Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p><strong>Executive Summary: </strong> 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.</p><p>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.</p><p>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.</p><p>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.</p><p>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.   </p>

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.   

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

<p><strong><em>*Don’t Be Misled By Better Numbers: </em></strong>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 </p><p><strong><em>*Credit Risk Rising: </em></strong>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.   </p>

*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

<p><strong>Executive Summary: </strong>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.</p><p>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.</p><p>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.</p><p>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.</p><p>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. </p>

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

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

<div><p><a href="https://www.smartkarma.com/entities/linklogis" target="_blank" data-smartkarma-citation="entities:31126:1" rel="noopener">Linklogis (LINK HK)</a> is a leading technology solution provider for supply chain finance in China. Its solutions optimise the payment cycle of supply chain transactions and digitalize the entire workflow of supply chain finance. Linklogis is backed by <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, CITIC Capital, GIC and <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>. </p></div><div><p>At the proposed IPO price range of HK$16.28-18.28 per share, Linklogis will have a market cap of HK$36,864-41,393 million ($4.7-5.3 billion). At the mid-point of the IPO price range, the net proceeds are HK$7,581.3 million ($976 million). Six cornerstone investors will purchase $365 million worth of the offer shares (36.22% of the offer shares at the mid-point of the IPO price range). The cornerstone investors are BlackRock, Fidelity International, Janus Henderson, Ontario Teachers’, Sequoia Funds and EDB Investments. </p></div><div><div>
<p>In <a href="https://www.smartkarma.com/insights/linklogis-ipo-initiation-isupply" target="_blank" data-smartkarma-citation="insights:47017" rel="noopener">Linklogis IPO Initiation: ISupply</a>, we stated that Linklogis is an attractive play on China’s supply chain finance market by combining a sensible monetisation model, high customer retention rate (good revenue visibility) and strong operating leverage. In <a href="https://www.smartkarma.com/insights/linklogis-ipo-every-little-helps" target="_blank" data-smartkarma-citation="insights:49480" rel="noopener">Linklogis IPO: Every Little Helps</a>, we noted that based on the PHIP which discloses the 2020 results and recent developments, we continue to believe that Linklogis’ fundamentals are attractive.</p>
<div class="content-highlight"><p>Notwithstanding the recent de-rating of Chinese tech names, our valuation analysis suggests that the IPO price range is attractive. Overall, we would participate in the IPO. </p></div>
</div></div>

Linklogis (LINK HK) is a leading technology solution provider for supply chain finance in China. Its solutions optimise the payment cycle of supply chain transactions and digitalize the entire workflow of supply chain finance. Linklogis is backed by Tencent Holdings (700 HK), CITIC Capital, GIC and Standard Chartered (STAN LN). At the proposed IPO price range of HK$16.28-18.28 per share, Linklogis will have a market cap of HK$36,864-41,393 million ($4.7-5.3 billion). At the mid-point of the IPO price range, the net proceeds are HK$7,581.3 million ($976 million). Six cornerstone investors will purchase $365 million worth of the offer shares (36.22% of the offer shares at the mid-point of the IPO price range). The cornerstone investors are BlackRock, Fidelity International, Janus Henderson, Ontario Teachers’, Sequoia Funds and EDB Investments. 
In Linklogis IPO Initiation: ISupply, we stated that Linklogis is an attractive play on China’s supply chain finance market by combining a sensible monetisation model, high customer retention rate (good revenue visibility) and strong operating leverage. In Linklogis IPO: Every Little Helps, we noted that based on the PHIP which discloses the 2020 results and recent developments, we continue to believe that Linklogis’ fundamentals are attractive.
Notwithstanding the recent de-rating of Chinese tech names, our valuation analysis suggests that the IPO price range is attractive. Overall, we would participate in the IPO. 


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.

<div><p>Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise around US$1bn in its Hong Kong IPO. Its investors include Tencent, GIC and Standard Chartered Bank.</p></div><div><p>We have covered various aspects of the deal in our earlier insights,</p></div><div><ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-positives-fast-growing-blockchain-driven-supply-chain-financier" target="_blank" rel="noopener">Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier,</a> </li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-negatives-inconsistent-growth-and-margins-well-funded-competitors" target="_blank" rel="noopener">Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors, and</a></li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-earnings-forecast-peer-comparison-and-first-stab-at-valuation" target="_blank" rel="noopener">Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation</a></li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-phip-updates-nothing-to-complain-about" target="_blank" rel="noopener">Linklogis Pre-IPO - PHIP Updates - Nothing to Complain About</a></li>
</ul></div><div><p>In this note, we'll talk about deal dynamics and final valuation.</p></div>

Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise around US$1bn in its Hong Kong IPO. Its investors include Tencent, GIC and Standard Chartered Bank.We have covered various aspects of the deal in our earlier insights,

Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier, 
Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors, and
Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation
Linklogis Pre-IPO - PHIP Updates - Nothing to Complain About
In this note, we'll talk about deal dynamics and final valuation.

