Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> and <a href="https://www.smartkarma.com/entities/kb-capital-co-ltd" target="_blank" data-smartkarma-citation="entities:3646:1" rel="noopener">KB Capital (021960 KS)</a> were the only financial institutions to access global capital market during the week. The <a href="https://www.smartkarma.com/entities/fbn-holdings-plc" target="_blank" data-smartkarma-citation="entities:27846:1" rel="noopener">First Bank of Nigeria (FBNH NL)</a> brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the <a href="https://www.smartkarma.com/entities/commercial-bank-of-dubai" target="_blank" data-smartkarma-citation="entities:29706:1" rel="noopener">Commercial Bank of Dubai's (CBD UH)</a> recently issued AT1 bond. For our thoughts on this security, please see: <a href="https://www.smartkarma.com/insights/commercial-bank-of-dubai-vs-bank-of-east-asia-a-tale-of-two-at1s-in-covid-19-uncertainty" target="_blank" data-smartkarma-citation="insights:44387" rel="noopener">Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty</a>.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBL TB)</a> notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> and <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>, respectively. As the week closed, <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the Sumitomo Mitsui Financial Group (8316 JP) and KB Capital (021960 KS) were the only financial institutions to access global capital market during the week. The First Bank of Nigeria (FBNH NL) brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the Commercial Bank of Dubai's (CBD UH) recently issued AT1 bond. For our thoughts on this security, please see: Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, Bangkok Bank's (BBL TB) notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see Bangkok Bank’s New AT1 – Overweight on Relative Value and Thai Bank Capital and Chronic COVID-19 Sensitivity, respectively. As the week closed, Yes Bank (YES IN) reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Thematic (Sector/Industry)

