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> newly issued Additional Tier 1 (AT1) bond is not worth chasing. HSBC remains adrift and a strategic reset in February could have an outsized impact on longer dated notes. We see better risk adjusted returns in lower duration securities of the issuer.HCBC’s 4.6% coupon 2030 first call AT1 bond priced in-line with similarly long-duration AT1 notes. The market’s preference for duration aided in generating attractive pricing for the issuer. Priced at 10-year Treasuries plus 365 basis points, we see little upside and plenty of market-driven downside at this level. Only <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> 4.5% coupon 2030 first call AT1 priced at a tighter spread in 10-year AT1 paper this year and BNP’s market timing was perfect.This issuance also suggests to us a sooner than expected restart of stock buybacks. To limit capital leverage, HSBC Holding’s UK regulator generally does not allow banks to issue AT1 while the firm is buying stock in the open market. Stock buybacks can deplete capital buffers faster than regular dividends and, therefore, are not AT1 investor friendly.  Taken together, a flat yield curve combined with<ul><li><ul>
<li>overpriced risk relative to ratings,</li>
<li>spreads that are tight to similar maturity senior bonds</li>
<li>capital buffers that are in-line with peers but driven by high conversion trigger levels that are not priced-in, and</li>
<li>underpriced credit default risk at the long end</li>
</ul></li></ul>leads us to conclude that the newly issued AT1 note has limited upside relative to its shorter duration cohorts.Finally, investor preference for long-duration assets in the low yield environment appears to be having a large impact on valuations. Chasing spread at this point in the cycle can be dangerous. Given better risk / return opportunities on other parts of the credit continuum, we do not recommend chasing HSBC’s new AT1 bond.

HSBC Holdings' (HSBA LN) newly issued Additional Tier 1 (AT1) bond is not worth chasing. HSBC remains adrift and a strategic reset in February could have an outsized impact on longer dated notes. We see better risk adjusted returns in lower duration securities of the issuer.HCBC’s 4.6% coupon 2030 first call AT1 bond priced in-line with similarly long-duration AT1 notes. The market’s preference for duration aided in generating attractive pricing for the issuer. Priced at 10-year Treasuries plus 365 basis points, we see little upside and plenty of market-driven downside at this level. Only BNP Paribas' (BNP FP) 4.5% coupon 2030 first call AT1 priced at a tighter spread in 10-year AT1 paper this year and BNP’s market timing was perfect.This issuance also suggests to us a sooner than expected restart of stock buybacks. To limit capital leverage, HSBC Holding’s UK regulator generally does not allow banks to issue AT1 while the firm is buying stock in the open market. Stock buybacks can deplete capital buffers faster than regular dividends and, therefore, are not AT1 investor friendly.  Taken together, a flat yield curve combined with
overpriced risk relative to ratings,
spreads that are tight to similar maturity senior bonds
capital buffers that are in-line with peers but driven by high conversion trigger levels that are not priced-in, and
underpriced credit default risk at the long end
leads us to conclude that the newly issued AT1 note has limited upside relative to its shorter duration cohorts.Finally, investor preference for long-duration assets in the low yield environment appears to be having a large impact on valuations. Chasing spread at this point in the cycle can be dangerous. Given better risk / return opportunities on other parts of the credit continuum, we do not recommend chasing HSBC’s new AT1 bond.

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

*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.

*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

*PRA Changes Its Tune On Dividends: The United Kingdom’s (UK) Prudential Regulatory Authority (PRA) recommended last week that the that UK banks can resume paying dividends subject to FY 2020 results. Linking dividends to the recent success of profitability mirrors Federal Reserve Board policy for the large US banks; and *HSBC Should Stand Pat On The Dividend: While its true that HSBC North America (HSBCNA) doesn’t contribute to the bottom-line, it has weighed down Group results through 3Q20 with losses of USD 963 mn. This thing simply needs to go. With this kind of uncertainty along with risks in France and Asia – again exacerbated by COVID-19 – HSBC Holdings Plc (HSBA/LN/5.HK) should be conserving capital especially if the weak HSBCNA is considered a takeunder candidate.