United Kingdom

NatWest Group plc operates as a banking and financial services company. The Bank provides personal and business banking, consumer loans, asset and invoice finances, commercial and residential mortgages, credit cards, and financial planning services, as well as life, personal, and income protection insurance. NatWest Group serves clients worldwide.

Barclays PLC is a global financial services provider engaged in retail banking, credit cards, wholesale banking, investment banking, wealth management and investment management services.

Barclays PLC is a global financial services provider engaged in retail banking, credit cards, wholesale banking, investment banking, wealth management, and investment management services.

Bank of Georgia Group PLC operates as a bank. The Bank services includes retail banking and payment services, corporate and investment banking, and wealth management operations solutions. Bank of Georgia Group serves customers in the United Kingdom, Belarus, and Georgia.

Secure Trust Bank PLC accepts deposits and offers retail banking services.  The Company offers automobile and retail point of sale financing, and personal unsecured lending.

Arbuthnot Banking Group PLC, together with its subsidiaries, provides various banking and financial products and services in the United Kingdom. It operates through three segments: Retail Banking, UK Private banking, and Group Centre. The company provides private banking services, such as current accounts, deposit accounts, loans, overdrafts, and foreign exchange services; wealth planning services comprising estate and tax planning, pensions, and wealth preservation and generation; and discretionary investment management services, including asset management and developing tailored investment strategies. It also offers retail banking products and services, such as savings and current accounts; consumer finance products in motor finance, retail finance, and unsecured personal lending areas; and SME?s funding for asset finance, invoice finance, and real estate finance. In addition, the company offers commercial banking services comprising financing and cash transaction requirements of SMEs, as well as household cash management and insurance services. Further, the company offers leasing, debt collection, and property rental and management services. Arbuthnot Banking Group PLC was founded in 1833 and is headquartered in London, the United Kingdom.

Metro Bank PLC provides a full range of commercial banking services for retail and institutional customers. The Bank offers services such as current accounts, mortgages, safe deposit boxes, cash management, private banking, and debit and credit cards. Metro Bank conducts its business in the United Kingdom.

Paragon Group of Cos PLC provides lending services, including personal financing, vehicle financing, and an assortment of residential mortgage choices.  The Group's mortgage loans are secured on residential properties within the United Kingdom.  Paragon offers its full range of services on-line through interactive websites.

Aviva PLC operates as an international insurance company that provides all classes of general and life assurance, including fire, motor, marine, aviation, and transport insurance. The Company also offers a variety of financial services, including unit trusts, stockbroking, long-term savings, and fund management.

Legal & General Group plc is a holding company. The Company, through its subsidiaries, provides savings, risk and investment management services such as annuities, long-term savings, life assurance and financial protection products. Legal & General Group's products are sold through bank, building society relationships, Independent Financial Advisers and directly to customers.

Hang Seng Bank Limited and its subsidiaries provide banking and related financial services.

Fifth Third Bancorp is a diversified financial services company that operates banking centers in the Midwestern and Southeastern regions of the United States. The Company's principal businesses include retail banking, commercial banking, investment advisory, and data processing.

BOC Hong Kong (Holdings) Limited provides a comprehensive range of financial products and services to retail and corporate customers.  Its products include retail banking, corporate banking, and treasury services.  The Company operates its branches in Hong Kong and China.

CTBC Financial Holding Company Ltd. is a holding company.  Through its subsidiaries, the Company provides a variety of banking and financial services, including deposit, loan, guarantee, international banking, trust banking, credit card, investment banking, safety deposit box, and Internet banking services.

Public Bank Berhad provides a range of banking and financial services which include leasing and factoring, stock and futures broking, financing for the purchase of licensed public vehicles, and other financial services. The Group's overseas operations include branches in Hong Kong, Sri Lanka, Laos, Cambodia, and Vietnam.

Malayan Banking Berhad operates as a bank. The Company provides financial services such as insurance, asset management, stock broking, nominee services, venture capital, leasing, and Internet banking. Malayan Banking Berhad serves customers in South East Asia.

Ping An Bank Co Ltd provides a full range of commercial banking services including RMB and foreign currency deposit, loan, international and domestic settlement, discount, currency trading, letter of credit, bank guarantee, and other related services.

KB Financial Group Inc. (the "Company"), in accordance with Financial Holding Companies Act, was established on September 29, 2008, through stock transfer with the former shareholders of its subsidiaries including Kookmin Bank in order to provide management services and financing to associated companies. The headquarters are located at Seoul, Korea

Bank of Beijing Company Ltd. attracts deposits and offers commercial banking services.  The Bank offers short-, medium- and long-term loans, insurance, foreign exchange, international settlement, government bonds, and other products and services.

China Everbright Bank Company Limited provides banking services. The Company offers deposits, loans, domestic settlement, currency trading, and other services. China Everbright Bank provides its services to individuals, enterprises, and other clients.

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)

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

Linklogis IPO: Valuation Insights

Linklogis has launched its IPO to raise net proceeds of $976m at the mid-point. Notwithstanding the recent de-rating of Chinese tech, we think that...

Arun George

Linklogis IPO - Pricey for a Reason

Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise around US$1bn in its Hong Kong IPO. Its investors...

Sumeet Singh

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