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

Last week we noted some deterioration in market dynamics, all while reiterating our overall constructive outlook looking weeks and months ahead. The fact is, “perfectly bullish” conditions rarely exist, and a weight of the evidence approach is necessary. To that end, the positives continue to outweigh the negatives and our outlook remains constructive.

Last week we noted some deterioration in market dynamics, all while reiterating our overall constructive outlook looking weeks and months ahead. The fact is, “perfectly bullish” conditions rarely exist, and a weight of the evidence approach is necessary. To that end, the positives continue to outweigh the negatives and our outlook remains constructive.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Given its low capital buffer and plans to lower it further, along with high market risk tolerance and leverage finance exposure, <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse's (CSGN VX)</a> Additional Tier 1 (AT1) trades too tight relative to <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS (UBSG VX)</a> and most other large banks globally. We see better value elsewhere at this point in the credit cycle.Many analysts compare CS and UBS and conclude that they are largely the same, with UBS having deleveraged its investment banking franchise years earlier. We disagree. While both may suffer outflows in assets under management during a prolonged equity market correction, UBS has a far less market-sensitive franchise during intermittent bouts of volatility, as was clearly shown over the past year. In addition to having a higher trading risk tolerance profile, CS appears to have a higher sensitivity to non-investment grade leverage finance and oil &amp; gas exposures.  These are more sensitive to the business cycle. As of now, with global growth set to accelerate post-vaccination, this is a benefit. However, this is also already priced into CS’ securities.  In fact, the longer-dated AT1 bonds are priced to perfection, in our view.In addition, CS has a substantially lower Common Equity Tier 1 (CET1) buffer than UBS and many other European banks.  Furthermore, as CS targets an even lower capital ratio, this buffer is at risk of falling further over the near term. While lofty aspirations to operate at a higher leverage level may be aimed at equity holders, we think it best to take management’s word at face value. Lower capital ratios are not AT1 capital supportive. Unless the firm simultaneously de-risks, sensitivity to non-IG leverage finance and non-IG oil &amp; gas exposures may increase.Furthermore, while we were impressed by Mr. Hoarta-Osório’s leadership at <a href="https://www.smartkarma.com/entities/lloyds-banking-group-plc" target="_blank" data-smartkarma-citation="entities:21009:1" rel="noopener">Lloyds Bank (LLOY LN)</a> in the UK, despite several blemishes, we are surprised that the ex-CEO of a UK-centric mortgage bank would be chosen as Chairman of the Board at a global investment bank with wealth management growth aspirations in Asia. We are not convinced this is the best choice and we question if the execution risk from an eventual strategy pivot will be credit positive.We explore these themes and provide an overview of CS’s Q4 results within. We conclude that, taken together amongst its longer-dated peer-issued AT1 notes, we find better value in <a href="https://www.smartkarma.com/entities/societe-generale-sa" target="_blank" data-smartkarma-citation="entities:21478:1" rel="noopener">Société Générale's (GLE FP)</a> 2030 first call AT1 than in the recently issued Credit Suisse security. (Please see: <a href="https://www.smartkarma.com/insights/societe-generale-s-at1-better-fundamental-and-relative-value-than-bnp" target="_blank" data-smartkarma-citation="insights:48177" rel="noopener">Société Générale’s AT1: Better Fundamental and Relative Value than BNP</a> for more details on SocGen). We also see greater spread pick-up in Credit Suisse’s 2025 first call AT1 note than further out the curve.

