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

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered's (StanLn)</a> decision to restart its share-buyback program while simultaneously aiming to achieve a 10% Return on Tangible Equity (ROTE) is not creditor friendly. The share-buyback is also inconsistent with trying to grow revenues at a cumulative annual growth rate of 5% to 7% over the medium term, as capital constraints may mean missing revenue opportunities. This is at complete odds with <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> wise decision to forgo buybacks through this year. Taken together with management’s plans toward achieving a higher ROTE, this is not credit positive. Pre-Covid-19, Standard Chartered’s problem was excess capacity in a fragmented distribution network. Covid-19 accentuated other weaknesses, including oversized net interest income reliance as well as bancassurance growth sensitivity to border crossing constraints. Underpinned by cost containment difficulties, StanLn is lost at sea, hoping for a return to higher interest rates, open borders, and greater globalization. We are in a world comprised of the exact opposite these days.Within this insight, we review StanLn’s 2020 annual and Q4 results as well as assess the firm’s plans to achieve a higher ROTE over the medium term. Our conclusion is that it is difficult to get excited about Standard Chartered’s US$-denominated Additional Tier 1 (AT1) bonds. In our view, most of these notes trade right where they belong, if not too dear, relative to other banks. If we had to buy a StanLn bond, we would favor the Singapore-dollar denominated AT1 note, despite the results and targets going forward.

Standard Chartered's (StanLn) decision to restart its share-buyback program while simultaneously aiming to achieve a 10% Return on Tangible Equity (ROTE) is not creditor friendly. The share-buyback is also inconsistent with trying to grow revenues at a cumulative annual growth rate of 5% to 7% over the medium term, as capital constraints may mean missing revenue opportunities. This is at complete odds with HSBC Holdings' (HSBA LN) wise decision to forgo buybacks through this year. Taken together with management’s plans toward achieving a higher ROTE, this is not credit positive. Pre-Covid-19, Standard Chartered’s problem was excess capacity in a fragmented distribution network. Covid-19 accentuated other weaknesses, including oversized net interest income reliance as well as bancassurance growth sensitivity to border crossing constraints. Underpinned by cost containment difficulties, StanLn is lost at sea, hoping for a return to higher interest rates, open borders, and greater globalization. We are in a world comprised of the exact opposite these days.Within this insight, we review StanLn’s 2020 annual and Q4 results as well as assess the firm’s plans to achieve a higher ROTE over the medium term. Our conclusion is that it is difficult to get excited about Standard Chartered’s US$-denominated Additional Tier 1 (AT1) bonds. In our view, most of these notes trade right where they belong, if not too dear, relative to other banks. If we had to buy a StanLn bond, we would favor the Singapore-dollar denominated AT1 note, despite the results and targets going forward.

Standard Chartered Results: Lost at Sea with No Credit Catalyst

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

*Poor Set Of Results, Which Should Have Been Worse: Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and*Credit Challenges Are Top Of Mind As Well: STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.

*Poor Set Of Results, Which Should Have Been Worse: Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and*Credit Challenges Are Top Of Mind As Well: STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.     

*Negative Jaws:  Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 4Q20 net profit of SGD 1.1 bn, a SGD 102 mn (9.9%) increase on a linked quarter basis. Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line performance would have come in at SGD 994 mn  - down SGD 34 mn (3.3%). In addition, OCBC continues to suffer from negative operating jaws, with revenues declining 2.6% and costs increasing 2.3%;*Credit Improving In Reality: We have become more optimistic. By our calculation, we find that net new NPL growth continued to be negative on an annualized basis at SGD 78 mn or 8.0% annualized (versus 2.3% annualized).  We also find that reserves are now where they need to be, which is a far cry from where currently DBS Group Holdings (DBS.SP) is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20.

*Negative Jaws:  Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 4Q20 net profit of SGD 1.1 bn, a SGD 102 mn (9.9%) increase on a linked quarter basis. Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line performance would have come in at SGD 994 mn  - down SGD 34 mn (3.3%). In addition, OCBC continues to suffer from negative operating jaws, with revenues declining 2.6% and costs increasing 2.3%;*Credit Improving In Reality: We have become more optimistic. By our calculation, we find that net new NPL growth continued to be negative on an annualized basis at SGD 78 mn or 8.0% annualized (versus 2.3% annualized).  We also find that reserves are now where they need to be, which is a far cry from where currently DBS Group Holdings (DBS.SP) is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20. 

Oversea Chinese Banking Corp. – Mixed Bag, But AQ Improving

*Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and*Did HSBC Overstate Results?:While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.

*Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and*Did HSBC Overstate Results?:While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.  

Hang Seng Bank – HSBC Fingerprints All Over This Print

United Kingdom

HSBC Holdings plc is the holding company for the HSBC Group. The Company provides a variety of international banking and financial services, including retail and corporate banking, trade, trusteeship, securities, custody, capital markets, treasury, private and investment banking, and insurance.  The Group operates worldwide.

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HSBC Holdings (HSBA LN)

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

Standard Chartered Results: Lost at Sea with No Credit Catalyst

StanLn’s need to focus on the E in ROTE is not creditor friendly. Recent results and exposures also do not offer comfort. It is difficult to get...

Hank Calenti, CFA

Standard Chartered - What A Mess

STANDARD CHARTERED: STAN reported 2H20 losses of USD 315 mn, declining 122.5% HOH as it struggled across the board. Negative operating jaws for...

Thomas J. Monaco

Oversea Chinese Banking Corp. – Mixed Bag, But AQ Improving

OVERSEA CHINESE BANKING CORP: Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line would've declined...

Thomas J. Monaco

Hang Seng Bank – HSBC Fingerprints All Over This Print

HANG SENG BANK: Hang Seng reported both a weak and low quality 2H20 result - declining 17.5% HOH due loan contraction and NIM compression. The...

Thomas J. Monaco

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