Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> A2 Senior Unsecured and A3 Tier 2 ratings are on review for downgrade by Moody’s Investors Service. The Additional Tier 1 (AT1) bonds are NOT on review for downgrade. We see this as more a case of Moody’s adjusting its ratings to the market, rather than a market making event. However, negative headline risk could nudge AT1 and Tier 2 bond prices lower. We would buy these dips.We believe the agency is mistaken to pre-judge the recent strategic update. Even if HSBC’s profitability suffers, short-term, the firm holds excess capital which it intends to invest in its future, rather than simply return to shareholders. Furthermore, Moody’s is clearly comfortable with HSBC’s lower capital target or it would also put the AT1 rating on review. Placing the Tier 2 rating on review for downgrade while stating that HSBC has a sufficient capital buffer to support its AT1 rating is a non-sequitur. Moody’s Tier 2 ratings are mechanically, rather than fundamentally, driven.Once a credit is placed on review for a downgrade, the likelihood of it occurring is greater than 50%. Irrespective, we are not convinced that this deserves to be reflected in the value of HSBC’s Tier 2 notes as this should be driven by the buffer of capital over the Point of Non-Viability. This buffer is enormous at HSBC. In fact, it is higher than that of the Singapore-based banks alongside of which HSBC’s Tier 2 bonds trade. Moody’s review for downgrade may create a buying opportunity in the Tier 2 space.

HSBC Holdings' (HSBA LN) A2 Senior Unsecured and A3 Tier 2 ratings are on review for downgrade by Moody’s Investors Service. The Additional Tier 1 (AT1) bonds are NOT on review for downgrade. We see this as more a case of Moody’s adjusting its ratings to the market, rather than a market making event. However, negative headline risk could nudge AT1 and Tier 2 bond prices lower. We would buy these dips.We believe the agency is mistaken to pre-judge the recent strategic update. Even if HSBC’s profitability suffers, short-term, the firm holds excess capital which it intends to invest in its future, rather than simply return to shareholders. Furthermore, Moody’s is clearly comfortable with HSBC’s lower capital target or it would also put the AT1 rating on review. Placing the Tier 2 rating on review for downgrade while stating that HSBC has a sufficient capital buffer to support its AT1 rating is a non-sequitur. Moody’s Tier 2 ratings are mechanically, rather than fundamentally, driven.Once a credit is placed on review for a downgrade, the likelihood of it occurring is greater than 50%. Irrespective, we are not convinced that this deserves to be reflected in the value of HSBC’s Tier 2 notes as this should be driven by the buffer of capital over the Point of Non-Viability. This buffer is enormous at HSBC. In fact, it is higher than that of the Singapore-based banks alongside of which HSBC’s Tier 2 bonds trade. Moody’s review for downgrade may create a buying opportunity in the Tier 2 space.

HSBC: On Review for Downgrade, Buy the Dips

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

Tier 1 ratios are all the same, however allowance for loan losses (LLR) are vastly different, for the three Singapore banks. This has implications for banks’ relative ability to absorb loan losses and for credit costs during the current year.

Tier 1 ratios are all the same, however allowance for loan losses (LLR) are vastly different, for the three Singapore banks. This has implications for banks’ relative ability to absorb loan losses and for credit costs during the current year.

Singapore Banks – Vast Differences In Provisioning

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.

Equity Bottom-Up

<ul>
<li>We see clear evidence that the <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> super-tanker is turning</li>
<li>Balance sheet strength at YE 2020, with delivery across most plan metrics in 2020 showing commitment</li>
<li>Execution on costs, the digital transformation, sustainably lower cost of risk going forward and the deepened Asia pivot, with an emphasis on Wealth and Personal Banking revenues, should be core drivers of returns</li>
<li>Potential disposals of France retail banking and possibly the US retail operations would also enhance returns and free up “trapped” RWAs</li>
<li>We believe that 2022E consensus ROE estimates are too conservative and that HSBC could potentially be on a c 8% dividend yield over the medium term</li>
<li>Risks to our positive view on HSBC include slower than expected execution on costs, and tougher competition in Asia retail banking, as well as worse than expected credit quality leading to a lower than expected reduction in cost of risk charges</li>
</ul>


