Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p>Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a dash of market volatility until greater clarity is found.</p><p>The potential trial of outgoing President Trump could prolong the partisan sentiment of recent weeks and delay needed additional stimulus legislation. This may add a dash of volatility to the market as additional evidence of a cooling U.S. economy unfolds. In fact, initial optimism over President-elect Joe Biden’s stimulus proposal soured after some lawmakers pushed back, suggesting that it is far from a done deal.  Treasury yields ended the week flatter, after rising by mid-week, as stimulus distractions set in.</p><p>Meanwhile, Fed officials are not reading from the same song sheet. We have been discussing the potential for a mid-to-late 2021 Fed induced market taper-tantrum since mid-Nov. The business media finally caught onto it this week.  However, admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Fed speak may distract as the market moves ahead to set its own expectations for when tapering may begin.</p><p>Concurrently, this week’s earnings reports clearly showed that US banks are releasing loan loss reserves; however, this distraction may be misinterpreted. As we discuss within, US bank earnings are not a harbinger for what may occur in other markets. In fact, Bank of Italy Governor Visco noted this week that small and medium-sized banks could suffer most from the economic consequences of the pandemic. Rhetorically he asked if “this creates an unprecedented ‘too-many-to-fail’ problem?” We see this as an opening salvo to push for more access to government backed asset management companies to assist with restructuring banking systems. This may prove positive for Additional Tier 1 bonds; however, market prices may suffer before this comes to fruition. To wit, EU bank credit risk perceptions deteriorated despite US bank results.</p><p>In Asia, the Reserve Bank of India (RBI) started draining liquidity from the banking system. Concurrently, three-year AAA, AA and BBB corporate bond yields rose. If India’s short-term rates could fall well below the policy rate, then the policy rate was misstated. This is more than a distraction. The tightening of monetary policy at this point is bizarre given that the RBI warned this week that a bad debt surge threatens India’s financial stability.</p><p>Meanwhile in Hong Kong, easy money is all but gone in the banking system. There is no gain to be had from borrowing in US$ and lending in HKD in short-term markets. This is net interest income negative. It also incentivizes the banks to lend for longer and to lend further down the curve. Hong Kong bank credit underperformed this week.</p><p>Against this backdrop, Asia’s higher risk Additional Tier 1 (AT1) bank bonds underperformed, principally driven by Thailand- and other higher risk China-centric securities, reversing last week’s outperformance. Thai banks underperformed in Tier 2 and AT1 notes although Senior Unsecured debt tightened as investors rotated to safer debt instruments with duration. Indonesian bank bonds may have sold-off in sympathy with concerns that Indonesia is more sensitive to a higher dollar than other Asian countries.</p><p><strong>Market Outlook</strong>: The US holiday shortened week may see less activity than usual given the uncertainty of when additional stimulus may get US Senate’ attention. The distraction of another set of impeachment proceedings may not be market friendly.  Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Breakeven rates suggest growth rather than inflation; however, credit has limited upside in a reflation scenario and duration is may not be your friend at this point in the cycle.</p>

