Alpha-Centric ESG Research

Kyle Rudden

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in <a href="https://www.smartkarma.com/insights/bitcoin-on-balance-sheets-indirect-crypto-exposure-considerations-for-crypto-leery-esg-investors" target="_blank" data-smartkarma-citation="insights:52207" rel="noopener">Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors</a>. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates <a href="https://www.smartkarma.com/entities/bitcoin-usd" target="_blank" data-smartkarma-citation="entities:25895:1" rel="noopener">Bitcoin (XBT)</a>'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

More and more, companies are using cryptocurrency (especially Bitcoin) as part of their corporate treasury management strategies, discussed in Bitcoin on Balance Sheets: Indirect Crypto Exposure Considerations for Crypto-Leery ESG Investors. That trend is behind the topic of this report.Greater mainstream corporate and institutional use of Bitcoin is driving the growth in demand for cryptocurrency custody services, and banks around the world are rushing to fill that demand. It is a logical and relatively safe foray into the cryptocurrency space, albeit not without some risk.For ESG investors wishing to avoid direct or indirect cryptocurrency exposure, perhaps due to their views on crypto's wretched Environmental footprint, the banks herein will have significant indirect crypto exposure. However, I personally find it hard to be categorically bearish on this theme.Whilst the theme in the first Insight (holding Bitcoin on balance sheets) represents real risk, this is different. It could be argued that crypto custody perpetuates Bitcoin (XBT)'s climate impacts, thus is a bad thing. Perhaps, from a purely idealistic ESG viewpoint, that is partially true.However, the connection from custody service to carbon emissions is so far removed, and the risks associated with entering the crypto custody space are so comparatively minimal, that the opinion on this theme should be "neutral" at worst, and definitely not across-the-board "negative."But really, that is for each investor to decide, because the crypto/ESG issue is highly subjective.

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

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

Equity Bottom-Up

*Recent USA Branch Disposal: As announced on February 22, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]  announced that is set to withdraw from U.S. retail banking, seeking to dispose of a business that has long underperformed. On May 26, 2021 HSBC and Cathay General Bancorp (CATY.US) [Cathay] in Los Angeles announced that Cathay will acquire 10 retail branches in California from HSBC. Cathay also acquired USD 0.8 bn in loans - residential mortgage, retail business banking, and personal loans, along with USD 1.0 bn in deposits;  and*HSBCNA Still A Chronic Headache: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. HSBCNA’s operating costs exceed recurring revenues. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis.

*Recent USA Branch Disposal: As announced on February 22, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]  announced that is set to withdraw from U.S. retail banking, seeking to dispose of a business that has long underperformed. On May 26, 2021 HSBC and Cathay General Bancorp (CATY.US) [Cathay] in Los Angeles announced that Cathay will acquire 10 retail branches in California from HSBC. Cathay also acquired USD 0.8 bn in loans - residential mortgage, retail business banking, and personal loans, along with USD 1.0 bn in deposits;  and*HSBCNA Still A Chronic Headache: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. HSBCNA’s operating costs exceed recurring revenues. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Issuance expectations are often a topic of anxiety for actively trading investors. The concern is that if issuance is expected to be large, then the value of the currently on-the-run security may fall as the market moves into the new security. Our experience is that timing matters. Any decline generally represents a buying opportunity in the older security; however, it can take a week or two for the security to regain lost value. As such, unexpected debt issuance just before quarter-end can be painful.With leverage ratios yet to be a requirement for Eurozone area banks, risk-weighted asset (RWA) capital ratios remain the constraining capital measure. By this standard, <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas (BNP FP)</a> and <a href="https://www.smartkarma.com/entities/credit-agricole-sa" target="_blank" data-smartkarma-citation="entities:21373:1" rel="noopener">Credit Agricole Group (ACAFP)</a> remain underweight in Additional Tier 1 (AT1) bond issuance.Amongst UK banks, <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> looks to have a surplus of AT1 bonds from a RWA capital ratio perspective. However, we calculate a deficiency relative to its leverage capital ratio needs. Basel IV inflation may diminish the RWA-base surplus; but for now, HSBC’s leverage ratio is its AT1 governor.In terms of Tier 2 needs, Eurozone banks are largely where they need to be from an efficiency perspective with the main exception of <a href="https://www.smartkarma.com/entities/cooperatieve-rabobank-ua" target="_blank" data-smartkarma-citation="entities:28085:1" rel="noopener">Cooperative Rabobank UA (RABO NA)</a>. Meanwhile, HSBC may be in a position to reduce its Common Equity Tier 1 levels by issuing Tier 2 bonds while remaining well above minimum capital requirements. Concurrently, <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered's (STAN LN)</a> Tier 2 levels are materially more than minimum regulatory requirements. These look better value than HSBC’s.

