Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened 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.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/industrial-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:19515:1" rel="noopener">Industrial Bank Co Ltd A (601166 CH)</a> and Kookmin Bank (<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">KB Financial Group (105560 KS))</a> were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see <a href="https://www.smartkarma.com/insights/kotak-indusind-happy-indusind-bondholders-move-to-overweight" target="_blank" data-smartkarma-citation="insights:44542" rel="noopener">Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight</a> for more details. On Friday, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened 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.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the Industrial Bank Co Ltd A (601166 CH) and Kookmin Bank (KB Financial Group (105560 KS)) were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that Kotak Mahindra Bank (KMB IN) is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight for more details. On Friday, Indusind Bank (IIB IN) reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

Asean-focused. Ex-Head of Thai Research

Athaporn Arayasantiparb, CFA

Asean (Thailand) Focused Independent Research

M Corp Review

M Corp is led by Athaporn Arayasantiparb who served as Head of Research for UOB and ANZ in Thailand and was an award-winning telecoms analyst at UBS in 2010 (AsiaMoney Thailand category) and Regional Strategist for DMG in Singapore. Prior to that, he also served as Kasikornbank credit analyst and scholar. He has a total work experience of 17 years, of which 14 were in research and 4 in research management roles. He started his career as an engineer for PTT and currently manages family investments. He holds an MBA from Stern (NYU) and CFA Charter since 2006. Apart from IPO Radar, which focuses on future listings, MCorp Review also provides six on-going thematic series ranked by frequency in descending order, namely: 1) Silicon Stories (technology) 2) Sathorn Series (financial services) 3) Thai-Coons (billionaire origin stories) 4) Reality Check (data-driven, investigative) 5) Thai Media Spotlight; and 6) Thai Macro Watch (global market drivers).

Thematic (Sector/Industry)

Brett King's bestseller Bank 4.0 highlights many important trends that could overturn conventional banking. In this review, we look at how some of them threaten Thai banks and how the banks adapt to these emerging changes. Here are some of the most important highlights:<ul>
<li>
Models that start from scratch. The First Principle highlights fintech business models that eliminate the need of certain facets such as physical branches, while conventional banks here have a tougher time downsizing to cope up with the trend.</li>
<li>
Rising regulatory costs and investments could end up crippling the Thai banks and putting them at a disadvantage to fintechs, but part of this burden will be up to the regulators themselves. Banking is labor-intensive, and there's a lot of good-paying jobs at risk if they make the wrong move.</li>
<li>
Encroachment by telcos. With banking expected to resemble technology platforms in the future, telecom operators who control such infrastructure could end up eating a big part of the banking business. Some very profitable services today such as wealth management will be more vulnerable than others.</li>
</ul>

Brett King's bestseller Bank 4.0 highlights many important trends that could overturn conventional banking. In this review, we look at how some of them threaten Thai banks and how the banks adapt to these emerging changes. Here are some of the most important highlights:

Models that start from scratch. The First Principle highlights fintech business models that eliminate the need of certain facets such as physical branches, while conventional banks here have a tougher time downsizing to cope up with the trend.

Rising regulatory costs and investments could end up crippling the Thai banks and putting them at a disadvantage to fintechs, but part of this burden will be up to the regulators themselves. Banking is labor-intensive, and there's a lot of good-paying jobs at risk if they make the wrong move.

Encroachment by telcos. With banking expected to resemble technology platforms in the future, telecom operators who control such infrastructure could end up eating a big part of the banking business. Some very profitable services today such as wealth management will be more vulnerable than others.


Nine Reasons Why Thai Banks Should Be Worry About in the Future

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.

Equity Bottom-Up

Most Thai banks saw a sizeable contraction in credit costs during the quarter. This is something that should generally be expected in Thailand and elsewhere, where the dire days of March and April are far behind us. What too stands out is the incredible variance across banks, which we believe is mostly due to provision expenses already incurred during the first half of the year. This is not all backwards looking: with the country’s first foreign tourists arriving since shutdown, credit metrics should continue to improve.

Most Thai banks saw a sizeable contraction in credit costs during the quarter. This is something that should generally be expected in Thailand and elsewhere, where the dire days of March and April are far behind us. What too stands out is the incredible variance across banks, which we believe is mostly due to provision expenses already incurred during the first half of the year. This is not all backwards looking: with the country’s first foreign tourists arriving since shutdown, credit metrics should continue to improve.

