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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div>In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal. We also recap our earlier ideas and recommend exiting a few positions, especially where there are gains and the price ratios are at turning points.</div><div>
These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.
These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.
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In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal. We also recap our earlier ideas and recommend exiting a few positions, especially where there are gains and the price ratios are at turning points.
These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.
These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.


India Financials

Saumya Agarwal

Thematic (Sector/Industry)

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure due to multiple factors playing out such as Moratorium, the Supreme Court interim order and the Restructuring framework. How well placed are Indian Banks to ride the current stress cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure due to multiple factors playing out such as Moratorium, the Supreme Court interim order and the Restructuring framework. How well placed are Indian Banks to ride the current stress cycle?

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Aadhar Housing Finance Ltd / Equity Capital Markets

Aadhar Housing Finance (AHF) was the largest affordable housing finance company (HFC) in India, in terms of AUM as of Mar 2020. It plans to raise around US$1bn via selling a mix of primary and secondary shares in its India IPO. AHF is 98.72% owned by Blackstone.AHF is entirely retail-focussed, serving economically weaker and low-to-middle income customers. The average ticket size of its loans was INR0.85m, with an average loan-to-value of 56.73%, as of Sep 2020. 64.83% of its gross AUM consisted of loans to salaried customers, with the rest coming from self-employed customers, as of Sep 2020. AHF’s customer base has grown at 22.18% CAGR over FY18-20, while AUM grew at a CAGR of 19.79%. Total income growth outpaced AUM growth with a 30.85% CAGR over FY18-20.However, its disbursements have been falling and its AUM growth has slowed down over the past few years. In addition, its disclosures aren’t exactly the best.

Aadhar Housing Finance (AHF) was the largest affordable housing finance company (HFC) in India, in terms of AUM as of Mar 2020. It plans to raise around US$1bn via selling a mix of primary and secondary shares in its India IPO. AHF is 98.72% owned by Blackstone.AHF is entirely retail-focussed, serving economically weaker and low-to-middle income customers. The average ticket size of its loans was INR0.85m, with an average loan-to-value of 56.73%, as of Sep 2020. 64.83% of its gross AUM consisted of loans to salaried customers, with the rest coming from self-employed customers, as of Sep 2020. AHF’s customer base has grown at 22.18% CAGR over FY18-20, while AUM grew at a CAGR of 19.79%. Total income growth outpaced AUM growth with a 30.85% CAGR over FY18-20.However, its disbursements have been falling and its AUM growth has slowed down over the past few years. In addition, its disclosures aren’t exactly the best.

Aadhar Housing Finance Pre-IPO - Decent past Growth but Comes with Weird Disclosures

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in February. Global monetary accommodation is in large part responsible for recent outperformance. Credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. Continued performance, however, cannot be ruled out as credit tourists crowd-in and markets melt-up.Asia’s US$-denominated bank bonds (x-Japan) had an outstanding month with each of the +100 bonds that we track tightening during the month of February, in Z-spread terms. The return of the economic reflation trade, with rising long-term rates on increased economic growth expectations, and short-term levels anchored by central banks globally, pushed investors to grab low risk, high duration securities. This could unwind spectacularly when real inflation concerns appear.Short duration, non-investment grade bond lagged with lower rated bonds at the bottom in terms of performance. Fundamental concerns remain regarding the weakest financial credits in Asia and these remain concentrated in India. At the same time, extension risk concerns may be overdone amongst the callable bonds which underperformed in February.In addition to identifying the bonds which out- and under-performed in February, we dive deeper into the Philippine banks which outperformed, despite starting at already tight spread levels, and we consider if extension risk being priced into the short-callable, China-centric, bonds is appropriate.

Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in February. Global monetary accommodation is in large part responsible for recent outperformance. Credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. Continued performance, however, cannot be ruled out as credit tourists crowd-in and markets melt-up.Asia’s US$-denominated bank bonds (x-Japan) had an outstanding month with each of the +100 bonds that we track tightening during the month of February, in Z-spread terms. The return of the economic reflation trade, with rising long-term rates on increased economic growth expectations, and short-term levels anchored by central banks globally, pushed investors to grab low risk, high duration securities. This could unwind spectacularly when real inflation concerns appear.Short duration, non-investment grade bond lagged with lower rated bonds at the bottom in terms of performance. Fundamental concerns remain regarding the weakest financial credits in Asia and these remain concentrated in India. At the same time, extension risk concerns may be overdone amongst the callable bonds which underperformed in February.In addition to identifying the bonds which out- and under-performed in February, we dive deeper into the Philippine banks which outperformed, despite starting at already tight spread levels, and we consider if extension risk being priced into the short-callable, China-centric, bonds is appropriate.