*PRA Changes Its Tune On Dividends: The United Kingdom’s (UK) Prudential Regulatory Authority (PRA) recommended last week that the that UK banks can resume paying dividends subject to FY 2020 results. Linking dividends to the recent success of profitability mirrors Federal Reserve Board policy for the large US banks; and *HSBC Should Stand Pat On The Dividend: While its true that HSBC North America (HSBCNA) doesn’t contribute to the bottom-line, it has weighed down Group results through 3Q20 with losses of USD 963 mn. This thing simply needs to go. With this kind of uncertainty along with risks in France and Asia – again exacerbated by COVID-19 – HSBC Holdings Plc (HSBA/LN/5.HK) should be conserving capital especially if the weak HSBCNA is considered a takeunder candidate.

HSBC Holdings Plc – PRA Says Yes, But Management Should Say No

*Follow-On To Poor 3Q20 Results Announcement: In a follow-on to Citigroup’s (C.US) [Citi] poor 3Q20 results announcement as discussed in our “Citigroup – Watch The Negative Jaws” note dated October 18, 2020, management held a competitor conference call to discuss its improved outlook. According to management, Citi is likely to see reserve releases given the recovery, as loss rates are expected to be lower than in 3Q20; and*Operating Performance Not Addressed: Outside of releasing reserves going forward, Citi said little to dissuade us from believing that negative operating jaws are here to stay.

*Follow-On To Poor 3Q20 Results Announcement: In a follow-on to Citigroup’s (C.US) [Citi] poor 3Q20 results announcement as discussed in our “Citigroup – Watch The Negative Jaws” note dated October 18, 2020, management held a competitor conference call to discuss its improved outlook. According to management, Citi is likely to see reserve releases given the recovery, as loss rates are expected to be lower than in 3Q20; and*Operating Performance Not Addressed: Outside of releasing reserves going forward, Citi said little to dissuade us from believing that negative operating jaws are here to stay.  