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a dash of market volatility until greater clarity is found.The potential trial of outgoing President Trump could prolong the partisan sentiment of recent weeks and delay needed additional stimulus legislation. This may add a dash of volatility to the market as additional evidence of a cooling U.S. economy unfolds. In fact, initial optimism over President-elect Joe Biden’s stimulus proposal soured after some lawmakers pushed back, suggesting that it is far from a done deal.  Treasury yields ended the week flatter, after rising by mid-week, as stimulus distractions set in.Meanwhile, Fed officials are not reading from the same song sheet. We have been discussing the potential for a mid-to-late 2021 Fed induced market taper-tantrum since mid-Nov. The business media finally caught onto it this week.  However, admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Fed speak may distract as the market moves ahead to set its own expectations for when tapering may begin.Concurrently, this week’s earnings reports clearly showed that US banks are releasing loan loss reserves; however, this distraction may be misinterpreted. As we discuss within, US bank earnings are not a harbinger for what may occur in other markets. In fact, Bank of Italy Governor Visco noted this week that small and medium-sized banks could suffer most from the economic consequences of the pandemic. Rhetorically he asked if “this creates an unprecedented ‘too-many-to-fail’ problem?” We see this as an opening salvo to push for more access to government backed asset management companies to assist with restructuring banking systems. This may prove positive for Additional Tier 1 bonds; however, market prices may suffer before this comes to fruition. To wit, EU bank credit risk perceptions deteriorated despite US bank results.In Asia, the Reserve Bank of India (RBI) started draining liquidity from the banking system. Concurrently, three-year AAA, AA and BBB corporate bond yields rose. If India’s short-term rates could fall well below the policy rate, then the policy rate was misstated. This is more than a distraction. The tightening of monetary policy at this point is bizarre given that the RBI warned this week that a bad debt surge threatens India’s financial stability.Meanwhile in Hong Kong, easy money is all but gone in the banking system. There is no gain to be had from borrowing in US$ and lending in HKD in short-term markets. This is net interest income negative. It also incentivizes the banks to lend for longer and to lend further down the curve. Hong Kong bank credit underperformed this week.Against this backdrop, Asia’s higher risk Additional Tier 1 (AT1) bank bonds underperformed, principally driven by Thailand- and other higher risk China-centric securities, reversing last week’s outperformance. Thai banks underperformed in Tier 2 and AT1 notes although Senior Unsecured debt tightened as investors rotated to safer debt instruments with duration. Indonesian bank bonds may have sold-off in sympathy with concerns that Indonesia is more sensitive to a higher dollar than other Asian countries.Market Outlook: The US holiday shortened week may see less activity than usual given the uncertainty of when additional stimulus may get US Senate’ attention. The distraction of another set of impeachment proceedings may not be market friendly.  Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Breakeven rates suggest growth rather than inflation; however, credit has limited upside in a reflation scenario and duration is may not be your friend at this point in the cycle.

Bank Credit Weekly: Distractions May Drive Markets Near Term

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

<p style="text-align: start;">The theme for global banks is one of lowered credit costs, improved loan demand and better fee income. The comparative to last year should be exceptional for many banks. Where flu season ends in about two months and with vaccinations starting, this further improves the economic outlook, and therefore credit risk of banks. </p>

The theme for global banks is one of lowered credit costs, improved loan demand and better fee income. The comparative to last year should be exceptional for many banks. Where flu season ends in about two months and with vaccinations starting, this further improves the economic outlook, and therefore credit risk of banks. 

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

Postal Savings Bank of China C / Equity Bottom-Up

<p><strong>*Private Placement Coming: </strong>We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   </p><p><strong>*Starting Off From A Better Place Than Peer: </strong>We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.</p>

*Private Placement Coming: We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   *Starting Off From A Better Place Than Peer: We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.