Welcome back to those returning from Golden Week. Smartkarma's coverage for the week focused on politics in the Korean peninsula and a slew of IPOs in South Korea, while in Japan the short period before the holidays saw earnings season begin in earnest.<div>Korea continued to attract attention as the back and forth over North Korea continued during the week. <a href="https://www.smartkarma.com/profiles/342" target="_blank" data-smartkarma-citation="accounts:342">Douglas Kim</a> and <a href="https://www.smartkarma.com/profiles/820" target="_blank" data-smartkarma-citation="accounts:820">Scott Laprise/ 乐天虎</a> continue their coverage of THAAD and North Korea in <a href="https://www.smartkarma.com/insights/why-is-trump-demanding-us-1-billion-for-thaad-from-south-korean-government" target="_blank" data-smartkarma-citation="insights:10372">Why Is Trump Demanding US$1 Billion for THAAD from South Korean Government?</a> and <a href="https://www.smartkarma.com/insights/china-s-view-of-the-north-korea-problem-part-iii" target="_blank" data-smartkarma-citation="insights:10381">China’s View of the North Korea Problem – Part III</a> respectively. Check out the comments sections for the active discussions between Smartkarma's insight providers.</div><div></div><div>Korea also saw significant IPO coverage from Douglas and <a href="https://www.smartkarma.com/profiles/354" target="_blank" data-smartkarma-citation="accounts:354">Sanghyun Park</a> in <a href="https://www.smartkarma.com/insights/ing-life-insurance-ipo-part-6-subscription-result-analysis-post-ipo-forecasts" target="_blank" data-smartkarma-citation="insights:10375">ING Life Insurance IPO Part 6 - Subscription Result Analysis &amp; Post IPO Forecasts</a> , <a href="https://www.smartkarma.com/insights/ing-life-insurance-korea-trading-strategy-for-day-1-intermediate-period-post-ipo" target="_blank" data-smartkarma-citation="insights:10400">ING Life Insurance Korea - TRADING STRATEGY for Day 1 &amp; Intermediate Period Post IPO</a>, <a href="https://www.smartkarma.com/insights/netmarble-games-trading-strategy-for-day-1-intermediate-period-post-the-ipo" target="_blank" data-smartkarma-citation="insights:10397">Netmarble Games - TRADING STRATEGY for Day 1 &amp; Intermediate Period Post the IPO</a>, <a href="https://www.smartkarma.com/insights/samyang-optics-ipo-part-1-schedule-financials-valuation" target="_blank" data-smartkarma-citation="insights:10269">Samyang Optics IPO Part 1 - Schedule, Financials &amp; Valuation</a> and <a href="https://www.smartkarma.com/insights/s-traffic-co-ipo-preview-part-1-primary-beneficiary-of-smart-highways-expansion-in-korea" target="_blank" data-smartkarma-citation="insights:10424">S-Traffic Co. IPO Preview - (Part 1): Primary Beneficiary of Smart Highways Expansion in Korea</a> . <a href="https://www.smartkarma.com/profiles/840" target="_blank" data-smartkarma-citation="accounts:840">David Blennerhassett</a> and <a href="https://www.smartkarma.com/profiles/1938" target="_blank" data-smartkarma-citation="accounts:286">Michael Chambers</a> round out the coverage with <a href="https://www.smartkarma.com/insights/taking-kbi-and-kbc-private" target="_blank" data-smartkarma-citation="insights:10357">Taking KBI and KBC Private</a> and <a href="https://www.smartkarma.com/insights/sk-telecom-s-focus-on-profitability-is-bearing-fruit" target="_blank" data-smartkarma-citation="insights:10328">SK Telecom’s Focus on Profitability Is Bearing Fruit</a> respectively.</div><div></div><div>Golden Week beginning on Wednesday meant limited coverage on Japan aside from a deluge of earnings. The general tone of results was positive while most company guidance was on the weak/conservative side. <a href="https://www.smartkarma.com/entities/154" target="_blank" data-smartkarma-citation="entities:154:1">Honda Motor Co Ltd (7267 JP)</a>, <a href="https://www.smartkarma.com/entities/19603" target="_blank" data-smartkarma-citation="entities:19603:1">Yahoo Japan Corp (4689 JP)</a> and <a href="https://www.smartkarma.com/entities/356" target="_blank" data-smartkarma-citation="entities:356:1">Olympus Corp (7733 JP)</a> were particularly weak among companies covered on Smartkarma. Please refer the table at the bottom for brief summaries of earnings and links to the relevant insights. Elsewhere, <a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a> and <a href="https://www.smartkarma.com/profiles/801" target="_blank" data-smartkarma-citation="accounts:801">Nicholas Benes</a> take a dim view of <a href="https://www.smartkarma.com/entities/12197" target="_blank" data-smartkarma-citation="entities:12197:1">JTEKT Corp (6473 JP)</a>'s offer for <a href="https://www.smartkarma.com/entities/20550" target="_blank" data-smartkarma-citation="entities:20550:1">Fuji Kiko Co Ltd (7260 JP)</a>, <a href="https://www.smartkarma.com/profiles/1134" target="_blank" data-smartkarma-citation="accounts:1134">Scott Foster</a> looks at <a href="https://www.smartkarma.com/entities/18886" target="_blank" data-smartkarma-citation="entities:18886:1">Horiba Ltd (6856 JP)</a>, <a href="https://www.smartkarma.com/profiles/713" target="_blank" data-smartkarma-citation="accounts:713">Mio Kato, CFA</a> offers ideas for the news fiscal year, <a href="https://www.smartkarma.com/profiles/919" target="_blank" data-smartkarma-citation="accounts:919">Ryota Hayashi</a> of Nowcast uses big data to forecast Japan's CPI and <a href="https://www.smartkarma.com/profiles/1044" target="_blank" data-smartkarma-citation="accounts:1044">Patrick Hansen</a> of Custom Products Group examines aggregate results so far.</div>

