Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<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> recently issued 4.6% coupon 2030 first call note is beginning to look overbought relative to other banks and relative to its own credit curve. At the same time, returns are likely to be negatively impacted by rising interest rates as the year progresses. As such, we screen for value in HSBC’s Additional Tier 1 (AT1) curve for alternate investment options to achieve greater total returns this year.This is the second insight in a series on HSBC. In the first note, we considered the bank's ability to withstand a material increase in its credit costs and identified potential Covid-19 asset quality sensitivity. Please see <a href="https://www.smartkarma.com/insights/hsbc-capital-forbearance-and-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:47598" rel="noopener">HSBC: Capital, Forbearance and Covid-19 Sensitivity</a> for more details.In this insight, we determine where the market may be mispricing the bank's credit risk and screen for potential extension risk while considering the liquidity of HSBC's AT1 instruments denominated in US$, Singapore-dollars and Euros.The longer the duration of the bond, the greater the price impact from a parallel shift in the yield curve. In theory, credit spreads should remain unchanged, to strengthen, as the economy recovers, and rates rise. In practice, this depends on the spread level per unit of duration along the credit curve. This accounts for the forward-looking nature of the market with respect to perceived credit risk. With an effective duration of 7.85 years and a relatively low credit risk premium, the 2030 callable AT1 note could suffer a lower total return than all other HSBC AT1s, as the yield curve steepens.Concurrently, given HSBC's Common Equity Tier 1 (CET1) capital buffer of approximately 370 basis points, the 10-year note trades tight relative to banks with higher CET1 buffers. In fact, <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS Group's (UBSG VX)</a> recently issued 4 3/8% coupon 2031 callable bond currently looks better value relative to each bank’s respective capital buffers.Taken together, we find better value elsewhere along HSBC’s AT1 curve.

HSBC Holdings' (HSBA LN) recently issued 4.6% coupon 2030 first call note is beginning to look overbought relative to other banks and relative to its own credit curve. At the same time, returns are likely to be negatively impacted by rising interest rates as the year progresses. As such, we screen for value in HSBC’s Additional Tier 1 (AT1) curve for alternate investment options to achieve greater total returns this year.This is the second insight in a series on HSBC. In the first note, we considered the bank's ability to withstand a material increase in its credit costs and identified potential Covid-19 asset quality sensitivity. Please see HSBC: Capital, Forbearance and Covid-19 Sensitivity for more details.In this insight, we determine where the market may be mispricing the bank's credit risk and screen for potential extension risk while considering the liquidity of HSBC's AT1 instruments denominated in US$, Singapore-dollars and Euros.The longer the duration of the bond, the greater the price impact from a parallel shift in the yield curve. In theory, credit spreads should remain unchanged, to strengthen, as the economy recovers, and rates rise. In practice, this depends on the spread level per unit of duration along the credit curve. This accounts for the forward-looking nature of the market with respect to perceived credit risk. With an effective duration of 7.85 years and a relatively low credit risk premium, the 2030 callable AT1 note could suffer a lower total return than all other HSBC AT1s, as the yield curve steepens.Concurrently, given HSBC's Common Equity Tier 1 (CET1) capital buffer of approximately 370 basis points, the 10-year note trades tight relative to banks with higher CET1 buffers. In fact, UBS Group's (UBSG VX) recently issued 4 3/8% coupon 2031 callable bond currently looks better value relative to each bank’s respective capital buffers.Taken together, we find better value elsewhere along HSBC’s AT1 curve.

HSBC: AT1 Positioning for Greater Total Returns

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

*Costs Now An Issue: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported CNY 6.5 bn – declining CNY 2.2 bn (25.1%) on a linked quarter basis. In this environment, credit troubles no doubt are a foregone conclusion. However, this was not necessarily PAB’s biggest issue in its most results announcement, where the bulk of the earnings decline was attributed to a CNY 1.9 bn (17.1%) linked quarter increase in costs;*Credit Is WEAKER Still:  We find that credit weakness is actually deteriorating at an even more accelerated pace than in 3Q20, as net new NPLs have increased CNY 20.5 bn or a massive 241% (223% in 3Q20) on an annualized basis. We also find that PAB’s reserves still remain quite light by CNY 152 bn if we assume a 2x NPL ratio. This shortfall represents 60% of stated equity; and*Fundamentally Challenged Still: Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans.