Given its low capital buffer and plans to lower it further, along with high market risk tolerance and leverage finance exposure, Credit Suisse's (CSGN VX) Additional Tier 1 (AT1) trades too tight relative to UBS (UBSG VX) and most other large banks globally. We see better value elsewhere at this point in the credit cycle.Many analysts compare CS and UBS and conclude that they are largely the same, with UBS having deleveraged its investment banking franchise years earlier. We disagree. While both may suffer outflows in assets under management during a prolonged equity market correction, UBS has a far less market-sensitive franchise during intermittent bouts of volatility, as was clearly shown over the past year. In addition to having a higher trading risk tolerance profile, CS appears to have a higher sensitivity to non-investment grade leverage finance and oil &amp; gas exposures.  These are more sensitive to the business cycle. As of now, with global growth set to accelerate post-vaccination, this is a benefit. However, this is also already priced into CS’ securities.  In fact, the longer-dated AT1 bonds are priced to perfection, in our view.In addition, CS has a substantially lower Common Equity Tier 1 (CET1) buffer than UBS and many other European banks.  Furthermore, as CS targets an even lower capital ratio, this buffer is at risk of falling further over the near term. While lofty aspirations to operate at a higher leverage level may be aimed at equity holders, we think it best to take management’s word at face value. Lower capital ratios are not AT1 capital supportive. Unless the firm simultaneously de-risks, sensitivity to non-IG leverage finance and non-IG oil &amp; gas exposures may increase.Furthermore, while we were impressed by Mr. Hoarta-Osório’s leadership at Lloyds Bank (LLOY LN) in the UK, despite several blemishes, we are surprised that the ex-CEO of a UK-centric mortgage bank would be chosen as Chairman of the Board at a global investment bank with wealth management growth aspirations in Asia. We are not convinced this is the best choice and we question if the execution risk from an eventual strategy pivot will be credit positive.We explore these themes and provide an overview of CS’s Q4 results within. We conclude that, taken together amongst its longer-dated peer-issued AT1 notes, we find better value in Société Générale's (GLE FP) 2030 first call AT1 than in the recently issued Credit Suisse security. (Please see: Société Générale’s AT1: Better Fundamental and Relative Value than BNP for more details on SocGen). We also see greater spread pick-up in Credit Suisse’s 2025 first call AT1 note than further out the curve.

Credit Suisse – Perfection Priced into Long-Dated AT1

Debt Capital Markets

Rizal Commercial Banking / Debt Capital Markets

There are several disconcerting issues pertaining to <a href="https://www.smartkarma.com/entities/rizal-commercial-banking-corp" target="_blank" data-smartkarma-citation="entities:23143:1" rel="noopener">Rizal Commercial Bank (RCBPM)</a> which potential investors need to gain comfort regarding in advance of its inaugural US$-denominated Additional Tier 1 (AT1) bond.The issues, besides the obvious Covid-19 related impacts, are the gap to possible restrictions on AT1 coupon payments and any potential liability relating to the unauthorized transfer of funds from the Bank of Bangladesh in 2016. Answers to each of these items are currently unknown. Note that we assessed Rizal's related-party exposure in <a href="https://www.smartkarma.com/insights/philippine-banks-a-related-party" target="_blank" data-smartkarma-citation="insights:41194" rel="noopener">Philippine Banks: A Related Party</a>. With a baa3 rating as its lowest fundamental credit score, an AT1 issue from RCBPM is likely to be rated at Ba3 / BB-. Comparatively rated US$-AT1 bonds with four to six years until first call date offer a yield to first call in the range of 5.9% to 8.4%.  Given the known unknowns relating to Rizal, we believe investors should demand a higher yield as compensation.

There are several disconcerting issues pertaining to Rizal Commercial Bank (RCBPM) which potential investors need to gain comfort regarding in advance of its inaugural US$-denominated Additional Tier 1 (AT1) bond.The issues, besides the obvious Covid-19 related impacts, are the gap to possible restrictions on AT1 coupon payments and any potential liability relating to the unauthorized transfer of funds from the Bank of Bangladesh in 2016. Answers to each of these items are currently unknown. Note that we assessed Rizal's related-party exposure in Philippine Banks: A Related Party. With a baa3 rating as its lowest fundamental credit score, an AT1 issue from RCBPM is likely to be rated at Ba3 / BB-. Comparatively rated US$-AT1 bonds with four to six years until first call date offer a yield to first call in the range of 5.9% to 8.4%.  Given the known unknowns relating to Rizal, we believe investors should demand a higher yield as compensation.

Rizal Commercial Bank: The Known Unknowns in Advance of Its AT1 Issuance

United Kingdom

Lloyds Banking Group plc, through subsidiaries and associated companies, offers a range of banking and financial services. The Company provides retail banking, mortgages, pensions, asset management, insurance services, corporate banking, and treasury services.

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Lloyds Banking Group (LYG US)

Breakaway Gaps In Place

Market dynamics are not perfect, but the fact is that “perfectly bullish” conditions rarely exist. The positives continue to outweigh the negatives...

Vermilion Research

Credit Suisse – Perfection Priced into Long-Dated AT1

Many analysts compare CS and UBS and conclude that they are largely the same. We disagree. Given its low capital buffer, higher leverage finance...

Hank Calenti, CFA

Rizal Commercial Bank: The Known Unknowns in Advance of Its AT1 Issuance

There are several disconcerting issues pertaining to Rizal Commercial Bank (RCBPM) which potential investors need to gain comfort regarding in...

Hank Calenti, CFA

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