Welcome back to those returning from Golden Week. Smartkarma's coverage for the week focused on politics in the Korean peninsula and a slew of IPOs in South Korea, while in Japan the short period before the holidays saw earnings season begin in earnest.Korea continued to attract attention as the back and forth over North Korea continued during the week. Douglas Kim and Scott Laprise/ 乐天虎 continue their coverage of THAAD and North Korea in Why Is Trump Demanding US$1 Billion for THAAD from South Korean Government? and China’s View of the North Korea Problem – Part III respectively. Check out the comments sections for the active discussions between Smartkarma's insight providers.Korea also saw significant IPO coverage from Douglas and Sanghyun Park in ING Life Insurance IPO Part 6 - Subscription Result Analysis &amp; Post IPO Forecasts , ING Life Insurance Korea - TRADING STRATEGY for Day 1 &amp; Intermediate Period Post IPO, Netmarble Games - TRADING STRATEGY for Day 1 &amp; Intermediate Period Post the IPO, Samyang Optics IPO Part 1 - Schedule, Financials &amp; Valuation and S-Traffic Co. IPO Preview - (Part 1): Primary Beneficiary of Smart Highways Expansion in Korea . David Blennerhassett and Michael Chambers round out the coverage with Taking KBI and KBC Private and SK Telecom’s Focus on Profitability Is Bearing Fruit respectively.Golden Week beginning on Wednesday meant limited coverage on Japan aside from a deluge of earnings. The general tone of results was positive while most company guidance was on the weak/conservative side. Honda Motor Co Ltd (7267 JP), Yahoo Japan Corp (4689 JP) and Olympus Corp (7733 JP) were particularly weak among companies covered on Smartkarma. Please refer the table at the bottom for brief summaries of earnings and links to the relevant insights. Elsewhere, Travis Lundy and Nicholas Benes take a dim view of JTEKT Corp (6473 JP)'s offer for Fuji Kiko Co Ltd (7260 JP), Scott Foster looks at Horiba Ltd (6856 JP), Mio Kato, CFA offers ideas for the news fiscal year, Ryota Hayashi of Nowcast uses big data to forecast Japan's CPI and Patrick Hansen of Custom Products Group examines aggregate results so far.

The Week That Was in NorthAsia@Smartkarma - N Korea, JTEKT's Lowball Acquisition, and Korean IPOs

David Blennerhassett

Event-Driven

Two weeks ago, <a href="https://www.smartkarma.com/entities/718" target="_blank" data-smartkarma-citation="entities:718:1">KB Financial Group Inc (105560 KS)</a> announced the privatisation of <a href="https://www.smartkarma.com/entities/3646" target="_blank" data-smartkarma-citation="entities:3646:1">KB Capital Co Ltd (021960 KS)</a> and <a href="https://www.smartkarma.com/entities/9647" target="_blank" data-smartkarma-citation="entities:9647:1">KB Insurance Co Ltd (002550 KS)</a> via a two-step process involving a Tender Offer/Share Swap mechanism.  The share prices of both targets have reacted leaving minimal arbitrage at current levels.Korean takeovers typically carry their own idiosyncrasies relative to Codes in neighbouring countries.  The basis for this short insight is hopefully to provide clarity on the expected delisting sequence for two relatively straightforward takeovers.I also summarise the terms of the offers, indicative timetables and expected settlement under various outcomes.

Two weeks ago, KB Financial Group Inc (105560 KS) announced the privatisation of KB Capital Co Ltd (021960 KS) and KB Insurance Co Ltd (002550 KS) via a two-step process involving a Tender Offer/Share Swap mechanism.  The share prices of both targets have reacted leaving minimal arbitrage at current levels.Korean takeovers typically carry their own idiosyncrasies relative to Codes in neighbouring countries.  The basis for this short insight is hopefully to provide clarity on the expected delisting sequence for two relatively straightforward takeovers.I also summarise the terms of the offers, indicative timetables and expected settlement under various outcomes.

Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Equity Capital Markets

Orange Life Insurance, Ltd.  / Equity Capital Markets

MBK Partners has done a great job of convincing foreign institutional investors that  <a href="https://www.smartkarma.com/entities/23999" target="_blank" data-smartkarma-citation="entities:23999:1">ING Life Insurance Korea Ltd. (079440 KS)</a> could continue to generate high dividends (50+% payout ratio) for years to come. With the company's "seemingly" sound and healthy financial structure, many foreign institutional investors seem to be feeling comfortable with MBK Partners' claim. But unfortunately, MBK hasn't had this kind of success with local investors (both institutional and retail). We now have retail subscription results, and they are very shocking. After the devastating first retail subscription day, ING Life's final retail subscription was even less than what it has originally allocated. It actually recorded an undersubscription of 0.82:1. In fact, Korea's local institutional investors hadn't done much differently. If we computed local institutional subscription rate based on stock allotment, ING Life IPO would record an undersubscription of 0.69:1, whereas foreign institutional investors would be an oversubscription of 3.18 times. What factors have really made the differences? And how will ING Life perform after the IPO? I have personally thought about these questions, and following is what I am thinking.

