India BFSI - Long-Short - Equity Research Analyst

Raj S, CA, CFA

Artoval Advisors

Art’o’val stands for Art of Valuation. Artoval Advisors LLP is a professionally run advisory firm catering to various financial advisory services including Valuation, Investment Research, Training, Accounting, CFO Services and other ancillary services.

We are passionate about what we do and strongly believe in working with our clients as their extended teams. With Artoval Advisors as their trusted partner, our clients find it easy to achieve efficiency in service delivery without compromising on quality.

True Art of Valuation

Thematic (Sector/Industry)

<ul>
<li>
Large regional banks in the US have been troubled in 2023 by the proposed “Basel III Endgame” regulations, asset quality issues and earning pressure in terms of the high COF</li>
<li>
We believe these factors have made the sector more cyclical and vulnerable to even a mild recession scenario in 2024-25</li>
<li>
We are particularly weary of names at regulatory risk (like USB), and those with higher exposures to CRE</li>
</ul>



Large regional banks in the US have been troubled in 2023 by the proposed “Basel III Endgame” regulations, asset quality issues and earning pressure in terms of the high COF

We believe these factors have made the sector more cyclical and vulnerable to even a mild recession scenario in 2024-25

We are particularly weary of names at regulatory risk (like USB), and those with higher exposures to CRE


Equity Strategy: US Regional Banks: Not Out of the Woods Yet

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.

<ul>
<li>Interest rate risk in the system increased with the Fed’s steep interest rate hikes and due to the opt-out for many US banks on the AFS securities market-to-market capital hit</li>
<li>Uninsured and concentrated deposits, at the first hint of bank trouble, can take flight very quickly especially in the case of concentrated, key elements of the Silicon Vally Bank collapse</li>
<li>We believe that it is premature to look for buy opportunities in US banks, although we believe that the largest US banks are sound in terms of their balance sheets</li>
</ul>


Interest rate risk in the system increased with the Fed’s steep interest rate hikes and due to the opt-out for many US banks on the AFS securities market-to-market capital hit
Uninsured and concentrated deposits, at the first hint of bank trouble, can take flight very quickly especially in the case of concentrated, key elements of the Silicon Vally Bank collapse
We believe that it is premature to look for buy opportunities in US banks, although we believe that the largest US banks are sound in terms of their balance sheets


US Bank Sector Stress – Old Fashioned Risks and a Regulatory Loophole Meet the Digital Age

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

<ul>
<li>Despite a few tumultuous trading days, the S&amp;P 500 remains above its 200-week MA (3590-3600) and the Russell 2000 (IWM) remains above $163 -- both important support levels moving forward.</li>
<li>We continue to see potential for a bear market rally (~+10% from the lows) as long as these support levels hold.</li>
<li>Bear market rallies would be confirmed by bullish reversals of the 2-month downtrends, or above 3810 on the SPX and above $174 on the IWM, and the latter happened today.</li>
</ul>


Despite a few tumultuous trading days, the S&amp;P 500 remains above its 200-week MA (3590-3600) and the Russell 2000 (IWM) remains above $163 -- both important support levels moving forward.
We continue to see potential for a bear market rally (~+10% from the lows) as long as these support levels hold.
Bear market rallies would be confirmed by bullish reversals of the 2-month downtrends, or above 3810 on the SPX and above $174 on the IWM, and the latter happened today.


Bear Market Rally Remains in Play; Russell 2000 (IWM) Short-Term Breakout; Buys in Banks & Insurance

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/jpmorgan-chase-co" target="_blank" data-smartkarma-citation="entities:277:1" rel="noopener">JPMorgan Chase &amp; Co's (JPM US)</a> fortress foundation needs repair. Rather than a rock-solid balance sheet, JPM’s capital foundation needs to be strengthened to handle the leverage load. It has the lowest Supplementary Leverage Ratio (SLR) amongst the largest US banks and its Tier 1 securities suffer, in part, due to this. It is time to lighten the leverage exposure and add a layer of capital. This creates an investment opportunity.As the pandemic-induced economic crisis unfolded last year, we noted that JPM Tier 1 securities were over-bought relative to the leverage exposure risk at the institution. Please see: <a href="https://www.smartkarma.com/compose/insight/49670/Bank%20Credit%20Weekly:%20US%20Capital%20Buffer%20Risk%20&amp;%20Q1%20Earnings%20Reports-%20JPMorgan%20Looks%20Slightly%20Overbought.%20Read%20more:%20https:/skr.ma/uQHaQ" target="_blank" rel="noopener">Bank Credit Weekly: US Capital Buffer Risk &amp; Q1 Earnings Reports- JPMorgan Looks Slightly Overbought.</a>The Fed exemption of Treasury securities and deposits with the central bank from the SLR bought JPM time. Fast forward one year later to the expiration of these exemptions and, despite ample opportunity, JPMorgan did not issue Tier 1 securities until only two weeks ago when it brought a $25 par security. In additional to raising needed capital, the firm recently threatened to stop taking deposits. It may price itself out of the deposit market, temporarily, but this is not a long-term strategy. The SLR is the binding capital constrain on the firm’s asset growth. JPM needs to obtain or retain more Tier 1 capital. We quantify this within.We believe that JPM could easily bring a 10-year Tier 1 bond to the market and find between US$2 to US$3bn in demand, thereby taking the total Tier 1 financing needs, or balance sheet optimization equivalent, down materially for the remainder of the year. Based on its recently issued Preferred, we believe JPM could achieve a price of Treasuries plus circa 300bps in a 10-year Tier 1 note.Aside from its SLR level, JPMorgan’s credit metrics are on-par with, if not superior to, most other large systemically important financial institutions. And yet, as we present within, JPM’s Tier 1 bonds trade at a discount to materially weaker banks located outside the US. Furthermore, we find that JPMorgan’s 2025 callable Tier 1 bond is at least 40bps oversold as, in our view, its call option is overvalued by the same amount.JPM faces an inflection point with respect to its capital adequacy. Concurrently, the Fed may re-adjust the SLR requirements before year-end; however, we believe it would be foolish of JPM not to take the opportunity to increase its SLR in an improving economic environment. It should re-enforce the foundation of its fortress balance sheet. We believe investors should pre-position for this eventuality. We recommend overweighting JPMorgan’s Tier 1 securities.

