Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group's (CSGN VX)</a> press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in <a href="https://www.smartkarma.com/compose/insight/49970/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a>, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Executive Summary: Credit Suisse Group's (CSGN VX) press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in Credit Suisse: Where There’s Smoke, There’s a Capital Raise, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Credit Suisse: Skating on a Thin Layer of Capital

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

*AGM Leads To More Questions Than Answers: At its recent annual general meeting (AGM), DBS Group Holdings (DBS.SP) [DBS] highlighted several back to the future mainland China strategies and tried to justify its truly dumb acquisition in India. The management team didn’t do itself any favors; and *Another Fine Mess You’ve Gotten Us Into: CEO Gupta was completely put back on his heals and left defending its acquisition of Lakshmi Vilas Bank (LVB). Shareholders raised fundamental concerns over financial losses and LVB’s impact on DBS' bottom-line. In our view, without some form of ring-fencing of LVB’s challenged assets it is unclear how this transaction would NOT have a negative material impact on DBS’ earnings and capital ratios over the near-term.

*AGM Leads To More Questions Than Answers: At its recent annual general meeting (AGM), DBS Group Holdings (DBS.SP) [DBS] highlighted several back to the future mainland China strategies and tried to justify its truly dumb acquisition in India. The management team didn’t do itself any favors; and *Another Fine Mess You’ve Gotten Us Into: CEO Gupta was completely put back on his heals and left defending its acquisition of Lakshmi Vilas Bank (LVB). Shareholders raised fundamental concerns over financial losses and LVB’s impact on DBS' bottom-line. In our view, without some form of ring-fencing of LVB’s challenged assets it is unclear how this transaction would NOT have a negative material impact on DBS’ earnings and capital ratios over the near-term. 

DBS Group Holdings – Quickly Losing Credibility

Executive Summary:  We recommend that investors Overweight <a href="https://www.smartkarma.com/entities/krung-thai-bank-pub-co-ltd" target="_blank" data-smartkarma-citation="entities:298:1" rel="noopener">Krung Thai Bank's (KTBTB)</a> recently issued Additional Tier 1 (AT1) bond. Krung Thai’s published credit metrics are on-par with, if not superior to, its Thailand-based peers as well as <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a>. Furthermore, after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank (KBank)</a> and <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank (TMB TB)</a>. As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s bond.Thailand-headquartered banks face both a net profit and a capital buffer test towards determining their ability to make optional distributions, such as dividends, bonuses, and Additional Tier 1 coupons. Unfortunately, Thai-bank AT1 spreads bear no relationship relative to their respective capital buffers. This suggests that other concerns may be driving their respective valuations.We note that loans under COVID-19 relief measures remain subject to an IFRS9 staging standstill under Bank of Thailand regulations until the end of 2021, according to Krung Thai Bank. Given the large amount of relief provided by Thai banks over the last year, and more that may develop in the future, current earnings power and capital buffers may overstate each banks’ ability to make optional distribution payments over time.Therefore, a complete analysis on the fair value of a Thai-bank security should incorporate the capital buffer and pre-provision earnings that may be at risk from Covid-19 relief loans that could go sour.  We undertake this analysis within.Taken together, we conclude that after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to Kasikornbank and TMB Bank. As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s, bond. Issued last week at a spread of T+353, and currently trading at T+ 330, we see at least 30bps of upside remaining for investors in KTBTB’s bond. As such, we recommend that investors Overweight Krung Thai Bank’s 4.4% coupon 2026 callable AT1 note.

Executive Summary:  We recommend that investors Overweight Krung Thai Bank's (KTBTB) recently issued Additional Tier 1 (AT1) bond. Krung Thai’s published credit metrics are on-par with, if not superior to, its Thailand-based peers as well as Standard Chartered (STAN LN). Furthermore, after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to Kasikornbank (KBank) and TMB Bank (TMB TB). As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s bond.Thailand-headquartered banks face both a net profit and a capital buffer test towards determining their ability to make optional distributions, such as dividends, bonuses, and Additional Tier 1 coupons. Unfortunately, Thai-bank AT1 spreads bear no relationship relative to their respective capital buffers. This suggests that other concerns may be driving their respective valuations.We note that loans under COVID-19 relief measures remain subject to an IFRS9 staging standstill under Bank of Thailand regulations until the end of 2021, according to Krung Thai Bank. Given the large amount of relief provided by Thai banks over the last year, and more that may develop in the future, current earnings power and capital buffers may overstate each banks’ ability to make optional distribution payments over time.Therefore, a complete analysis on the fair value of a Thai-bank security should incorporate the capital buffer and pre-provision earnings that may be at risk from Covid-19 relief loans that could go sour.  We undertake this analysis within.Taken together, we conclude that after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to Kasikornbank and TMB Bank. As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s, bond. Issued last week at a spread of T+353, and currently trading at T+ 330, we see at least 30bps of upside remaining for investors in KTBTB’s bond. As such, we recommend that investors Overweight Krung Thai Bank’s 4.4% coupon 2026 callable AT1 note.   

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 410 bn which amounts to over a year of pre-tax results at ICBC.

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 410 bn which amounts to over a year of pre-tax results at ICBC.   