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

<div><a href="https://www.smartkarma.com/entities/scg-packaging-public-company-limited" target="_blank" data-smartkarma-citation="entities:28684:1" rel="noopener">SCG Packaging (SCGP TB)</a> raise around US$1.2bn in its Thailand IPO. It is a part of the <a href="https://www.smartkarma.com/entities/siam-cement-pcl-the" target="_blank" data-smartkarma-citation="entities:2589:1" rel="noopener">Siam Cement (SCC TB)</a> group.</div><div>SCGP is a packaging solutions provider in ASEAN offering fiber-based packaging, performance and polymer packaging, food service products, design, printing and other solutions. SCGP is the largest packaging paper and corrugated containers producer in ASEAN, as per Frost &amp; Sullivan. </div><div>I have covered various aspects of the deal in my earlier notes:</div><div><ul>
<li><a href="https://www.smartkarma.com/insights/scg-packaging-pre-ipo-shift-to-packaging-has-been-aiding-margins-but-acquisition-drove-up-leverage" target="_blank" rel="noopener">SCG Packaging Pre-IPO - Shift to packaging has been aiding margins but acquisitions have driven up leverage</a></li>
<li><a href="https://www.smartkarma.com/insights/scg-packaging-ipo-unexciting" target="_blank" rel="noopener">SCG Packaging IPO - Unexciting</a></li>
</ul></div>In this note, I'll talk about the deal updates and provide implied valuations at different share price levels.

SCG Packaging (SCGP TB) raise around US$1.2bn in its Thailand IPO. It is a part of the Siam Cement (SCC TB) group.SCGP is a packaging solutions provider in ASEAN offering fiber-based packaging, performance and polymer packaging, food service products, design, printing and other solutions. SCGP is the largest packaging paper and corrugated containers producer in ASEAN, as per Frost &amp; Sullivan. I have covered various aspects of the deal in my earlier notes:
SCG Packaging Pre-IPO - Shift to packaging has been aiding margins but acquisitions have driven up leverage
SCG Packaging IPO - Unexciting
In this note, I'll talk about the deal updates and provide implied valuations at different share price levels.

SCG Packaging IPO Trading - Placed with Domestics

Underweight <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank's (KBANK)</a> inaugural Additional Tier 1 (AT1) bond on franchise challenges and valuation. Although Thailand is a long-term Coronavirus vaccine recovery play, we believe that KBANK’s SME emphasis is a franchise challenge that may extend the bank’s recovery timeframe. At the same time, trading at only 33bps higher than <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBLTB)</a> in Option Adjusted Spread terms, KBANK’s inaugural issue appears to be fully valued.Kasikornbank’s 5.275% coupon 2025 callable US$-AT1 bond was 3x over-subscribed with 25% of orders from outside Asia, according to Bloomberg. Asian investors were likely attracted by the coupon; however, we are not convinced they are prepared for a relatively higher risk outcome as the bond’s yield declines. As such, yield compression is likely to be capped. In addition to this technical trading aspect, we elaborate on what we like and dislike regarding the issuer and this security within this insight.  What we like:<ul>
<li>The 5+ percent coupon should attract investors searching for higher yielding product.</li>
<li>The relatively high coupon reset level at five-year US Treasuries plus 494 should enable call at first call date, absent considerable credit quality deterioration.</li>
<li>Lower lending concentrations than Bangkok Bank.</li>
<li>High net interest margins and fee income juice pre-provision revenue.</li>
<li>Highest buffers to minimum capital requirements amongst Thai banks.</li>
</ul>What we dislike:<ul>
<li>Thai bank AT1 is subject to tougher coupon payment requirements than in other countries.</li>
<li>Leadership in lending to small &amp; medium sized enterprises (SME) may result in higher loan restructuring needs in the COVID-19 operating environment.</li>
<li>Restructured loan recidivism is high and this is a primary risk to chronic COVID loan relief decay.</li>
<li>Net interest margin to be pressured from Bank of Thailand rate moves and programmes to lower interest rates on SME borrowers.</li>
<li>KBANK’s SME ecosystem is likely to be tested by fragile operating conditions in Thailand.</li>
</ul>Despite the challenges of operating an SME franchise during an economic crisis, KBANK achieved a relatively attractive coupon level in its inaugural AT1 bond. This bond may outperform the market over the very near term, due to global monetary accommodation that will push investors to this security and domestic loan forbearance measures that will mask the true financial condition of Thai banks for months. However, the market impact of these measures may diminish with time. As such, we are taking a longer-term view and believe that this security will underperform its peers. Taken together, we recommend that investors underweight KBANK’s AT1 bond given the franchise challenges that the firm faces and current valuation levels. Issued at T+494 and trading at around T+ 492, we suggest taking profits at T+540 and recommend a stop loss at T+440.

