Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Quantitative Analysis

In this report, we screen for the largest overweight Country/Sectors across Global EM by analysing the allocations of long-only active Emerging Market funds.In part one of the series, we focus on Indian Financials.  We look at where current allocations sit versus history, drill down to find the most widely held stocks in the sector, the key overweight and the key underweight holdings. We find that despite it being the largest overweight holding, Indian Financials exposure is far from excessive, both versus its own history and versus peers.  Furthermore, recent activity points to an increase in exposure among managers.Our Emerging Market fund universe consists of 242 Global Emerging Market active long-only funds, with combined AUM of $450bn.

In this report, we screen for the largest overweight Country/Sectors across Global EM by analysing the allocations of long-only active Emerging Market funds.In part one of the series, we focus on Indian Financials.  We look at where current allocations sit versus history, drill down to find the most widely held stocks in the sector, the key overweight and the key underweight holdings. We find that despite it being the largest overweight holding, Indian Financials exposure is far from excessive, both versus its own history and versus peers.  Furthermore, recent activity points to an increase in exposure among managers.Our Emerging Market fund universe consists of 242 Global Emerging Market active long-only funds, with combined AUM of $450bn. 

Emerging Market Overweights Series.  Part 1:  Indian Financials

Ironically, a distracted and internally divided US Congress combined with an accommodative Fed could be bullish for risk assets and simultaneously reduce bearish fixed income pressures. For bond investors, it could be reassuring that the Goldilocks election outcome remains as political balances keep the US government from undertaking an even larger, more sustained, reflationary fiscal push. This could benefit Asia-headquartered risk assets.Some observers worry, rightly so, that the trial of former President Trump threatens to elongate the political divide in the U.S. This could make it more difficult for President Biden to effectively deliver on his fiscal spending plans in a timely manner while economic activity indicators soften. In addition, expectations that President Biden’s $1.9 trillion stimulus plan may be materially watered-down, by almost one-half, raised expectations that Fed accommodation would be extended longer than anticipated when the stimulus plan was first announced. As such, the current distraction may be credit positive. Meanwhile, U.S. CCC-rated indexes compressed into uncharted territory as CCC-index yields hit all-time lows. Asia risk asset followed, although the credit spread relationship between these two geographies remains far from the norm.  We note that credits only have limited upside in the reflation scenario.  Please see <a href="https://www.smartkarma.com/insights/bank-credit-weekly-moving-the-goal-posts" target="_blank" data-smartkarma-citation="insights:46889" rel="noopener">Bank Credit Weekly: Moving the Goal Posts</a> for more on this. A delay in the reflation scenario could also benefit Asia-headquartered risk assets.In addition, just as the US-dollar media narrative began to change from one of universal weakening to strengthening, US-dollar strengthening stopped. Declining odds on a large federal stimulus package likely arrested dollar strength. We present our US-dollar views inside and why it may be short-term Asia credit positive.Meanwhile, Fed officials are not reading from the same song sheet. Admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Please see last week’s <a href="https://www.smartkarma.com/insights/bank-credit-weekly-distractions-may-drive-markets-near-term" target="_blank" data-smartkarma-citation="insights:47117" rel="noopener">Bank Credit Weekly: Distractions May Drive Markets Near Term</a> for more on this. Fed Chairman Jerome Powell will discuss the FOMC’s decisions on Wednesday, 27 January.Against this backdrop, almost all of Asia’s bank debt tightened during the week. Improved risk sentiment, the arrest of a stronger US-dollar, EM inflows and country specific announcements drove these results. In particular, the Reserve Bank of India’s proposal to revise the regulatory framework for India’s non-bank finance companies likely had a positive impact on the US-dollar bonds of these institutions.Several Asia-headquartered banks reported earnings as the week ended and into the weekend. Asia bank earnings season is upon us. However, we note that asset quality indicators at many banks greatly underestimate the level of troubled debt within the institution as forbearance measures remain in place in several operating environments. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these earnings reports is significantly diminished for credit investors. As such, credit value should remain driven by larger market forces.Market Outlook: The distraction of another set of impeachment proceedings could turn out to be market friendly if it results in more targeted stimulus. Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Credit has limited upside in a fast reflation scenario. A slower, more contained, reflation environment could be Emerging Market credit supportive.

