Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Equity Bottom-Up

<ul>
<li>We see clear evidence that the <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> super-tanker is turning</li>
<li>Balance sheet strength at YE 2020, with delivery across most plan metrics in 2020 showing commitment</li>
<li>Execution on costs, the digital transformation, sustainably lower cost of risk going forward and the deepened Asia pivot, with an emphasis on Wealth and Personal Banking revenues, should be core drivers of returns</li>
<li>Potential disposals of France retail banking and possibly the US retail operations would also enhance returns and free up “trapped” RWAs</li>
<li>We believe that 2022E consensus ROE estimates are too conservative and that HSBC could potentially be on a c 8% dividend yield over the medium term</li>
<li>Risks to our positive view on HSBC include slower than expected execution on costs, and tougher competition in Asia retail banking, as well as worse than expected credit quality leading to a lower than expected reduction in cost of risk charges</li>
</ul>


We see clear evidence that the HSBC Holdings (HSBA LN) super-tanker is turning
Balance sheet strength at YE 2020, with delivery across most plan metrics in 2020 showing commitment
Execution on costs, the digital transformation, sustainably lower cost of risk going forward and the deepened Asia pivot, with an emphasis on Wealth and Personal Banking revenues, should be core drivers of returns
Potential disposals of France retail banking and possibly the US retail operations would also enhance returns and free up “trapped” RWAs
We believe that 2022E consensus ROE estimates are too conservative and that HSBC could potentially be on a c 8% dividend yield over the medium term
Risks to our positive view on HSBC include slower than expected execution on costs, and tougher competition in Asia retail banking, as well as worse than expected credit quality leading to a lower than expected reduction in cost of risk charges


HSBC (HSBA LN): The Super-Tanker Is Turning

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Given its low capital buffer and plans to lower it further, along with high market risk tolerance and leverage finance exposure, <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse's (CSGN VX)</a> Additional Tier 1 (AT1) trades too tight relative to <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS (UBSG VX)</a> and most other large banks globally. We see better value elsewhere at this point in the credit cycle.Many analysts compare CS and UBS and conclude that they are largely the same, with UBS having deleveraged its investment banking franchise years earlier. We disagree. While both may suffer outflows in assets under management during a prolonged equity market correction, UBS has a far less market-sensitive franchise during intermittent bouts of volatility, as was clearly shown over the past year. In addition to having a higher trading risk tolerance profile, CS appears to have a higher sensitivity to non-investment grade leverage finance and oil &amp; gas exposures.  These are more sensitive to the business cycle. As of now, with global growth set to accelerate post-vaccination, this is a benefit. However, this is also already priced into CS’ securities.  In fact, the longer-dated AT1 bonds are priced to perfection, in our view.In addition, CS has a substantially lower Common Equity Tier 1 (CET1) buffer than UBS and many other European banks.  Furthermore, as CS targets an even lower capital ratio, this buffer is at risk of falling further over the near term. While lofty aspirations to operate at a higher leverage level may be aimed at equity holders, we think it best to take management’s word at face value. Lower capital ratios are not AT1 capital supportive. Unless the firm simultaneously de-risks, sensitivity to non-IG leverage finance and non-IG oil &amp; gas exposures may increase.Furthermore, while we were impressed by Mr. Hoarta-Osório’s leadership at <a href="https://www.smartkarma.com/entities/lloyds-banking-group-plc" target="_blank" data-smartkarma-citation="entities:21009:1" rel="noopener">Lloyds Bank (LLOY LN)</a> in the UK, despite several blemishes, we are surprised that the ex-CEO of a UK-centric mortgage bank would be chosen as Chairman of the Board at a global investment bank with wealth management growth aspirations in Asia. We are not convinced this is the best choice and we question if the execution risk from an eventual strategy pivot will be credit positive.We explore these themes and provide an overview of CS’s Q4 results within. We conclude that, taken together amongst its longer-dated peer-issued AT1 notes, we find better value in <a href="https://www.smartkarma.com/entities/societe-generale-sa" target="_blank" data-smartkarma-citation="entities:21478:1" rel="noopener">Société Générale's (GLE FP)</a> 2030 first call AT1 than in the recently issued Credit Suisse security. (Please see: <a href="https://www.smartkarma.com/insights/societe-generale-s-at1-better-fundamental-and-relative-value-than-bnp" target="_blank" data-smartkarma-citation="insights:48177" rel="noopener">Société Générale’s AT1: Better Fundamental and Relative Value than BNP</a> for more details on SocGen). We also see greater spread pick-up in Credit Suisse’s 2025 first call AT1 note than further out the curve.