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</div><div>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a>, <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a> and <a href="https://www.smartkarma.com/entities/anta-sports-products-ltd" target="_blank" data-smartkarma-citation="entities:10261:1" rel="noopener">Anta Sports Products (2020 HK)</a> while there was short covering on <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a>, <a href="https://www.smartkarma.com/entities/sunac-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:240:1" rel="noopener">Sunac China Holdings (1918 HK)</a> and <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc" target="_blank" data-smartkarma-citation="entities:516:1" rel="noopener">HSBC Holdings (5 HK)</a>. Shorts decreased in most sectors led by Communication Services, Financials, Industrials, Real Estate, Energy and Utilities.</div><div>In Japan, stocks that saw the most shorts were <a href="https://www.smartkarma.com/entities/ana-holdings-inc" target="_blank" data-smartkarma-citation="entities:5308:1" rel="noopener">Ana Holdings (9202 JP)</a>, <a href="https://www.smartkarma.com/entities/suzuki-motor-corp" target="_blank" data-smartkarma-citation="entities:732:1" rel="noopener">Suzuki Motor (7269 JP)</a>, <a href="https://www.smartkarma.com/entities/shionogi-co-ltd" target="_blank" data-smartkarma-citation="entities:19535:1" rel="noopener">Shionogi &amp; Co (4507 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> while shorts decreased on <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/tokyo-electron-ltd" target="_blank" data-smartkarma-citation="entities:280:1" rel="noopener">Tokyo Electron (8035 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/tdk-corp" target="_blank" data-smartkarma-citation="entities:18847:1" rel="noopener">TDK Corp (6762 JP)</a>. Sectorally, shorts increased on Industrials, Health Care, Financials and Consumer Discretionary names.</div><div>In Korea, there was large short covering on <a href="https://www.smartkarma.com/entities/celltrion-inc" target="_blank" data-smartkarma-citation="entities:991:1" rel="noopener">Celltrion Inc (068270 KS)</a>, <a href="https://www.smartkarma.com/entities/samsung-biologics-co-ltd" target="_blank" data-smartkarma-citation="entities:22932:1" rel="noopener">Samsung Biologics Co., (207940 KS)</a>, <a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a> and <a href="https://www.smartkarma.com/entities/sk-hynix-inc" target="_blank" data-smartkarma-citation="entities:16955:1" rel="noopener">SK Hynix (000660 KS)</a>. </div><div>Stocks in Taiwan that saw the highest increase in shorts were <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a>, <a href="https://www.smartkarma.com/entities/largan-precision-co-ltd" target="_blank" data-smartkarma-citation="entities:9126:1" rel="noopener">Largan Precision (3008 TT)</a>, <a href="https://www.smartkarma.com/entities/united-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:6450:1" rel="noopener">United Microelectronics Corp (2303 TT)</a> and <a href="https://www.smartkarma.com/entities/compeq-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:9306:1" rel="noopener">Compeq Manufacturing (2313 TT)</a> while shorts were covered on <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>, <a href="https://www.smartkarma.com/entities/winbond-electronics-corp" target="_blank" data-smartkarma-citation="entities:9177:1" rel="noopener">Winbond Electronics (2344 TT)</a>, <a href="https://www.smartkarma.com/entities/unimicron-technology-corp" target="_blank" data-smartkarma-citation="entities:18778:1" rel="noopener">Unimicron Technology (3037 TT)</a> and <a href="https://www.smartkarma.com/entities/nanya-technology-corp" target="_blank" data-smartkarma-citation="entities:3269:1" rel="noopener">Nanya Technology (2408 TT)</a>. </div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on Ping An Insurance (H) (2318 HK), Meituan (3690 HK), Xiaomi Corp (1810 HK) and Anta Sports Products (2020 HK) while there was short covering on Tencent Holdings (700 HK), China Construction Bank H (939 HK), Sunac China Holdings (1918 HK) and HSBC Holdings (5 HK). Shorts decreased in most sectors led by Communication Services, Financials, Industrials, Real Estate, Energy and Utilities.In Japan, stocks that saw the most shorts were Ana Holdings (9202 JP), Suzuki Motor (7269 JP), Shionogi &amp; Co (4507 JP) and Mitsubishi UFJ Financial (MUFG) (8306 JP) while shorts decreased on Fast Retailing (9983 JP), Tokyo Electron (8035 JP), Canon Inc (7751 JP) and TDK Corp (6762 JP). Sectorally, shorts increased on Industrials, Health Care, Financials and Consumer Discretionary names.In Korea, there was large short covering on Celltrion Inc (068270 KS), Samsung Biologics Co., (207940 KS), Samsung Electronics (005930 KS) and SK Hynix (000660 KS). Stocks in Taiwan that saw the highest increase in shorts were Evergreen Marine Corp (2603 TT), Largan Precision (3008 TT), United Microelectronics Corp (2303 TT) and Compeq Manufacturing (2313 TT) while shorts were covered on TSMC (2330 TT), Winbond Electronics (2344 TT), Unimicron Technology (3037 TT) and Nanya Technology (2408 TT). 

Asia Short Interest: BIG Covering in HK & Korea

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 (5 HK)

HSBC’s New AT1: Not Worth Chasing

HSBC remains adrift and a strategic reset could have an outsized impact on longer dated notes. The newly issued AT1 is not worth chasing. We see...

Hank Calenti, CFA

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

HSBC Holdings Plc – PRA Says Yes, But Management Should Say No

HSBC HOLDINGS: PRA Allowing UK Banks To Dividend But Is Restrictive. HSBC Should Stay Away From Cash Dividends Given The High Degree Of Balance...

Thomas J. Monaco

Citigroup – Reserve Releases Coming

CITIGROUP: Call Reveals Reserve Releases To Buttress Results Going Forward, But No Word On Improving Negative Operating Jaws

Thomas J. Monaco

Asia Short Interest: BIG Covering in HK & Korea

There was a big drop in short interest in Hong Kong and Korea while shorts rose in Japan mainly led by ANA on the back of the offering. Shorts in...

Brian Freitas

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