Ironically, a distracted and internally divided US Congress combined with an accommodative Fed could be bullish for risk assets and simultaneously reduce bearish fixed income pressures. For bond investors, it could be reassuring that the Goldilocks election outcome remains as political balances keep the US government from undertaking an even larger, more sustained, reflationary fiscal push. This could benefit Asia-headquartered risk assets.Some observers worry, rightly so, that the trial of former President Trump threatens to elongate the political divide in the U.S. This could make it more difficult for President Biden to effectively deliver on his fiscal spending plans in a timely manner while economic activity indicators soften. In addition, expectations that President Biden’s $1.9 trillion stimulus plan may be materially watered-down, by almost one-half, raised expectations that Fed accommodation would be extended longer than anticipated when the stimulus plan was first announced. As such, the current distraction may be credit positive. Meanwhile, U.S. CCC-rated indexes compressed into uncharted territory as CCC-index yields hit all-time lows. Asia risk asset followed, although the credit spread relationship between these two geographies remains far from the norm.  We note that credits only have limited upside in the reflation scenario.  Please see Bank Credit Weekly: Moving the Goal Posts for more on this. A delay in the reflation scenario could also benefit Asia-headquartered risk assets.In addition, just as the US-dollar media narrative began to change from one of universal weakening to strengthening, US-dollar strengthening stopped. Declining odds on a large federal stimulus package likely arrested dollar strength. We present our US-dollar views inside and why it may be short-term Asia credit positive.Meanwhile, Fed officials are not reading from the same song sheet. Admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Please see last week’s Bank Credit Weekly: Distractions May Drive Markets Near Term for more on this. Fed Chairman Jerome Powell will discuss the FOMC’s decisions on Wednesday, 27 January.Against this backdrop, almost all of Asia’s bank debt tightened during the week. Improved risk sentiment, the arrest of a stronger US-dollar, EM inflows and country specific announcements drove these results. In particular, the Reserve Bank of India’s proposal to revise the regulatory framework for India’s non-bank finance companies likely had a positive impact on the US-dollar bonds of these institutions.Several Asia-headquartered banks reported earnings as the week ended and into the weekend. Asia bank earnings season is upon us. However, we note that asset quality indicators at many banks greatly underestimate the level of troubled debt within the institution as forbearance measures remain in place in several operating environments. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these earnings reports is significantly diminished for credit investors. As such, credit value should remain driven by larger market forces.Market Outlook: The distraction of another set of impeachment proceedings could turn out to be market friendly if it results in more targeted stimulus. Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Credit has limited upside in a fast reflation scenario. A slower, more contained, reflation environment could be Emerging Market credit supportive.

Risk Assets Are Supported by a Distracted Congress and Accommodative Fed

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

Home First Finance / Equity Capital Markets

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company aims to raise around US$160m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-20, HFF’s loan grew at a CAGR of 62%, while its earnings grew even faster with NII growing at 68%, PPoP at 117% and PAT at 128% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependent.I have covered various aspects of the deal in my earlier notes,  <a href="https://www.smartkarma.com/insights/home-first-finance-pre-ipo-riding-on-affordable-housing" target="_blank" rel="noopener">Home First Finance Pre-IPO - Riding on affordable housing</a> and <a href="https://www.smartkarma.com/insights/home-first-finance-pre-ipo-earnings-not-showing-the-covid-strain-but-other-metrics-are" target="_blank" rel="noopener">Home First Finance Pre-IPO - Earnings not showing the COVID strain but other metrics are</a>.In this note I’ll run the deal through our ECM framework and talk about recent updates.