We see clear evidence that the HSBC Holdings (HSBA LN) super-tanker is turning
Balance sheet strength at YE 2020, with delivery across most plan metrics in 2020 showing commitment
Execution on costs, the digital transformation, sustainably lower cost of risk going forward and the deepened Asia pivot, with an emphasis on Wealth and Personal Banking revenues, should be core drivers of returns
Potential disposals of France retail banking and possibly the US retail operations would also enhance returns and free up “trapped” RWAs
We believe that 2022E consensus ROE estimates are too conservative and that HSBC could potentially be on a c 8% dividend yield over the medium term
Risks to our positive view on HSBC include slower than expected execution on costs, and tougher competition in Asia retail banking, as well as worse than expected credit quality leading to a lower than expected reduction in cost of risk charges


HSBC (HSBA LN): The Super-Tanker Is Turning

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Negative Jaws:  Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 4Q20 net profit of SGD 1.1 bn, a SGD 102 mn (9.9%) increase on a linked quarter basis. Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line performance would have come in at SGD 994 mn  - down SGD 34 mn (3.3%). In addition, OCBC continues to suffer from negative operating jaws, with revenues declining 2.6% and costs increasing 2.3%;*Credit Improving In Reality: We have become more optimistic. By our calculation, we find that net new NPL growth continued to be negative on an annualized basis at SGD 78 mn or 8.0% annualized (versus 2.3% annualized).  We also find that reserves are now where they need to be, which is a far cry from where currently DBS Group Holdings (DBS.SP) is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20.

*Negative Jaws:  Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] reported 4Q20 net profit of SGD 1.1 bn, a SGD 102 mn (9.9%) increase on a linked quarter basis. Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line performance would have come in at SGD 994 mn  - down SGD 34 mn (3.3%). In addition, OCBC continues to suffer from negative operating jaws, with revenues declining 2.6% and costs increasing 2.3%;*Credit Improving In Reality: We have become more optimistic. By our calculation, we find that net new NPL growth continued to be negative on an annualized basis at SGD 78 mn or 8.0% annualized (versus 2.3% annualized).  We also find that reserves are now where they need to be, which is a far cry from where currently DBS Group Holdings (DBS.SP) is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20. 

Oversea Chinese Banking Corp. – Mixed Bag, But AQ Improving

*Continued Weak Great Eastern Core Returns: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20; and*Poor Readacross to Regional Insurers: Higher overall costs at Great Eastern during the half driven by claims and a change in contract liability increases would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers.

*Continued Weak Great Eastern Core Returns: Great Eastern Holdings (GE.SP) [Great Eastern] reported 2H20 bottom-line results of SGD 688.5 mn, improving SGD 348.6 mn (102.5%) HOH. However, when we exclude 2H20’s net gains on sale of SGD 3.8 bn, core operating results were far from impressive at a loss of SGD 3.1 bn versus operating income SGD 217.3 mn in 1H20; and*Poor Readacross to Regional Insurers: Higher overall costs at Great Eastern during the half driven by claims and a change in contract liability increases would imply a negative readacross to AIA (1299.HK), Prudential (PRU.LN), ManuLife (MFC.CN), and of course the mainland Chinese insurers. 

Oversea Chinese Banking Corp. – Great Eastern HOH Operating Results Flop

Singapore

Oversea-Chinese Banking Corporation Limited offers a comprehensive range of financial services.  The Company's services include deposit-taking, corporate, enterprise and personal lending, international trade financing, investment banking, private banking, treasury, stockbroking, insurance, credit cards, cash management, asset management and other financial and related services.

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OCBC (OCBC SP)

HSBC: On Review for Downgrade, Buy the Dips

The capital buffer over the Point of Non-Viability matters most to Tier 2 investors. Moody’s Tier 2 ratings are mechanically, rather than...

Hank Calenti, CFA

Singapore Banks – Vast Differences In Provisioning

DBS has a higher loan loss allowance/loan ratio than peers, and far more FY20 credit costs vs. FY19 than peers. Its loss absorption, reversal...

Daniel Tabbush

HSBC (HSBA LN): The Super-Tanker Is Turning

Cost gains, digital transformation, lower cost of risk going forward and the deepened Asia pivot on revenue growth, should be core drivers of...

Victor Galliano

Oversea Chinese Banking Corp. – Mixed Bag, But AQ Improving

OVERSEA CHINESE BANKING CORP: Were it not for the 0.7% tax rate as opposed to the 12.2% tax rate during 3Q20, OCBC’s bottom-line would've declined...

Thomas J. Monaco

Oversea Chinese Banking Corp. – Great Eastern HOH Operating Results Flop

OVERSEA CHINESE BANKING CORP: Great Eastern reported hefty 2H20 core operating losses. Higher overall costs HOH imply a negative readacross to...

Thomas J. Monaco

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