JPMorgan Chase &amp; Co's (JPM US) fortress foundation needs repair. Rather than a rock-solid balance sheet, JPM’s capital foundation needs to be strengthened to handle the leverage load. It has the lowest Supplementary Leverage Ratio (SLR) amongst the largest US banks and its Tier 1 securities suffer, in part, due to this. It is time to lighten the leverage exposure and add a layer of capital. This creates an investment opportunity.As the pandemic-induced economic crisis unfolded last year, we noted that JPM Tier 1 securities were over-bought relative to the leverage exposure risk at the institution. Please see: Bank Credit Weekly: US Capital Buffer Risk &amp; Q1 Earnings Reports- JPMorgan Looks Slightly Overbought.The Fed exemption of Treasury securities and deposits with the central bank from the SLR bought JPM time. Fast forward one year later to the expiration of these exemptions and, despite ample opportunity, JPMorgan did not issue Tier 1 securities until only two weeks ago when it brought a $25 par security. In additional to raising needed capital, the firm recently threatened to stop taking deposits. It may price itself out of the deposit market, temporarily, but this is not a long-term strategy. The SLR is the binding capital constrain on the firm’s asset growth. JPM needs to obtain or retain more Tier 1 capital. We quantify this within.We believe that JPM could easily bring a 10-year Tier 1 bond to the market and find between US$2 to US$3bn in demand, thereby taking the total Tier 1 financing needs, or balance sheet optimization equivalent, down materially for the remainder of the year. Based on its recently issued Preferred, we believe JPM could achieve a price of Treasuries plus circa 300bps in a 10-year Tier 1 note.Aside from its SLR level, JPMorgan’s credit metrics are on-par with, if not superior to, most other large systemically important financial institutions. And yet, as we present within, JPM’s Tier 1 bonds trade at a discount to materially weaker banks located outside the US. Furthermore, we find that JPMorgan’s 2025 callable Tier 1 bond is at least 40bps oversold as, in our view, its call option is overvalued by the same amount.JPM faces an inflection point with respect to its capital adequacy. Concurrently, the Fed may re-adjust the SLR requirements before year-end; however, we believe it would be foolish of JPM not to take the opportunity to increase its SLR in an improving economic environment. It should re-enforce the foundation of its fortress balance sheet. We believe investors should pre-position for this eventuality. We recommend overweighting JPMorgan’s Tier 1 securities.

US Banks and the SLR Situation: Overweight JPM Tier 1 Securities

We screen for value in <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> Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit versus a Sovereign CDS Portfolio</a> as well as <a href="https://www.smartkarma.com/insights/standard-chartered-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:47266" rel="noopener">Capital, Forbearance and CDS</a> for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

We screen for value in Standard Chartered' s  (StanLn) Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: Standard Chartered Credit versus a Sovereign CDS Portfolio as well as Capital, Forbearance and CDS for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

Standard Chartered: Screening for AT1 Value, Post-Covid-19

United States

Huntington Bancshares Incorporated is a multi-state bank holding company.  The Company's subsidiaries provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services.

Huntington Bancshares (HBAN US)

Equity Strategy: US Regional Banks: Not Out of the Woods Yet

US Regional Banks have been in turmoil for the last several quarters with valuations down by 40% or more on average. We think this is may not yet...

Raj S, CA, CFA

US Bank Sector Stress – Old Fashioned Risks and a Regulatory Loophole Meet the Digital Age

US bank system strains reflects heightened interest rate risk, exacerbated by uninsured and concentrated deposits at a time of sharply rising...

Victor Galliano

Bear Market Rally Remains in Play; Russell 2000 (IWM) Short-Term Breakout; Buys in Banks & Insurance

A bear market rally (+10% from the lows) remains in play as long as the $SPX remains above its 200-week MA (3590-3600) and the $IWM remains above...

Vermilion Research

US Banks and the SLR Situation: Overweight JPM Tier 1 Securities

JPM’s fortress foundation needs repair. It has the lowest SLR buffer, and its Tier 1 suffers from this. Leverage slimming and a deeper capital...

Hank Calenti, CFA

Standard Chartered: Screening for AT1 Value, Post-Covid-19

We screen for value in StanLn’s AT1 curve, including the S$ bond, within a post-Covid-19 economic environment, and we determine StanLn’s capacity...

Hank Calenti, CFA