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

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

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

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.

Australia & New Zealand Bankin / Equity Bottom-Up

In a world of low rates, poor margins, and similar dynamics on credit costs, it is with operating costs where differences in banks can be most acute, most valuable. There are few large market cap banks that compare with ANZ, both in terms of cost direction and absolute level.

In a world of low rates, poor margins, and similar dynamics on credit costs, it is with operating costs where differences in banks can be most acute, most valuable. There are few large market cap banks that compare with ANZ, both in terms of cost direction and absolute level.

Executive Summary: The US Treasury bond market rally gave up the ghost at the longer-end of the curve while excess cash levels compressed rates at the short-end last week. The Treasury curve bull steepened for the first time in over three weeks.Market participants re-positioned into month-end and ahead of April data releases over the next two weeks. Expectations are for strong economic data. High readings could prove bearish for Treasury prices. However, since the markets are forward looking, the question is also why are rates not already higher?As markets focused on upside inflation risks, with commodity prices continuing to surge, both Sweden’s Riksbank and the Bank of Japan highlighted soft inflation pressures in their latest policy meetings. These statements may add to uncertainty over how sustainable the current rise in US inflation may prove to be.At the same time, the run-off of the US Treasury Department’s cash balances at the Fed continues to keep pressure on repo rates. This in turn is resulting in a melt-up with two year and under area yields being squeezed tighter as investors move up the curve for a return. For more on this melt-up approach, please see: <a href="https://www.smartkarma.com/compose/insight/50971/Bank%20Credit%20Strategy:%20Melt-Up%20Before%20Meltdown,%20Where%20to%20Position.%20Read%20more:%20https:/skr.ma/W1NcQ" target="_blank" rel="noopener">Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position</a>. In bank credit, with short-end interest rates compressing week-on-week and short-end credit tightening, positive total returns were easy to generate. Although credit spreads tightened more in the long- than short-end, Treasury curve steepening meant that positive total returns were not realized in longer dated notes. Most Asia-headquartered bank credits tightened by two- to three- basis points week-on-week. Tier 2 and HY Senior Unsecured notes tended to outperform on a spread basis. Most European-headquartered bank credits tightened by three- to four- basis points week-on-week. Lower risk Senior Bail-in bonds delivered higher average spread tighteningWith peak earnings season now behind us, the upcoming week will essentially complete Q1 reports for most major financial institutions. US banks signaled that they anticipate significantly higher interest rates by raising record breaking amounts in the debt capital markets following their Q1 earnings announcements. Other banks may follow. May is historically the start of a bullish period for Treasuries. However, as we start the month, the absence of evidence should not be taken as evidence of its absence. Various holidays around the world may reduce visibility over the next week. Markets in China, Japan and the UK are closed on Monday, with those in Tokyo and China shut through Wednesday. Look to the end of the week for more directionality. We explore these market themes within.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is more constrained in terms of rates than was previously expected. This should be risk asset supportive. The concern is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.

Executive Summary: The US Treasury bond market rally gave up the ghost at the longer-end of the curve while excess cash levels compressed rates at the short-end last week. The Treasury curve bull steepened for the first time in over three weeks.Market participants re-positioned into month-end and ahead of April data releases over the next two weeks. Expectations are for strong economic data. High readings could prove bearish for Treasury prices. However, since the markets are forward looking, the question is also why are rates not already higher?As markets focused on upside inflation risks, with commodity prices continuing to surge, both Sweden’s Riksbank and the Bank of Japan highlighted soft inflation pressures in their latest policy meetings. These statements may add to uncertainty over how sustainable the current rise in US inflation may prove to be.At the same time, the run-off of the US Treasury Department’s cash balances at the Fed continues to keep pressure on repo rates. This in turn is resulting in a melt-up with two year and under area yields being squeezed tighter as investors move up the curve for a return. For more on this melt-up approach, please see: Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position. In bank credit, with short-end interest rates compressing week-on-week and short-end credit tightening, positive total returns were easy to generate. Although credit spreads tightened more in the long- than short-end, Treasury curve steepening meant that positive total returns were not realized in longer dated notes. Most Asia-headquartered bank credits tightened by two- to three- basis points week-on-week. Tier 2 and HY Senior Unsecured notes tended to outperform on a spread basis. Most European-headquartered bank credits tightened by three- to four- basis points week-on-week. Lower risk Senior Bail-in bonds delivered higher average spread tighteningWith peak earnings season now behind us, the upcoming week will essentially complete Q1 reports for most major financial institutions. US banks signaled that they anticipate significantly higher interest rates by raising record breaking amounts in the debt capital markets following their Q1 earnings announcements. Other banks may follow. May is historically the start of a bullish period for Treasuries. However, as we start the month, the absence of evidence should not be taken as evidence of its absence. Various holidays around the world may reduce visibility over the next week. Markets in China, Japan and the UK are closed on Monday, with those in Tokyo and China shut through Wednesday. Look to the end of the week for more directionality. We explore these market themes within.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is more constrained in terms of rates than was previously expected. This should be risk asset supportive. The concern is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.  

Bank Credit Weekly: Bull Steepening, but Is It Sustainable?

United Kingdom

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 (STAN LN)

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

ANZ – Cost Containment Differentiates

In a world of low rates and similar dynamics on credit costs, operating costs can better differentiate. ANZ shines in both cost direction and...

Daniel Tabbush

Bank Credit Weekly: Bull Steepening, but Is It Sustainable?

Treasury yields bull steepened while the melt-up led credit total returns. Yield conviction may build as April economic data is published; however,...

Hank Calenti, CFA

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