Underweight Kasikornbank's (KBANK) inaugural Additional Tier 1 (AT1) bond on franchise challenges and valuation. Although Thailand is a long-term Coronavirus vaccine recovery play, we believe that KBANK’s SME emphasis is a franchise challenge that may extend the bank’s recovery timeframe. At the same time, trading at only 33bps higher than Bangkok Bank (BBLTB) in Option Adjusted Spread terms, KBANK’s inaugural issue appears to be fully valued.Kasikornbank’s 5.275% coupon 2025 callable US$-AT1 bond was 3x over-subscribed with 25% of orders from outside Asia, according to Bloomberg. Asian investors were likely attracted by the coupon; however, we are not convinced they are prepared for a relatively higher risk outcome as the bond’s yield declines. As such, yield compression is likely to be capped. In addition to this technical trading aspect, we elaborate on what we like and dislike regarding the issuer and this security within this insight.  What we like:
The 5+ percent coupon should attract investors searching for higher yielding product.
The relatively high coupon reset level at five-year US Treasuries plus 494 should enable call at first call date, absent considerable credit quality deterioration.
Lower lending concentrations than Bangkok Bank.
High net interest margins and fee income juice pre-provision revenue.
Highest buffers to minimum capital requirements amongst Thai banks.
What we dislike:
Thai bank AT1 is subject to tougher coupon payment requirements than in other countries.
Leadership in lending to small &amp; medium sized enterprises (SME) may result in higher loan restructuring needs in the COVID-19 operating environment.
Restructured loan recidivism is high and this is a primary risk to chronic COVID loan relief decay.
Net interest margin to be pressured from Bank of Thailand rate moves and programmes to lower interest rates on SME borrowers.
KBANK’s SME ecosystem is likely to be tested by fragile operating conditions in Thailand.
Despite the challenges of operating an SME franchise during an economic crisis, KBANK achieved a relatively attractive coupon level in its inaugural AT1 bond. This bond may outperform the market over the very near term, due to global monetary accommodation that will push investors to this security and domestic loan forbearance measures that will mask the true financial condition of Thai banks for months. However, the market impact of these measures may diminish with time. As such, we are taking a longer-term view and believe that this security will underperform its peers. Taken together, we recommend that investors underweight KBANK’s AT1 bond given the franchise challenges that the firm faces and current valuation levels. Issued at T+494 and trading at around T+ 492, we suggest taking profits at T+540 and recommend a stop loss at T+440.

Kasikornbank’s Inaugural AT1 – Underweight on Franchise Challenges and Valuation

Thailand

SCB X Public Company Limited provides banking services. The Bank offers accounts, loans, cards, deposits, insurance, investment, payment, digital banking, and other related services. SCB X serves customers worldwide.

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Siam Commercial Bank (SCB TB)

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market...

Hank Calenti, CFA

Nine Reasons Why Thai Banks Should Be Worry About in the Future

Brett King's bestseller sheds spotlight on one of the world's largest sector anywhere. Is the business model dead? Do regulators get it? Are you...

Athaporn Arayasantiparb, CFA

KBANK – Provision Expense Collapse

The range of 3Q20 credit cost change among Thai banks is vast, from -57% to +41% QoQ, with the two similar banks, Kasikornbank PCL (KBANK TB) and...

Daniel Tabbush

SCG Packaging IPO Trading - Placed with Domestics

SCG Packaging (SCGP TB) raised around US$1.2bn in its Thailand IPO. Given its lack of growth in the past, we remain less than excited, to put it...

Sumeet Singh

Kasikornbank’s Inaugural AT1 – Underweight on Franchise Challenges and Valuation

Underweight Kasikornbank’s inaugural Additional Tier 1 bond on franchise challenges and valuation. The bank's SME emphasis may extend its recovery...

Hank Calenti, CFA

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