target="_blank" rel="noopener">article</a> in the SCMP.Known as the Digital Currency Electronic Payment (DC/EP or "DCEP"), this sovereign digital currency issued by the central bank is designed to replace cash circulation - called M0 in monetary system language - and pass through a PBOC-approved electronic wallet application, which would be linked to a bank card/account, and would allow payment or receipt of digital renmimbi through merchants the way AliPay and WeChat Pay are used, or ATMs the way a bank card is used. It turns the mobile phone into a payment terminal or ATM. Interestingly, the system is also designed to be used offline - by phones being bumped together.Ultimately, this digital currency (数字货币) is designed to track transactions between parties, providing the PBOC with a better understanding of the flow of money, credit, and person-to-person transfer of funds, allowing for more real-time understanding at the PBOC of money supply and money velocity. Eventually, it could also be used to track all money flow for regulatory and tax purposes. In addition, the concept can be expanded to use cases for international trade and the PBOC is not shy about proclaiming that use case.But what is it? How does it work? What is the purpose? Will it really mean the world moves to the RMB as a reserve currency?Much more discussion continues below the fold.

Almost a year ago, on 31 October 2019, the PBOC announced that after years of preparation (by the PBOC's Digital Currency Research Institute (央行数字货币研究所), established in 2017 and tasked with digital currency development and testing with counterparts, three years after the study effort was launched by then-Governor of the PBOC Xiaochuan Zhou in 2014), an official "digital renmimbi" would shortly be released. This "digital currency" is adapted to the world of cashless mobile payments, relevant for China as something like four out of every five payment transactions in China are now made through smartphone payment systems such as Alibaba Group (BABA US)'s AliPay and Tencent Holdings (700 HK)'s WeChat Pay according to a May 2020 article in the SCMP.Known as the Digital Currency Electronic Payment (DC/EP or "DCEP"), this sovereign digital currency issued by the central bank is designed to replace cash circulation - called M0 in monetary system language - and pass through a PBOC-approved electronic wallet application, which would be linked to a bank card/account, and would allow payment or receipt of digital renmimbi through merchants the way AliPay and WeChat Pay are used, or ATMs the way a bank card is used. It turns the mobile phone into a payment terminal or ATM. Interestingly, the system is also designed to be used offline - by phones being bumped together.Ultimately, this digital currency (数字货币) is designed to track transactions between parties, providing the PBOC with a better understanding of the flow of money, credit, and person-to-person transfer of funds, allowing for more real-time understanding at the PBOC of money supply and money velocity. Eventually, it could also be used to track all money flow for regulatory and tax purposes. In addition, the concept can be expanded to use cases for international trade and the PBOC is not shy about proclaiming that use case.But what is it? How does it work? What is the purpose? Will it really mean the world moves to the RMB as a reserve currency?Much more discussion continues below the fold.

The NEW Chinese CBDC (DCEP - 数字货币) - Not Quite All The Money in China

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious activity reports (SARs), which were filed with the US Treasury’s Financial Crimes Enforcement Network (FINCEN). The report suggests that there was about USD 2 tn in questionable transactions between 1999-2017, which were flagged by the sector’s internal compliance officers from over 90 financial institutions;  and*Expect An Active DOJ Under Biden/Harris: If Biden/Harris win, Deutsche and Turkey’s Halkbank (HALKB.TI) would appear to be most as risk with a more proactive Department of Justice (DOJ). However, not far behind are others including: HSBC Holdings (5.HK/HSBA/LN) and Standard Chartered (2888.HK/STAN.LN). In addition, when mainland Chinese-US relations materially deteriorate under a Biden administration, we would fully anticipate the entire mainland Chinese financial system to be under a magnifying glass.

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious activity reports (SARs), which were filed with the US Treasury’s Financial Crimes Enforcement Network (FINCEN). The report suggests that there was about USD 2 tn in questionable transactions between 1999-2017, which were flagged by the sector’s internal compliance officers from over 90 financial institutions;  and*Expect An Active DOJ Under Biden/Harris: If Biden/Harris win, Deutsche and Turkey’s Halkbank (HALKB.TI) would appear to be most as risk with a more proactive Department of Justice (DOJ). However, not far behind are others including: HSBC Holdings (5.HK/HSBA/LN) and Standard Chartered (2888.HK/STAN.LN). In addition, when mainland Chinese-US relations materially deteriorate under a Biden administration, we would fully anticipate the entire mainland Chinese financial system to be under a magnifying glass.

Asia Banks – Watch Your Anti-Money Laundering Risk Again

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The AH premium for Ping An Insurance (<a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> / <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>) has continued to move in cycles. After hitting a high of 10% a year ago, and a low of -2.5% earlier this year, the AH premium is trading near the 98th percentile using data going back to January 2015.At a premium of close to 13% now, the reward to risk of buying the H-shares and selling the A-shares is attractive and we expect a reversion over the next few months.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to a reversion in the premium.

The AH premium for Ping An Insurance (Ping An Insurance Group Co Of China (601318 CH) / Ping An Insurance (H) (2318 HK)) has continued to move in cycles. After hitting a high of 10% a year ago, and a low of -2.5% earlier this year, the AH premium is trading near the 98th percentile using data going back to January 2015.At a premium of close to 13% now, the reward to risk of buying the H-shares and selling the A-shares is attractive and we expect a reversion over the next few months.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to a reversion in the premium.

Ping An A/H Premium - Back Near The Highs

China

China Construction Bank Corporation provides a comprehensive range of commercial banking products and services to individuals and corporate customers. The Bank's business consists of three principal business segments: corporate banking, personal banking, and treasury operations. China Construction Bank also services infrastructure loans, residential mortgage, and bank cards.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

China Construction Bank H (939 HK)

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

JP Morgan & Co. – Good Credit Omen For US and Global Banks

JPM Results, A Good Credit Omen For US and Global Banks. Reserve Reversals Likely To Be A Trend For 4Q20 Results Season -Although Issues Persist

Thomas J. Monaco

The NEW Chinese CBDC (DCEP - 数字货币) - Not Quite All The Money in China

Almost a year ago, on 31 October 2019, the PBOC announced that after years of preparation, an official "digital renmimbi" would bre releas

Travis Lundy

Asia Banks – Watch Your Anti-Money Laundering Risk Again

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious...

Thomas J. Monaco

Ping An A/H Premium - Back Near The Highs

The AH premium for Ping An Insurance Ping An Insurance Group Co Of China (601318 CH) / $2318 hk

Brian Freitas

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)