*Costs Now An Issue: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported CNY 6.5 bn – declining CNY 2.2 bn (25.1%) on a linked quarter basis. In this environment, credit troubles no doubt are a foregone conclusion. However, this was not necessarily PAB’s biggest issue in its most results announcement, where the bulk of the earnings decline was attributed to a CNY 1.9 bn (17.1%) linked quarter increase in costs;*Credit Is WEAKER Still:  We find that credit weakness is actually deteriorating at an even more accelerated pace than in 3Q20, as net new NPLs have increased CNY 20.5 bn or a massive 241% (223% in 3Q20) on an annualized basis. We also find that PAB’s reserves still remain quite light by CNY 152 bn if we assume a 2x NPL ratio. This shortfall represents 60% of stated equity; and*Fundamentally Challenged Still: Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans. 

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.

If ever there were a time for the Scottish conservative bank to show poor results, it would be now. This may be the best way for the bank to prove that it must accelerate restructuring, while at the same time, trying to make for a better comparative in FY21; the Kitchen Sink effect.

If ever there were a time for the Scottish conservative bank to show poor results, it would be now. This may be the best way for the bank to prove that it must accelerate restructuring, while at the same time, trying to make for a better comparative in FY21; the Kitchen Sink effect. 

A pack of small, but smart, investors in a free and open market caught hedge funds off guard this week. The hunter was hunted, and the resulting equity market volatility drove financial concerns more than financial conditions. The GameStop situation is noise and not a signal for risk assets. For a nasty global risk asset unwind, there needs to be a catalyst in the form of either an economic downturn or a material tightening in Fed policy. Neither is in play. Weakness in Asia High Yield this week may create opportunities.More importantly, for credit investors, short-term Libor levels hit record lows on Friday. This matters as investors that focus on high-quality short-term securities may be pushed into commercial paper or other very short-duration paper. The rate curve should bull steepening from the excess amount of cash in the market. The flood of cash could drive credit yields even lower.In this environment, U.S. CCC-rated and Asia High Yield index spreads widened.  More and more brokerage houses are recommending Asia High Yield as the place to be in 2021, despite property developer concerns in China. Our take is that fundamentals have yet to catch-up with spreads in the US CCC-rated area although we suspect that they may. However, US High Yield has a higher effective duration now, versus pre-Covid, and versus Asia High Yield. As such US High Yield credits have more limited upside in the reflation scenario. A delay in the reflation scenario should benefit Asia-headquartered risk assets.At the same time, ivory-tower syndrome has taken over the Fed. Chairman Powell’s comments this week that what is really driving asset prices is not monetary policy, suggests that the disconcerting disconnect between financial and economic conditions is not understood by senior policymakers. If the Chairman’s comments were true, then there would be no need to signal a tapering of asset purchases well in advance. Whether you call it price fixing or price guidance by the Fed and ECB policymakers, it does not matter as you cannot fight it. The Fear of Missing Out (FOMO) is real in the credit markets.Despite these challenges, Asia’s bank spreads continued to tighten during the week. Officials in India anticipate 11% GDP growth in ’21-’22 from April, following vaccination, in-line with the 11.5% and 8.1% projected for India and China, respectively, by the IMF. The near-term future is in South Asian, but this may not apply to all India-headquartered banks. We also note that significant bank recapitalized in needed for these forecasts to materialize. Please see <a href="https://www.smartkarma.com/insights/yes-bank-solvency-simulation-with-covid-19-coverage-scenarios" target="_blank" data-smartkarma-citation="insights:47523" rel="noopener">YES Bank Solvency Simulation with Covid-19 Coverage Scenarios</a> for an example of the difficulties facing India-headquartered banks.Market Outlook: GameStop is noise and not a signal. Although weakening in some markets, economic growth and continued monetary accommodation remain the main drivers for credit markets. Credit fundamentals should catch-up with repressed credit spreads. Therefore, credit has limited upside in a fast reflation scenario. Reconciliation or negotiation may deliver the same stimulus result over the near term.  As such, a slower, more contained, reflation environment could be Emerging Market credit supportive.