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company aims to raise around US$160m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-20, HFF’s loan grew at a CAGR of 62%, while its earnings grew even faster with NII growing at 68%, PPoP at 117% and PAT at 128% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependent.I have covered various aspects of the deal in my earlier notes,  Home First Finance Pre-IPO - Riding on affordable housing and Home First Finance Pre-IPO - Earnings not showing the COVID strain but other metrics are.In this note I’ll run the deal through our ECM framework and talk about recent updates.

Home First Finance IPO - It’s Not Really Cheap, Banking on Momentum

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a dash of market volatility until greater clarity is found.The potential trial of outgoing President Trump could prolong the partisan sentiment of recent weeks and delay needed additional stimulus legislation. This may add a dash of volatility to the market as additional evidence of a cooling U.S. economy unfolds. In fact, initial optimism over President-elect Joe Biden’s stimulus proposal soured after some lawmakers pushed back, suggesting that it is far from a done deal.  Treasury yields ended the week flatter, after rising by mid-week, as stimulus distractions set in.Meanwhile, Fed officials are not reading from the same song sheet. We have been discussing the potential for a mid-to-late 2021 Fed induced market taper-tantrum since mid-Nov. The business media finally caught onto it this week.  However, admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Fed speak may distract as the market moves ahead to set its own expectations for when tapering may begin.Concurrently, this week’s earnings reports clearly showed that US banks are releasing loan loss reserves; however, this distraction may be misinterpreted. As we discuss within, US bank earnings are not a harbinger for what may occur in other markets. In fact, Bank of Italy Governor Visco noted this week that small and medium-sized banks could suffer most from the economic consequences of the pandemic. Rhetorically he asked if “this creates an unprecedented ‘too-many-to-fail’ problem?” We see this as an opening salvo to push for more access to government backed asset management companies to assist with restructuring banking systems. This may prove positive for Additional Tier 1 bonds; however, market prices may suffer before this comes to fruition. To wit, EU bank credit risk perceptions deteriorated despite US bank results.In Asia, the Reserve Bank of India (RBI) started draining liquidity from the banking system. Concurrently, three-year AAA, AA and BBB corporate bond yields rose. If India’s short-term rates could fall well below the policy rate, then the policy rate was misstated. This is more than a distraction. The tightening of monetary policy at this point is bizarre given that the RBI warned this week that a bad debt surge threatens India’s financial stability.Meanwhile in Hong Kong, easy money is all but gone in the banking system. There is no gain to be had from borrowing in US$ and lending in HKD in short-term markets. This is net interest income negative. It also incentivizes the banks to lend for longer and to lend further down the curve. Hong Kong bank credit underperformed this week.Against this backdrop, Asia’s higher risk Additional Tier 1 (AT1) bank bonds underperformed, principally driven by Thailand- and other higher risk China-centric securities, reversing last week’s outperformance. Thai banks underperformed in Tier 2 and AT1 notes although Senior Unsecured debt tightened as investors rotated to safer debt instruments with duration. Indonesian bank bonds may have sold-off in sympathy with concerns that Indonesia is more sensitive to a higher dollar than other Asian countries.Market Outlook: The US holiday shortened week may see less activity than usual given the uncertainty of when additional stimulus may get US Senate’ attention. The distraction of another set of impeachment proceedings may not be market friendly.  Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Breakeven rates suggest growth rather than inflation; however, credit has limited upside in a reflation scenario and duration is may not be your friend at this point in the cycle.

