Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

<p>Shares in <a href="https://www.smartkarma.com/entities/vtb-bank-pjsc" target="_blank" data-smartkarma-citation="entities:498:1" rel="noopener">Vtb Bank Pjsc (VTBR RM)</a> are cheap and trade as a short-dated bond or no-growth stock given the bank's rich strategic franchise within a solid IG country framework which suggest that share valuation (currently a derisory PER) should resemble more a perpetual. Shares also may signal some concern with the future Dividend stream.</p><p>The franchise is indeed evolving into a strategic powerhouse. The lender commands a top position in areas such as M&amp;A and DCM while accounting for almost a quarter of Russia's mortgage market, a fifth of corporate Deposits, 17.5% of corporate and retail Loans, and 15.9% of total Assets.</p><p>Quarterly results reveal an uptick in CoR to 1.5% and some signals of increasing toxic asset migration with the mainly substandard "stage 2" bucket which receives most of the Provisioning. Loans to companies from industries most affected by the pandemic, as identified by the government, constitute 3% of VTB's loans to corporates, though the lender has not yet noticed material deterioration in the financial condition of borrowers.  Quarterly credit losses of 42.9 billion rubles, versus 14.3 billion rubles a year earlier, included a 10 billion ruble "macro" adjustment based on a somewhat benign assumption of GDP growth for this year. It is also hard to model for CoR and NPLs in the best of times, let alone the worst of times.  The bank though commits itself to CIR of around 40% despite aggressive IT modernization and innovation, and a NIM of 3.4%, supported by a lower key rate and enhanced current account funding. These seem pretty gettable.</p><p>LTM dynamics were highly positive with enhanced trends in Profitability, in Liquidity, in Efficiency, in Capitalisation, and in Asset Quality. There was some slippage in NIM and Interest Spread on a LTM basis. The increased contribution of "Non-Core Income" was on the high side though bancassurance-driven Fee Income encouragingly gained in weight as a % of  RWAs and Operating Income while Liquidity improved on the back of robust Deposit growth.</p><div><p><a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">VTB</a> commands a stellar PH Score™ of 10, an underbought RSI signal, and a FV of 4%: shares thus find themselves in the top decile of our VFM rankings.</p></div><div><div><div class="content-highlight">
<p>The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </p>
<p>With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.</p>
</div></div></div><div><div><div class="content-highlight"><p>VFM rankings position <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">VTB</a>  in the top quintile of opportunity globally. </p></div></div></div><div>
<p>Trading at a 75% discount to BV, with a Franchise Value and Earnings Yield, of 4% and 49%, respectively, shares are relatively attractive on a global scale. We recognise that a Dividend Yield of 3.2% could be higher. A stellar PH Score™ can act as a tailwind.</p>
<p>We are mindful though that a bank is a bond equivalent or quasi utility with a dividend seen as a compensation for a leveraged structure. One could quite fairly ask: if I'm not going to receive the dividend, should I not buy the perpetual bonds? The executive at VTB has stated that it has not yet officially changed its plans to earmark 50% of its 2019 net profit under International Financial Reporting Standards for dividend payments, but could reduce dividend payouts on government-owned preference shares to deduct the cost of state support programs for COVID-19-hit borrowers. (Other jurisdictions should wake up to this implicit circular structure where the State funds Pandemic costs via bank dividends to the detriment of other shareholders).  The lender did not rule out (somewhat ominously but in a transparent way) the possibility that dividend reduction could also affect ordinary shares depending on how the crisis unfolds. A decision will be made in August prior to the General Meeting in September. A great deal can change in 3 months.</p>
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Shares in Vtb Bank Pjsc (VTBR RM) are cheap and trade as a short-dated bond or no-growth stock given the bank's rich strategic franchise within a solid IG country framework which suggest that share valuation (currently a derisory PER) should resemble more a perpetual. Shares also may signal some concern with the future Dividend stream.The franchise is indeed evolving into a strategic powerhouse. The lender commands a top position in areas such as M&amp;A and DCM while accounting for almost a quarter of Russia's mortgage market, a fifth of corporate Deposits, 17.5% of corporate and retail Loans, and 15.9% of total Assets.Quarterly results reveal an uptick in CoR to 1.5% and some signals of increasing toxic asset migration with the mainly substandard "stage 2" bucket which receives most of the Provisioning. Loans to companies from industries most affected by the pandemic, as identified by the government, constitute 3% of VTB's loans to corporates, though the lender has not yet noticed material deterioration in the financial condition of borrowers.  Quarterly credit losses of 42.9 billion rubles, versus 14.3 billion rubles a year earlier, included a 10 billion ruble "macro" adjustment based on a somewhat benign assumption of GDP growth for this year. It is also hard to model for CoR and NPLs in the best of times, let alone the worst of times.  The bank though commits itself to CIR of around 40% despite aggressive IT modernization and innovation, and a NIM of 3.4%, supported by a lower key rate and enhanced current account funding. These seem pretty gettable.LTM dynamics were highly positive with enhanced trends in Profitability, in Liquidity, in Efficiency, in Capitalisation, and in Asset Quality. There was some slippage in NIM and Interest Spread on a LTM basis. The increased contribution of "Non-Core Income" was on the high side though bancassurance-driven Fee Income encouragingly gained in weight as a % of  RWAs and Operating Income while Liquidity improved on the back of robust Deposit growth.VTB commands a stellar PH Score™ of 10, an underbought RSI signal, and a FV of 4%: shares thus find themselves in the top decile of our VFM rankings.
The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 
With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.
VFM rankings position VTB  in the top quintile of opportunity globally. 
Trading at a 75% discount to BV, with a Franchise Value and Earnings Yield, of 4% and 49%, respectively, shares are relatively attractive on a global scale. We recognise that a Dividend Yield of 3.2% could be higher. A stellar PH Score™ can act as a tailwind.
We are mindful though that a bank is a bond equivalent or quasi utility with a dividend seen as a compensation for a leveraged structure. One could quite fairly ask: if I'm not going to receive the dividend, should I not buy the perpetual bonds? The executive at VTB has stated that it has not yet officially changed its plans to earmark 50% of its 2019 net profit under International Financial Reporting Standards for dividend payments, but could reduce dividend payouts on government-owned preference shares to deduct the cost of state support programs for COVID-19-hit borrowers. (Other jurisdictions should wake up to this implicit circular structure where the State funds Pandemic costs via bank dividends to the detriment of other shareholders).  The lender did not rule out (somewhat ominously but in a transparent way) the possibility that dividend reduction could also affect ordinary shares depending on how the crisis unfolds. A decision will be made in August prior to the General Meeting in September. A great deal can change in 3 months.


VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested

First Abu Dhabi Bank PJSC / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/qatar-national-bank-qpsc" target="_blank" data-smartkarma-citation="entities:27700:1" rel="noopener">Qatar National Bank QPSC (QNBK QD)</a> , <a href="https://www.smartkarma.com/entities/al-rajhi-bank" target="_blank" data-smartkarma-citation="entities:27038:1" rel="noopener">Al Rajhi Bank (RJHI AB)</a> , and <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a>  are the largest banks, by market capitalization,  in the middle east. You pay top dollar for the pleasure of holding these banks. It is as if risks just did not exist. After all, they are self-styled "National Champions". We do not doubt that they may have their merits and advantages but are they so much better than anywhere else? They must share their impregnability or secret sauce with the likes of Jamie Dimon and Brian Moynihan who command much cheaper franchises: franchises that may not be so cheap in the current environment. </p><p><a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a> does carry risks. In fact, its DSIB-Balance Sheet may not be so well balanced. Almost a fifth of its loan portfolio is dedicated to CRI: the gift that keeps giving. Another third of its credit book (and increasing fast) is focused on the government and public sector. Another 14% of Loans are channeled into the financial sector. Energy makes up another 9%. The Balance Sheet is bloated by cash (21% of Assets) and commands a sizable amount of "investments" at 16% of Assets. For a "National Champion" it is perhaps surprising that  international loans and deposits represent 25% and 21% of Group loans and deposits, respectively. The bank says that it is growing strongly in India and Hong Kong. In Loan Capital Markets, FAB seems to specialise in Chinese and African deals.</p><p>UAE -like anywhere else- carries risks. The economy is dependent on mining and construction as well as restaurants and hotels: even more so Abu Dhabi. The PMI is highly correlated to Brent Crude despite diversification efforts. AA-rated Abu Dhabi, like FAB UH, likes investments too: Sovereign foreign assets account for 185% of GDP. Would these be risk-free too?</p><p>To say that FAB has being growing at a fair clip in recent years is an understatement. Since 2016, Assets have ballooned by 235%. Derivatives have soared by 715%. Securities (including derivatives) have climbed by 461%. Loans, by contrast, have expanded by "just" 160%. While Deposits have risen by 248%, wholesale funding has jumped by 308% over this period. If I have learnt anything in my time as an analyst, it is to be very distrustful of explosive asset growth. It tends to generate distortions, and is difficult to manage in terms of KPIs. FAB suffers not just from unbalanced growth but from "Asset bloat" which does not generate value and can result in share price under performance.</p><div><p><a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a> commands a subpar PH Score™ of 3.1, an overbought RSI signal, and a FV of 25%: shares thus find themselves in the bottom decile of our VFM rankings.</p></div><div><div><div class="content-highlight">
<p>The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </p>
<p>With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.</p>
</div></div></div><div><div><div class="content-highlight"><p>VFM rankings position <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a>  in the bottom quintile of opportunity globally. </p></div></div></div><div><div><p>Trading at a 30% premium to BV, with a Franchise Value,  Earnings Yield,  and Total Return Ratio of 25%, 9%, and 1x, respectively, shares do not appear attractive. We recognise that a Dividend Yield of 6.3% for an AA-rated entity might not be the worst investment in the world if there is no cut: there is a bond equivalent or utility argument. However, putting all the pieces of the jigsaw together, we see shares under performing and believe in this case that the PH Score™ can act as a headwind.</p></div></div>