Bank Credit Compass: High Duration, Low Risk Notes Outperform in Feb.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

The capital markets continue to reward private sector banks with rich valuations, benefitting shareholders. But larger stakeholders such as bank customers are registering a steep increase in complaints to the banks’ ombudsman. For the year July 1, 2019 to June 30, 2020, customer <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51095" target="_blank" rel="noopener">complaints</a> (per branch and per 1,000 accounts) in the entire banking industry rose, but the complaint rate for private sector banks increased significantly, and remain higher than the industry. In FY2020 (July-June), while the disposal rate for complaints for the industry was 92.4%, it has been coming down from 96.5% in FY2018. It is likely that the Covid19 pandemic and the severe lockdown in India inconvenienced banking customers, resulting in a rise in industry complaints. It is also possible that since private sector banks are concentrated in urban India and have a younger customer age profile more familiar with digital operations their customers find it easier to file complaints digitally but, nevertheless, stakeholders should be concerned about the alarming rise in complaints for the much fancied private sector banks.  It is unfortunate, though not surprising, that sell-side research regularly highlights the high CASA (current and saving account deposits), substantial fee income and other positive features of private sector banks, but steadfastly refuses to even acknowledge the growing customer complaints, which are a creditable documentation of customer dis-satisfaction with the banking services. Since few customers are motivated and informed enough to register a complaint, such complaints are the tip of the iceberg of customer dissatisfaction. In banking, customers by number are much larger stakeholders than shareholders, and when customer complaints report not just a sharp increase but also a rising trend, it needs to be highlighted by the sell-side, business media, credit rating agencies and the banking regulator.Customer dis-satisfaction at the private sector banks is a highly relevant issue as the general perception is that customer service is superior to the government banks which this data contradicts. Furthermore, if banks such as HDFC Bank and Kotak Mahindra Bank continue to report higher customer complaints and since the customer profile is common to all new generation private sector banks there is a concern that their customers can shift to other private sector banks offering better customer service.Pressure must be brought on senior management of banks to address this issue. Merely focusing on superior profitability enriching valuations, and ignoring the rise in customer complaints, can undermine any business model over the medium term, and shareholders need to take cognisance of such an important issue.

The capital markets continue to reward private sector banks with rich valuations, benefitting shareholders. But larger stakeholders such as bank customers are registering a steep increase in complaints to the banks’ ombudsman. For the year July 1, 2019 to June 30, 2020, customer complaints (per branch and per 1,000 accounts) in the entire banking industry rose, but the complaint rate for private sector banks increased significantly, and remain higher than the industry. In FY2020 (July-June), while the disposal rate for complaints for the industry was 92.4%, it has been coming down from 96.5% in FY2018. It is likely that the Covid19 pandemic and the severe lockdown in India inconvenienced banking customers, resulting in a rise in industry complaints. It is also possible that since private sector banks are concentrated in urban India and have a younger customer age profile more familiar with digital operations their customers find it easier to file complaints digitally but, nevertheless, stakeholders should be concerned about the alarming rise in complaints for the much fancied private sector banks.  It is unfortunate, though not surprising, that sell-side research regularly highlights the high CASA (current and saving account deposits), substantial fee income and other positive features of private sector banks, but steadfastly refuses to even acknowledge the growing customer complaints, which are a creditable documentation of customer dis-satisfaction with the banking services. Since few customers are motivated and informed enough to register a complaint, such complaints are the tip of the iceberg of customer dissatisfaction. In banking, customers by number are much larger stakeholders than shareholders, and when customer complaints report not just a sharp increase but also a rising trend, it needs to be highlighted by the sell-side, business media, credit rating agencies and the banking regulator.Customer dis-satisfaction at the private sector banks is a highly relevant issue as the general perception is that customer service is superior to the government banks which this data contradicts. Furthermore, if banks such as HDFC Bank and Kotak Mahindra Bank continue to report higher customer complaints and since the customer profile is common to all new generation private sector banks there is a concern that their customers can shift to other private sector banks offering better customer service.Pressure must be brought on senior management of banks to address this issue. Merely focusing on superior profitability enriching valuations, and ignoring the rise in customer complaints, can undermine any business model over the medium term, and shareholders need to take cognisance of such an important issue.

Does Customer Satisfaction Matter to the Share Valuations of Private Sector Banks?

India

ICICI Bank Limited operates as a bank. The Bank offers saving accounts, loans, debit, credit cards, insurance, investments, mortgages, and online banking services. ICICI Bank serves customers worldwide.

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ICICI Bank Ltd (ICICIBC IN)

Pair Trading Ideas - Asian Financials

Pair trades on large cap Asian financials that trade in excess of US$20m a day. These pairs trade in bands versus each other and currently offer...

Brian Freitas

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure . Can...

Saumya Agarwal

Aadhar Housing Finance Pre-IPO - Decent past Growth but Comes with Weird Disclosures

Aadhar Housing Finance, the largest affordable housing finance company, plans to raise around US$1bn via selling a mix of primary and secondary...

Sumeet Singh

Bank Credit Compass: High Duration, Low Risk Notes Outperform in Feb.

Lower risk tolerance combined with duration desires to drive performance in Feb. Continued performance cannot be ruled out as credit tourists crowd...

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Pair Trading Ideas - Asian Financials

Pair trades on large cap Asian financials that trade in excess of US$20m a day. These pairs trade in bands versus each other and currently offer...

Brian Freitas

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure . Can...

Saumya Agarwal

Aadhar Housing Finance Pre-IPO - Decent past Growth but Comes with Weird Disclosures

Aadhar Housing Finance, the largest affordable housing finance company, plans to raise around US$1bn via selling a mix of primary and secondary...

Sumeet Singh

Bank Credit Compass: High Duration, Low Risk Notes Outperform in Feb.

Lower risk tolerance combined with duration desires to drive performance in Feb. Continued performance cannot be ruled out as credit tourists crowd...

Hank Calenti, CFA

Does Customer Satisfaction Matter to the Share Valuations of Private Sector Banks?

That customer grievances are growing is of less importance when shareholders are being rewarded today. But the durability of a business depends on...

Hemindra Hazari