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a dash of market volatility until greater clarity is found.The potential trial of outgoing President Trump could prolong the partisan sentiment of recent weeks and delay needed additional stimulus legislation. This may add a dash of volatility to the market as additional evidence of a cooling U.S. economy unfolds. In fact, initial optimism over President-elect Joe Biden’s stimulus proposal soured after some lawmakers pushed back, suggesting that it is far from a done deal.  Treasury yields ended the week flatter, after rising by mid-week, as stimulus distractions set in.Meanwhile, Fed officials are not reading from the same song sheet. We have been discussing the potential for a mid-to-late 2021 Fed induced market taper-tantrum since mid-Nov. The business media finally caught onto it this week.  However, admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Fed speak may distract as the market moves ahead to set its own expectations for when tapering may begin.Concurrently, this week’s earnings reports clearly showed that US banks are releasing loan loss reserves; however, this distraction may be misinterpreted. As we discuss within, US bank earnings are not a harbinger for what may occur in other markets. In fact, Bank of Italy Governor Visco noted this week that small and medium-sized banks could suffer most from the economic consequences of the pandemic. Rhetorically he asked if “this creates an unprecedented ‘too-many-to-fail’ problem?” We see this as an opening salvo to push for more access to government backed asset management companies to assist with restructuring banking systems. This may prove positive for Additional Tier 1 bonds; however, market prices may suffer before this comes to fruition. To wit, EU bank credit risk perceptions deteriorated despite US bank results.In Asia, the Reserve Bank of India (RBI) started draining liquidity from the banking system. Concurrently, three-year AAA, AA and BBB corporate bond yields rose. If India’s short-term rates could fall well below the policy rate, then the policy rate was misstated. This is more than a distraction. The tightening of monetary policy at this point is bizarre given that the RBI warned this week that a bad debt surge threatens India’s financial stability.Meanwhile in Hong Kong, easy money is all but gone in the banking system. There is no gain to be had from borrowing in US$ and lending in HKD in short-term markets. This is net interest income negative. It also incentivizes the banks to lend for longer and to lend further down the curve. Hong Kong bank credit underperformed this week.Against this backdrop, Asia’s higher risk Additional Tier 1 (AT1) bank bonds underperformed, principally driven by Thailand- and other higher risk China-centric securities, reversing last week’s outperformance. Thai banks underperformed in Tier 2 and AT1 notes although Senior Unsecured debt tightened as investors rotated to safer debt instruments with duration. Indonesian bank bonds may have sold-off in sympathy with concerns that Indonesia is more sensitive to a higher dollar than other Asian countries.Market Outlook: The US holiday shortened week may see less activity than usual given the uncertainty of when additional stimulus may get US Senate’ attention. The distraction of another set of impeachment proceedings may not be market friendly.  Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Breakeven rates suggest growth rather than inflation; however, credit has limited upside in a reflation scenario and duration is may not be your friend at this point in the cycle.

Bank Credit Weekly: Distractions May Drive Markets Near Term

India

Indiabulls Housing Finance Ltd (IBHFL) is a Housing Finance Company (HFC). The company provides long-term housing loans to individuals and loans against homes to small business owners. IBHFL also provides Lease Rent Discounting (LRD) loans against leased out commercial premises.

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Indiabulls Housing Finance (IHFL IN)

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Credit tourists may vacate if economic growth and real credit fundaments are not delivered. The gap between credit spreads and fundamentals is...

Hank Calenti, CFA

Emerging Market Overweights Series. Part 1: Indian Financials

Emerging Market Overweights Series. Part 1: Indian Financials. Analysing the make-up of the overweight in Indian Financial stocks.

Steven Holden

Risk Assets Are Supported by a Distracted Congress and Accommodative Fed

Declining odds on a large US federal stimulus package likely arrested US-dollar strength. A slower, more contained, reflation environment could...

Hank Calenti, CFA

Home First Finance IPO - It’s Not Really Cheap, Banking on Momentum

Home First Finance is an affordable housing finance company aiming to raise around US$160m in its India IPO. It is backed by True North, Warburg,...

Sumeet Singh

Bank Credit Weekly: Distractions May Drive Markets Near Term

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a...

Hank Calenti, CFA

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