A pack of small, but smart, investors in a free and open market caught hedge funds off guard this week. The hunter was hunted, and the resulting equity market volatility drove financial concerns more than financial conditions. The GameStop situation is noise and not a signal for risk assets. For a nasty global risk asset unwind, there needs to be a catalyst in the form of either an economic downturn or a material tightening in Fed policy. Neither is in play. Weakness in Asia High Yield this week may create opportunities.More importantly, for credit investors, short-term Libor levels hit record lows on Friday. This matters as investors that focus on high-quality short-term securities may be pushed into commercial paper or other very short-duration paper. The rate curve should bull steepening from the excess amount of cash in the market. The flood of cash could drive credit yields even lower.In this environment, U.S. CCC-rated and Asia High Yield index spreads widened.  More and more brokerage houses are recommending Asia High Yield as the place to be in 2021, despite property developer concerns in China. Our take is that fundamentals have yet to catch-up with spreads in the US CCC-rated area although we suspect that they may. However, US High Yield has a higher effective duration now, versus pre-Covid, and versus Asia High Yield. As such US High Yield credits have more limited upside in the reflation scenario. A delay in the reflation scenario should benefit Asia-headquartered risk assets.At the same time, ivory-tower syndrome has taken over the Fed. Chairman Powell’s comments this week that what is really driving asset prices is not monetary policy, suggests that the disconcerting disconnect between financial and economic conditions is not understood by senior policymakers. If the Chairman’s comments were true, then there would be no need to signal a tapering of asset purchases well in advance. Whether you call it price fixing or price guidance by the Fed and ECB policymakers, it does not matter as you cannot fight it. The Fear of Missing Out (FOMO) is real in the credit markets.Despite these challenges, Asia’s bank spreads continued to tighten during the week. Officials in India anticipate 11% GDP growth in ’21-’22 from April, following vaccination, in-line with the 11.5% and 8.1% projected for India and China, respectively, by the IMF. The near-term future is in South Asian, but this may not apply to all India-headquartered banks. We also note that significant bank recapitalized in needed for these forecasts to materialize. Please see YES Bank Solvency Simulation with Covid-19 Coverage Scenarios for an example of the difficulties facing India-headquartered banks.Market Outlook: GameStop is noise and not a signal. Although weakening in some markets, economic growth and continued monetary accommodation remain the main drivers for credit markets. Credit fundamentals should catch-up with repressed credit spreads. Therefore, credit has limited upside in a fast reflation scenario. Reconciliation or negotiation may deliver the same stimulus result over the near term.  As such, a slower, more contained, reflation environment could be Emerging Market credit supportive.

Bank Credit Weekly: GameStop Is Noise, Not a Signal, for Risk Assets

<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> capital ratios remain above regulatory minimums, even after adjusting COVID-19 forbearance loans at Stage 3 provisioning levels. However, the resulting theoretically slim real economic capital buffer would leave the bank sensitive to another downturn. The risk for AT1 and other credit investors is that HSBC's board misinterprets the “surplus” capital of the firm as being something manufactured by management, rather than artificially engineered by regulators.Having recently raised AT1 capital, HSBC will, undoubtedly, restart equity buy-backs as a show of strength. AT1 investors should be concerned by a large return of capital at this point in the economic. In fact, given the relief cohort composition from a product and geographic perspective, combined with limited personal loan reserve coverage, credit investors should prefer continued capital accretion rather than large “surplus” capital outflows.  Like most banks globally, HSBC’s credit costs were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped the bank report better results and inflated HSBC’s capital ratios despite the ongoing health crisis. Zero-recovery rates on both the unprovided level of current non-performing assets and the Covid-19 relief portfolio would take HSBC’s CET1 capital buffer into uncomfortable territory. However, annual, normalized, pre-provision income is around 63% the capital buffer at risk from Covid-19 relief granted. This equates to an earn-out period of 1.6 years. This 18-month time-period should be sufficient for the Covid-19 relief portfolio to mature.We caution that it is premature to calculate real economic performance by the Covid-19 relief cohort. As of 30 June, HSBC estimated that over 96% of its Covid-19 relief measures were due to expire by year-end. However, since then, several countries where HSBC operates have extended the duration of legislated relief and others are experiencing another wave of Covid-19 lockdowns. In fact, the 50% reduction in relief that HSBC had forecast to expire by the end of September did not materialize. The question is where are the stress points in the relief cohort?Covid-19 relief was largest against corporate and commercial wholesale borrowers both in terms of the amount of relief provided and relative to the total amount of wholesale loans outstanding. At the same time, Covid-19 relief assistance to unsecured personal loan customers was materially lower despite higher default rates in personal loans. This is not to say that personal lending may not become problematic going forward as that is dependent on the speed, strength, and sustainability of the on-going economic recovery, particularly as it applies to employment levels. The limited assistance provided against personal lending may result in higher delinquencies within this portfolio over time.  In geographic terms, Covid-19 relief granted was largest in Hong Kong. In fact, Hong Kong exposure may be problematic for the firm, given the higher percentage of wholesale relief granted  combined with generally higher expected loss-given-defaults within this type of lending.Meanwhile, with one-month Hibor trading flat to one-month Libor, the easy money to be made from borrowing in USD and lending in HKD is over. The exceedingly low rate may be beneficial to Hong Kong based corporate borrowers, but it may not be so beneficial to HSBC’s net interest margin. Nonetheless, some margin pain may be the price to pay for lower Covid-19 related delinquencies amongst Hong Kong corporate borrowers. Another round of Coronavirus lockdowns, further unrest or another economic shock in Hong Kong, could result in rising non-performing loans.