Industrial and Commercial Bank of China – Troubling Result

Executive Summary: The <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group (CSGN VX)</a> requires between CHF4 to 8bn in additional Common Equity Tier 1 (CET1) to remain competitive and bring its capital buffer in-line with peers. We noted several week ago that the firm’s capital buffer was too thin to absorb large losses while its Contingent Capital (CoCo) securities continued to trade rich relative to peers. The thin, and likely declining, buffer may now affect its ability to compete. In our view, the issue is quickly moving from damage control towards a capital raise.We derive our capital estimates by starting with the amount required to bring the CET1 buffer up to peer levels. To this we add various exceptional charges which are increasing every other week. Details within.We were ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $95. Our recommendation was based on a fundamental assessment of CS’ business model, risk tolerance and capitalization. Please see: <a href="https://www.smartkarma.com/compose/insight/49775/Credit%20Suisse%20%E2%80%93%20Perfection%20Priced%20into%20Long-Dated%20AT1.%20Read%20more:%20https:/skr.ma/7w5Cm" target="_blank" rel="noopener">Credit Suisse – Perfection Priced into Long-Dated AT1</a> for more details. These negative factors were magnified by the Greensill episode. Please see: <a href="https://www.smartkarma.com/compose/insight/49775/Credit%20Suisse:%20Greensill%20Sows%20Reputation%20Risks,%20Underweight%20CS%20Bonds.%20Read%20more:%20https:/skr.ma/tq31o" target="_blank" rel="noopener">Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds</a> and <a href="https://www.smartkarma.com/compose/insight/49775/Credit%20Suisse:%20Greensill's%20Capital%20Implications%20Outweigh%20Asset%20Management%20Corrective%20Action.%20Read%20more:%20https:/skr.ma/WWiXU" target="_blank" rel="noopener">Credit Suisse: Greensill's Capital Implications Outweigh Asset Management Corrective Action</a>. The Archegos affair adds fuel to this fire.It is too early to consider this a buying opportunity. While we believe in our recapitalization call, we do not anticipate an immediate move towards improving the firms’ competitive position. The flames are rising and more fuel could be added before the capital blanket is applied. As such, we believe CS’ bonds may continue to lag that of its peers.However, the Swiss regulator may be unwilling to wait for the smoke to dampen and the arrival of a new Board Chairman should create the opportunity to clear the air at Credit Suisse. Obviously in addition to raising equity, CS would need to take serious action concerning its risk management and tolerance. Risk tolerance needs to be reduced until risk management is improved as these are the embers which stated this fire. This should be beneficial to AT1 investors over the long-run.

Executive Summary: The Credit Suisse Group (CSGN VX) requires between CHF4 to 8bn in additional Common Equity Tier 1 (CET1) to remain competitive and bring its capital buffer in-line with peers. We noted several week ago that the firm’s capital buffer was too thin to absorb large losses while its Contingent Capital (CoCo) securities continued to trade rich relative to peers. The thin, and likely declining, buffer may now affect its ability to compete. In our view, the issue is quickly moving from damage control towards a capital raise.We derive our capital estimates by starting with the amount required to bring the CET1 buffer up to peer levels. To this we add various exceptional charges which are increasing every other week. Details within.We were ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $95. Our recommendation was based on a fundamental assessment of CS’ business model, risk tolerance and capitalization. Please see: Credit Suisse – Perfection Priced into Long-Dated AT1 for more details. These negative factors were magnified by the Greensill episode. Please see: Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds and Credit Suisse: Greensill's Capital Implications Outweigh Asset Management Corrective Action. The Archegos affair adds fuel to this fire.It is too early to consider this a buying opportunity. While we believe in our recapitalization call, we do not anticipate an immediate move towards improving the firms’ competitive position. The flames are rising and more fuel could be added before the capital blanket is applied. As such, we believe CS’ bonds may continue to lag that of its peers.However, the Swiss regulator may be unwilling to wait for the smoke to dampen and the arrival of a new Board Chairman should create the opportunity to clear the air at Credit Suisse. Obviously in addition to raising equity, CS would need to take serious action concerning its risk management and tolerance. Risk tolerance needs to be reduced until risk management is improved as these are the embers which stated this fire. This should be beneficial to AT1 investors over the long-run. 

Credit Suisse: Where There’s Smoke, There’s a Capital Raise

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)

Credit Suisse: Skating on a Thin Layer of Capital

CS is skating on thin ice from a capital perspective while its risk management blade is dulled. Asset bubbles could crack the ice. A loss of less...

Hank Calenti, CFA

DBS Group Holdings – Quickly Losing Credibility

DBS GROUP HOLDINGS: At its recent AGM, DBS highlighted several back to the future mainland China strategies and tried to justify its acquisition in...

Thomas J. Monaco

Krung Thai Bank: Overweight This AT1 Gem

Krung Thai offers superior Covid-19 adjusted metrics. Issued at a discount to fair value, its recently issued AT1 bond is a gem for investors.

Hank Calenti, CFA

Industrial and Commercial Bank of China – Troubling Result

ICBC: ICBC reported a 9.2% QOQ increase in 4Q20 results, which is solely attributed to an unjustified and massive linked quarter reduction in loss...

Thomas J. Monaco

Credit Suisse: Where There’s Smoke, There’s a Capital Raise

CS needs as much as CHF8bn in common equity to bring its capital buffer in-line with peers. The Archegos affair adds fuel to risk management and...

Hank Calenti, CFA

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