Given its low capital buffer and plans to lower it further, along with high market risk tolerance and leverage finance exposure, Credit Suisse's (CSGN VX) Additional Tier 1 (AT1) trades too tight relative to UBS (UBSG VX) and most other large banks globally. We see better value elsewhere at this point in the credit cycle.Many analysts compare CS and UBS and conclude that they are largely the same, with UBS having deleveraged its investment banking franchise years earlier. We disagree. While both may suffer outflows in assets under management during a prolonged equity market correction, UBS has a far less market-sensitive franchise during intermittent bouts of volatility, as was clearly shown over the past year. In addition to having a higher trading risk tolerance profile, CS appears to have a higher sensitivity to non-investment grade leverage finance and oil &amp; gas exposures.  These are more sensitive to the business cycle. As of now, with global growth set to accelerate post-vaccination, this is a benefit. However, this is also already priced into CS’ securities.  In fact, the longer-dated AT1 bonds are priced to perfection, in our view.In addition, CS has a substantially lower Common Equity Tier 1 (CET1) buffer than UBS and many other European banks.  Furthermore, as CS targets an even lower capital ratio, this buffer is at risk of falling further over the near term. While lofty aspirations to operate at a higher leverage level may be aimed at equity holders, we think it best to take management’s word at face value. Lower capital ratios are not AT1 capital supportive. Unless the firm simultaneously de-risks, sensitivity to non-IG leverage finance and non-IG oil &amp; gas exposures may increase.Furthermore, while we were impressed by Mr. Hoarta-Osório’s leadership at Lloyds Bank (LLOY LN) in the UK, despite several blemishes, we are surprised that the ex-CEO of a UK-centric mortgage bank would be chosen as Chairman of the Board at a global investment bank with wealth management growth aspirations in Asia. We are not convinced this is the best choice and we question if the execution risk from an eventual strategy pivot will be credit positive.We explore these themes and provide an overview of CS’s Q4 results within. We conclude that, taken together amongst its longer-dated peer-issued AT1 notes, we find better value in Société Générale's (GLE FP) 2030 first call AT1 than in the recently issued Credit Suisse security. (Please see: Société Générale’s AT1: Better Fundamental and Relative Value than BNP for more details on SocGen). We also see greater spread pick-up in Credit Suisse’s 2025 first call AT1 note than further out the curve.

Credit Suisse – Perfection Priced into Long-Dated AT1

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

*Super Results And Will Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 4Q20 bottom-line results of USD 12.1 bn, increasing USD 2.7 bn (28.5%) linked quarter. On a core operating basis, we note an even stronger QOQ improvement, with numbers coming in at USD 12.1 bn or USD 3.1 bn (34.6%) higher than 3Q20. Results were essentially driven by a reserve reversal of USD 1.9 bn, which no doubt will be a consistent theme in 2021;*Credit Weakness Significantly Decelerates: We find that net new NPLs on a linked quarter amounted to only USD 1 mn or well under 1.0% on an annualized basis. The pace of increase has decelerated from the 7.0% and 26% posted in 3Q20 and 2Q20, respectively; and*Solid Share Buyback In Place: JPM noted that it could repurchase a maximum number of shares of USD 4.5 bn for 1Q21.

*Super Results And Will Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 4Q20 bottom-line results of USD 12.1 bn, increasing USD 2.7 bn (28.5%) linked quarter. On a core operating basis, we note an even stronger QOQ improvement, with numbers coming in at USD 12.1 bn or USD 3.1 bn (34.6%) higher than 3Q20. Results were essentially driven by a reserve reversal of USD 1.9 bn, which no doubt will be a consistent theme in 2021;*Credit Weakness Significantly Decelerates: We find that net new NPLs on a linked quarter amounted to only USD 1 mn or well under 1.0% on an annualized basis. The pace of increase has decelerated from the 7.0% and 26% posted in 3Q20 and 2Q20, respectively; and*Solid Share Buyback In Place: JPM noted that it could repurchase a maximum number of shares of USD 4.5 bn for 1Q21. 

*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

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results.

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results. 

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

Switzerland

Credit Suisse Group AG operates as a wealth management firm. The Company specializes in investment banking and offers wealth management activities aiming to capitalize on both the large pool of wealth within mature markets, as well as the significant growth in wealth in Asia Pacific and other emerging markets. Credit Suisse Group serves customers worldwide.

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Credit Suisse Group (CS US)

HSBC (HSBA LN): The Super-Tanker Is Turning

Cost gains, digital transformation, lower cost of risk going forward and the deepened Asia pivot on revenue growth, should be core drivers of...

Victor Galliano

Credit Suisse – Perfection Priced into Long-Dated AT1

Many analysts compare CS and UBS and conclude that they are largely the same. We disagree. Given its low capital buffer, higher leverage finance...

Hank Calenti, CFA

JP Morgan Chase & Co. – Just Wow

JP MORGAN CHASE: JPM] reported 4Q20 bottom-line results increased 28.5% linked quarter, driven by a reserve reversal. Net new NPLs on a linked...

Thomas J. Monaco

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

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

MUFG Receives Additional Dilution From Morgan Stanley In Another Overpriced US Transaction. Eaton Vance Was The Fourth In a Series of Wealth...

Thomas J. Monaco

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