MBK Partners has done a great job of convincing foreign institutional investors that  ING Life Insurance Korea Ltd. (079440 KS) could continue to generate high dividends (50+% payout ratio) for years to come. With the company's "seemingly" sound and healthy financial structure, many foreign institutional investors seem to be feeling comfortable with MBK Partners' claim. But unfortunately, MBK hasn't had this kind of success with local investors (both institutional and retail). We now have retail subscription results, and they are very shocking. After the devastating first retail subscription day, ING Life's final retail subscription was even less than what it has originally allocated. It actually recorded an undersubscription of 0.82:1. In fact, Korea's local institutional investors hadn't done much differently. If we computed local institutional subscription rate based on stock allotment, ING Life IPO would record an undersubscription of 0.69:1, whereas foreign institutional investors would be an oversubscription of 3.18 times. What factors have really made the differences? And how will ING Life perform after the IPO? I have personally thought about these questions, and following is what I am thinking.

ING Life Insurance IPO Part 6 - Subscription Result Analysis & Post IPO Forecasts

Corporate Credit Analyst

Alan Greene

Recently announced industrial output figures for June suggest that Korea may be able to trade its way towards higher growth rates. However, at the same time, on 30 June, the Korea Times carried a headline “Bedroom shock: Korea's sexless rate ranked world's second”. The sovereign rating of its neighbour Japan has seen steady pressure for the last five years driven in part by its demographic profile. Korea's demographic profile is likely to deteriorate more rapidly than Japan's and we should therefore expect a similar debt induced stall in growth. The banking system is under pressure and this could soon translate into pressure on Korea's credit ratings.

Recently announced industrial output figures for June suggest that Korea may be able to trade its way towards higher growth rates. However, at the same time, on 30 June, the Korea Times carried a headline “Bedroom shock: Korea's sexless rate ranked world's second”. The sovereign rating of its neighbour Japan has seen steady pressure for the last five years driven in part by its demographic profile. Korea's demographic profile is likely to deteriorate more rapidly than Japan's and we should therefore expect a similar debt induced stall in growth. The banking system is under pressure and this could soon translate into pressure on Korea's credit ratings.

Can "sexless" Korea Beat the Demographic Cliff and Maintain Its Credit Rating?

South Korea

KB Capital Co., Ltd., a financial services firm, provides capital and financial leasing to the consumer and commercial markets.  The Company's products include industrial equipment lending, installment financing, venture capital, operational fund, and factoring.

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Kb Capital (021960 KS)

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

A must-read on US$-risk sentiment derived from high yield and equity markets, interest rates, dollar levels, capital flows and issuance to frame...

Hank Calenti, CFA

The Week That Was in NorthAsia@Smartkarma - N Korea, JTEKT's Lowball Acquisition, and Korean IPOs

Welcome back to those returning from Golden Week. Smartkarma's coverage for the week focused on politics in the Korean peninsula and a slew of IPOs...

Travis Lundy

Taking KBI and KBC Private

Two weeks ago, KB Financial Group Inc (105560 KS) announced the privatisation of KB Capital Co Ltd (021960 KS) and KB Insurance Co Ltd (002550 KS)...

David Blennerhassett

ING Life Insurance IPO Part 6 - Subscription Result Analysis & Post IPO Forecasts

MBK Partners has done a great job of convincing foreign institutional investors that ING Life Insurance Korea Ltd. (079440 KS) could continue to...

Sanghyun Park

Can "sexless" Korea Beat the Demographic Cliff and Maintain Its Credit Rating?

Recently announced industrial output figures for June suggest that Korea may be able to trade its way towards higher growth rates. However, at the...

Alan Greene

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