HSBC Holdings' (HSBA LN) capital ratios remain above regulatory minimums, even after adjusting COVID-19 forbearance loans at Stage 3 provisioning levels. However, the resulting theoretically slim real economic capital buffer would leave the bank sensitive to another downturn. The risk for AT1 and other credit investors is that HSBC's board misinterprets the “surplus” capital of the firm as being something manufactured by management, rather than artificially engineered by regulators.Having recently raised AT1 capital, HSBC will, undoubtedly, restart equity buy-backs as a show of strength. AT1 investors should be concerned by a large return of capital at this point in the economic. In fact, given the relief cohort composition from a product and geographic perspective, combined with limited personal loan reserve coverage, credit investors should prefer continued capital accretion rather than large “surplus” capital outflows.  Like most banks globally, HSBC’s credit costs were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped the bank report better results and inflated HSBC’s capital ratios despite the ongoing health crisis. Zero-recovery rates on both the unprovided level of current non-performing assets and the Covid-19 relief portfolio would take HSBC’s CET1 capital buffer into uncomfortable territory. However, annual, normalized, pre-provision income is around 63% the capital buffer at risk from Covid-19 relief granted. This equates to an earn-out period of 1.6 years. This 18-month time-period should be sufficient for the Covid-19 relief portfolio to mature.We caution that it is premature to calculate real economic performance by the Covid-19 relief cohort. As of 30 June, HSBC estimated that over 96% of its Covid-19 relief measures were due to expire by year-end. However, since then, several countries where HSBC operates have extended the duration of legislated relief and others are experiencing another wave of Covid-19 lockdowns. In fact, the 50% reduction in relief that HSBC had forecast to expire by the end of September did not materialize. The question is where are the stress points in the relief cohort?Covid-19 relief was largest against corporate and commercial wholesale borrowers both in terms of the amount of relief provided and relative to the total amount of wholesale loans outstanding. At the same time, Covid-19 relief assistance to unsecured personal loan customers was materially lower despite higher default rates in personal loans. This is not to say that personal lending may not become problematic going forward as that is dependent on the speed, strength, and sustainability of the on-going economic recovery, particularly as it applies to employment levels. The limited assistance provided against personal lending may result in higher delinquencies within this portfolio over time.  In geographic terms, Covid-19 relief granted was largest in Hong Kong. In fact, Hong Kong exposure may be problematic for the firm, given the higher percentage of wholesale relief granted  combined with generally higher expected loss-given-defaults within this type of lending.Meanwhile, with one-month Hibor trading flat to one-month Libor, the easy money to be made from borrowing in USD and lending in HKD is over. The exceedingly low rate may be beneficial to Hong Kong based corporate borrowers, but it may not be so beneficial to HSBC’s net interest margin. Nonetheless, some margin pain may be the price to pay for lower Covid-19 related delinquencies amongst Hong Kong corporate borrowers. Another round of Coronavirus lockdowns, further unrest or another economic shock in Hong Kong, could result in rising non-performing loans.

HSBC: Capital, Forbearance and Covid-19 Sensitivity

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: AT1 Positioning for Greater Total Returns

HSBC’s recently issued AT1 is beginning to look overbought. Returns may be negatively impacted by rising interest rates. We screen for better total...

Hank Calenti, CFA

Ping An Insurance - Awful Bank Result

PING AN INSURANCE: PAB reported a 25.1% lower linked quarter result. The bulk of the earnings decline was attributed to a 17.1% increase in costs;...

Thomas J. Monaco

HSBC – One Bank, One Kitchen Sink

HSBC may find it advantageous to report high credit costs in 4Q20. This may be the best way to prove that it must accelerate restructuring and to...

Daniel Tabbush

Bank Credit Weekly: GameStop Is Noise, Not a Signal, for Risk Assets

GME is noise, not a signal. Economic growth and monetary policy remain the drivers for credit markets. Reconciliation or negotiation equal the same...

Hank Calenti, CFA

HSBC: Capital, Forbearance and Covid-19 Sensitivity

AT1 holders should be concerned by a large stock buyback at this point in the economic cycle. Hong Kong may be problematic, given higher wholesale...

Hank Calenti, CFA

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