Postal Savings Bank – D-SIB Spurs Placement

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<div>
<p>The H-Share/A-Share monitor is published every weekend for the data ending the last trading day of the previous week. It includes all H-Share/A-Share pairs where the H-Share has a 90-day average daily value-traded of US$1.0mm or more. It shows basic data per H/A spread stock by sector, with...</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>H/A Discount,</li>
<li>movement in H/A Discount over 5 and 20 days,</li>
<li>a 52-week Z-score for the spread,</li>
<li>A chart showing evolution of the H/A spread over the last 20 days,</li>
<li>Southbound shares held (millions of shares), Net Change in Southbound (Shanghai and Shenzhen combined) shares held by millions of shares, and contribution of Net Southbound Volume to HK-traded volume over the past five days and 20 days, </li>
<li>There is also a chart showing the average sector spread and the individual spreads within each sector over the last three years. </li>
</ul>
</div>
<div>
<p>A recent addition is the possible status of H/A-share companies in the monitor which are subject to the Trump Executive Order on Chinese Military Companies. They are separated into three types (Possible Direct Qualifying Entity, Possible Indirect Qualifying Entity, and 20+%-owned by Qualifying Entity). They are color-coded as below.</p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/784/original/image?1606541170" class="editor-image img-responsive" data-smartkarma-image-id="174784"></figure>
</section>
<div>
<p>For more on the list of names, please see <a href="https://www.smartkarma.com/insights/trump-s-executive-order-on-chinese-military-companies" target="_blank" data-smartkarma-citation="insights:45259" rel="noopener">Trump's Executive Order on Chinese Military Companies</a>. </p>
</div>
<hr>
<div class="content-highlight">
<p>This past week saw mixed movement in H/A spreads but on average they were narrower.</p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/829/original/Screenshot%202020-11-28%20at%206.25.16%20PM.png?1606559131" class="editor-image img-responsive" data-smartkarma-image-id="174829"></figure>
<p></p>
</section>
<p>Average performance of the 39 recommendations (long 27, short 12) from last week was for a profit of 0.67% per trade.</p>
<p>There are 43 recommendations for the upcoming week.</p>
</div>
<hr>
<div>
<p>The first sector discussed is <strong>Consumer</strong>, where liquid H/A spreads narrowed on average 0.6% this past week after narrowing 2.7% the week before. Spreads are now tighter by 2.1% on average over a four-week period. Four of six liquid Hs outperformed their As.</p>
<p>Southbound accounts were large-ish net buyers on the week. There were three net buys and three net sells but the net buying ended up being all <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a>, again. <a href="https://www.smartkarma.com/entities/guangzhou-automobile-group-co-ltd" target="_blank" data-smartkarma-citation="entities:11082:1" rel="noopener">Guangzhou Automobile Group (2238 HK)</a> saw significant net selling. </p>
</div>
<div>
<div>
<div class="content-highlight">
<p>Last week I recommended staying long the H vs A on <a href="https://www.smartkarma.com/entities/great-wall-motor-co-ltd-cb302af9-398c-4d2d-ba39-023e43287eef" target="_blank" data-smartkarma-citation="entities:128:1" rel="noopener">Great Wall Motor (2333 HK)</a> and that spread gained 1.6% for the week (after gaining 4.7% the week before when it was also recommended). This past week I put out the Weekly late on Monday (after 2pm), when BYD in Hong Kong had gained 3.7% vs the As on the day, and so recommended implementing a short BYD (1211 HK) H vs A share trade and from that point or even from the end of the day or the next, the Hs actually underperformed the As by 0.4%. </p>
<p>See below the fold for this week's recommendations.</p>
</div>
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</div>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/809/original/Screenshot%202020-11-28%20at%205.32.56%20PM.png?1606556000" class="editor-image img-responsive" data-smartkarma-image-id="174809"></figure>
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<p></p>
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<section class="figure"></section>
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<section class="figure">For Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities, please read on.</section>
</section>


The H-Share/A-Share monitor is published every weekend for the data ending the last trading day of the previous week. It includes all H-Share/A-Share pairs where the H-Share has a 90-day average daily value-traded of US$1.0mm or more. It shows basic data per H/A spread stock by sector, with...



H/A Discount,
movement in H/A Discount over 5 and 20 days,
a 52-week Z-score for the spread,
A chart showing evolution of the H/A spread over the last 20 days,
Southbound shares held (millions of shares), Net Change in Southbound (Shanghai and Shenzhen combined) shares held by millions of shares, and contribution of Net Southbound Volume to HK-traded volume over the past five days and 20 days, 
There is also a chart showing the average sector spread and the individual spreads within each sector over the last three years. 



A recent addition is the possible status of H/A-share companies in the monitor which are subject to the Trump Executive Order on Chinese Military Companies. They are separated into three types (Possible Direct Qualifying Entity, Possible Indirect Qualifying Entity, and 20+%-owned by Qualifying Entity). They are color-coded as below.





For more on the list of names, please see Trump's Executive Order on Chinese Military Companies. 



This past week saw mixed movement in H/A spreads but on average they were narrower.




Average performance of the 39 recommendations (long 27, short 12) from last week was for a profit of 0.67% per trade.
There are 43 recommendations for the upcoming week.



The first sector discussed is Consumer, where liquid H/A spreads narrowed on average 0.6% this past week after narrowing 2.7% the week before. Spreads are now tighter by 2.1% on average over a four-week period. Four of six liquid Hs outperformed their As.
Southbound accounts were large-ish net buyers on the week. There were three net buys and three net sells but the net buying ended up being all BYD (1211 HK), again. Guangzhou Automobile Group (2238 HK) saw significant net selling. 




Last week I recommended staying long the H vs A on Great Wall Motor (2333 HK) and that spread gained 1.6% for the week (after gaining 4.7% the week before when it was also recommended). This past week I put out the Weekly late on Monday (after 2pm), when BYD in Hong Kong had gained 3.7% vs the As on the day, and so recommended implementing a short BYD (1211 HK) H vs A share trade and from that point or even from the end of the day or the next, the Hs actually underperformed the As by 0.4%. 
See below the fold for this week's recommendations.











For Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities, please read on.