Qatar National Bank QPSC (QNBK QD) , Al Rajhi Bank (RJHI AB) , and First Abu Dhabi Bank PJSC (FAB UH)  are the largest banks, by market capitalization,  in the middle east. You pay top dollar for the pleasure of holding these banks. It is as if risks just did not exist. After all, they are self-styled "National Champions". We do not doubt that they may have their merits and advantages but are they so much better than anywhere else? They must share their impregnability or secret sauce with the likes of Jamie Dimon and Brian Moynihan who command much cheaper franchises: franchises that may not be so cheap in the current environment. First Abu Dhabi Bank PJSC (FAB UH) does carry risks. In fact, its DSIB-Balance Sheet may not be so well balanced. Almost a fifth of its loan portfolio is dedicated to CRI: the gift that keeps giving. Another third of its credit book (and increasing fast) is focused on the government and public sector. Another 14% of Loans are channeled into the financial sector. Energy makes up another 9%. The Balance Sheet is bloated by cash (21% of Assets) and commands a sizable amount of "investments" at 16% of Assets. For a "National Champion" it is perhaps surprising that  international loans and deposits represent 25% and 21% of Group loans and deposits, respectively. The bank says that it is growing strongly in India and Hong Kong. In Loan Capital Markets, FAB seems to specialise in Chinese and African deals.UAE -like anywhere else- carries risks. The economy is dependent on mining and construction as well as restaurants and hotels: even more so Abu Dhabi. The PMI is highly correlated to Brent Crude despite diversification efforts. AA-rated Abu Dhabi, like FAB UH, likes investments too: Sovereign foreign assets account for 185% of GDP. Would these be risk-free too?To say that FAB has being growing at a fair clip in recent years is an understatement. Since 2016, Assets have ballooned by 235%. Derivatives have soared by 715%. Securities (including derivatives) have climbed by 461%. Loans, by contrast, have expanded by "just" 160%. While Deposits have risen by 248%, wholesale funding has jumped by 308% over this period. If I have learnt anything in my time as an analyst, it is to be very distrustful of explosive asset growth. It tends to generate distortions, and is difficult to manage in terms of KPIs. FAB suffers not just from unbalanced growth but from "Asset bloat" which does not generate value and can result in share price under performance.First Abu Dhabi Bank PJSC (FAB UH) commands a subpar PH Score™ of 3.1, an overbought RSI signal, and a FV of 25%: shares thus find themselves in the bottom decile of our VFM rankings.
The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 
With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.
VFM rankings position First Abu Dhabi Bank PJSC (FAB UH)  in the bottom quintile of opportunity globally. Trading at a 30% premium to BV, with a Franchise Value,  Earnings Yield,  and Total Return Ratio of 25%, 9%, and 1x, respectively, shares do not appear attractive. We recognise that a Dividend Yield of 6.3% for an AA-rated entity might not be the worst investment in the world if there is no cut: there is a bond equivalent or utility argument. However, putting all the pieces of the jigsaw together, we see shares under performing and believe in this case that the PH Score™ can act as a headwind.

United Arab Emirates

First Abu Dhabi Bank PJSC provides banking services. The Bank offers deposits, personal loans, e-banking, trade finance, foreign exchange, and other banking services. First Abu Dhabi Bank serves customers worldwide.

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First Abu Dhabi Bank PJSC (FAB UH)

VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested

Shares in Vtb Bank Pjsc (VTBR RM) are cheap and trade as a short-dated bond or no-growth stock given the bank's rich strategic franchise within a...

Paul Hollingworth

First Abu Dhabi Bank: Fab Asset Growth

Qatar National Bank QPSC (QNBK QD) , Al Rajhi Bank (RJHI AB) , and First Abu Dhabi Bank PJSC (FAB UH) are the largest banks, by market...

Paul Hollingworth

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