Executive Summary: Issuance expectations are often a topic of anxiety for actively trading investors. The concern is that if issuance is expected to be large, then the value of the currently on-the-run security may fall as the market moves into the new security. Our experience is that timing matters. Any decline generally represents a buying opportunity in the older security; however, it can take a week or two for the security to regain lost value. As such, unexpected debt issuance just before quarter-end can be painful.With leverage ratios yet to be a requirement for Eurozone area banks, risk-weighted asset (RWA) capital ratios remain the constraining capital measure. By this standard, BNP Paribas (BNP FP) and Credit Agricole Group (ACAFP) remain underweight in Additional Tier 1 (AT1) bond issuance.Amongst UK banks, HSBC Holdings (HSBA LN) looks to have a surplus of AT1 bonds from a RWA capital ratio perspective. However, we calculate a deficiency relative to its leverage capital ratio needs. Basel IV inflation may diminish the RWA-base surplus; but for now, HSBC’s leverage ratio is its AT1 governor.In terms of Tier 2 needs, Eurozone banks are largely where they need to be from an efficiency perspective with the main exception of Cooperative Rabobank UA (RABO NA). Meanwhile, HSBC may be in a position to reduce its Common Equity Tier 1 levels by issuing Tier 2 bonds while remaining well above minimum capital requirements. Concurrently, Standard Chartered's (STAN LN) Tier 2 levels are materially more than minimum regulatory requirements. These look better value than HSBC’s. 

Debt Capital Surplus (Shortfall) And Trading Opportunities in European Banks

Indiabulls Housing Finance / Equity Bottom-Up

*Bad News On The Doorstep: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 4Q21 results of INR 2.8 bn, declining INR 531 mn (16.1%) linked quarter. The linked quarter weakness can be attributed to both: a) net interest income decline of INR 804 mn (10.5%) tracking a decline in both loans of 6.8% and NIM compression of 59 bp to 2.94%; and b) loss provision increase of INR 1.7 bn (120.9%); and   *Wrong Turn: Net new NPLs had increased INR 8.0 bn for the quarter for an annualized rate of increase of 159.3% - a complete about face from FY 3Q21’s decline of 11.3%. Reserves ae now frighteningly low, and we would suggest INR 30.2 bn or 9x stated PBT.

*Bad News On The Doorstep: IndiaBulls Housing Finance (IHFL.IN) [IndiaBulls] reported FY 4Q21 results of INR 2.8 bn, declining INR 531 mn (16.1%) linked quarter. The linked quarter weakness can be attributed to both: a) net interest income decline of INR 804 mn (10.5%) tracking a decline in both loans of 6.8% and NIM compression of 59 bp to 2.94%; and b) loss provision increase of INR 1.7 bn (120.9%); and   *Wrong Turn: Net new NPLs had increased INR 8.0 bn for the quarter for an annualized rate of increase of 159.3% - a complete about face from FY 3Q21’s decline of 11.3%. Reserves ae now frighteningly low, and we would suggest INR 30.2 bn or 9x stated PBT. 

IndiaBulls Housing Finance – A Turn For The Worse

Executive Summary: A liquidity driven melt-up remains the key driver of bank credit spread performance. As US banks push deposits into money market funds, to manage their Supplemental Leverage Ratio requirements, the short end of the rates market continues to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up is the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last week. In fact, rate curve flattening, and forward breakeven rate declines, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory. While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning.The risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive and moving too early to position for higher or longer than anticipated inflation may be career ending. Ergo, the silent self-doubtful suffering of the rate and credit markets.We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender.

Executive Summary: A liquidity driven melt-up remains the key driver of bank credit spread performance. As US banks push deposits into money market funds, to manage their Supplemental Leverage Ratio requirements, the short end of the rates market continues to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up is the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last week. In fact, rate curve flattening, and forward breakeven rate declines, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory. While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning.The risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive and moving too early to position for higher or longer than anticipated inflation may be career ending. Ergo, the silent self-doubtful suffering of the rate and credit markets.We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender.

Bank Credit Weekly: Liquidity Driven Melt-Up Pulls Spreads Tighter

Hong Kong

Standard Chartered plc is an international banking group operating principally in Asia, Africa, and the Middle East.  The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

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Standard Chartered (2888 HK)

Banks on the Bitcoin Bandwagon: Cashing in Through Crypto Custody Services

Bitcoin holdings by issuers and investors is driving crypto custody demand. Big banks are stepping. A big opportunity, but some ESG investors might...

Kyle Rudden

HSBC Holdings Plc – And So It Begins

HSBC HOLDINGS: HSBC is withdrawing from U.S. retail banking, and recently announced that it will sell 10 branches to Cathay General Bancorp in Los...

Thomas J. Monaco

Debt Capital Surplus (Shortfall) And Trading Opportunities in European Banks

Timing matters. A price decline in an on-the-run bond due to issuance represents a buying opportunity; however, it can take time to regain value....

Hank Calenti, CFA

IndiaBulls Housing Finance – A Turn For The Worse

INDIABULLS HOUSING FINANCE: IndiaBulls reported a QOQ FY 4Q21 results decline of 16.1% due to a net interest income decline and loss provision...

Thomas J. Monaco

Bank Credit Weekly: Liquidity Driven Melt-Up Pulls Spreads Tighter

Liquidity remains the key driver of bank credit spread performance. The risk is that the rates market is underpricing the potential for an extended...

Hank Calenti, CFA

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