Quiddity Weekly H/​​A: Share Spread Monitor as of 27 Nov 2020

<p style="text-align: justify;">We move to Overweight <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's (BNKEA)</a> capital inefficient securities, from Buy, as these securities have outperformed their peers since our recommendation. Investors have been well rewarded but remaining upside is less compelling.</p><p style="text-align: justify;">Bank of East Asia announced the retirement of it 5.5% coupon December first call US$- Additional Tier 1 (AT1) bond last week. This bond was not capital efficient. We first recommended that investors overweight this security in mid-February within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-overweight-short-call-at1-on-refinancing-ability" target="_blank" data-smartkarma-citation="insights:36787" rel="noopener">Overweight Short-Call AT1 on Refinancing Ability</a> and recently re-iterated this call within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Buy the Inefficient Capital Securities</a><em>.</em> In retrospect, this was the most volatile AT1 security amongst those issued by Asian-headquartered banks and subject to first call in 2020, as we anticipated at the time of our first recommendation. Nonetheless, the courage of one’s convictions is what makes or breaks investment returns. We were fortunate to make the right call on this one. In fact, we have been told that we were the only research house making this recommendation based on the capital efficiency of the securities. </p><p style="text-align: justify;">Going forward, we see less upside in the AT1 capital curve of BNKEA as it trades more in-line with securities of other Hong Kong issuing banks. As such, we move to Overweight, from Buy, on BNKEA’s 5.625% coupon 2022 callable AT1.</p>

We move to Overweight Bank of East Asia's (BNKEA) capital inefficient securities, from Buy, as these securities have outperformed their peers since our recommendation. Investors have been well rewarded but remaining upside is less compelling.Bank of East Asia announced the retirement of it 5.5% coupon December first call US$- Additional Tier 1 (AT1) bond last week. This bond was not capital efficient. We first recommended that investors overweight this security in mid-February within Overweight Short-Call AT1 on Refinancing Ability and recently re-iterated this call within Buy the Inefficient Capital Securities. In retrospect, this was the most volatile AT1 security amongst those issued by Asian-headquartered banks and subject to first call in 2020, as we anticipated at the time of our first recommendation. Nonetheless, the courage of one’s convictions is what makes or breaks investment returns. We were fortunate to make the right call on this one. In fact, we have been told that we were the only research house making this recommendation based on the capital efficiency of the securities. Going forward, we see less upside in the AT1 capital curve of BNKEA as it trades more in-line with securities of other Hong Kong issuing banks. As such, we move to Overweight, from Buy, on BNKEA’s 5.625% coupon 2022 callable AT1.

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

China

China Merchants Bank Co., Ltd. operates as a commercial bank. The Company provides deposits, loans, wealth management, asset custody, finance leasing, investment banking, and other banking services. China Merchants Bank conducts businesses domestically and internationally.

Price Gauge
52-week Range	0.00 - 0.00
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China Merchants Bank H (3968 HK)

Bank Credit Weekly: Distractions May Drive Markets Near Term

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a...

Hank Calenti, CFA

Banks - A Turning Point

The theme for global banks is one of lowered credit costs, improved loan demand and better fee income. The comparative to last year should be...

Daniel Tabbush

Postal Savings Bank – D-SIB Spurs Placement

POSTAL SAVINGS BANK OF CHINA: D-SIB Status Spurs Private Placement And Likely A Lower ROE Both From Dilution And Challenged Fundamentals In 2021.

Thomas J. Monaco

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

We move to Overweight Bank of East Asia’s capital inefficient securities as these securities have outperformed their peers since our Buy...

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Bank Credit Weekly: Distractions May Drive Markets Near Term

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a...

Hank Calenti, CFA

Banks - A Turning Point

The theme for global banks is one of lowered credit costs, improved loan demand and better fee income. The comparative to last year should be...

Daniel Tabbush

Postal Savings Bank – D-SIB Spurs Placement

POSTAL SAVINGS BANK OF CHINA: D-SIB Status Spurs Private Placement And Likely A Lower ROE Both From Dilution And Challenged Fundamentals In 2021.

Thomas J. Monaco

Quiddity Weekly H/​​A: Share Spread Monitor as of 27 Nov 2020

The weekly H/A Share Monitor and Trade Recommendations. Spreads narrower on the week. Last week's 39 trade recommendations gained 0.67% on average....

Travis Lundy

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

We move to Overweight Bank of East Asia’s capital inefficient securities as these securities have outperformed their peers since our Buy...

Hank Calenti, CFA

Quiddity Weekly H/A: Share Spread Monitor as of 27 Nov 2020