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

*Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.

 *Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.  

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

We screen for value in <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered' s  (StanLn)</a> Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit versus a Sovereign CDS Portfolio</a> as well as <a href="https://www.smartkarma.com/insights/standard-chartered-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:47266" rel="noopener">Capital, Forbearance and CDS</a> for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

We screen for value in Standard Chartered' s  (StanLn) Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: Standard Chartered Credit versus a Sovereign CDS Portfolio as well as Capital, Forbearance and CDS for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

Standard Chartered: Screening for AT1 Value, Post-Covid-19

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered' s (StanLn)</a> capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit Versus a Sovereign CDS Portfolio</a> for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than <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>.

Standard Chartered' s (StanLn) capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see Standard Chartered Credit Versus a Sovereign CDS Portfolio for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than HSBC Holdings' (HSBA LN).

Standard Chartered: Capital, Forbearance and CDS

We examine <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (StanLn)</a> as a diversified portfolio of sovereign Credit Default Swaps (CDS) plus an element to represent non-sovereign risk. Potential investors have a choice of buying StanLn securities, including CDS, or buying securities issued by the countries that StanLn lends within. As such, we assess the additional pick-up that an investor gets from gaining exposure to StanLn via CDS versus buying CDS exposure to the main countries where StanLn operates.StanLn’s senior holding company CDS can vary considerably relative to the sovereign credit risk of the underlying portfolio. Although currently priced in-line with expectations, we think this is worth tracking. As such, we will consider the additional return obtained from investing in StanLn relative to potential risks which may not be fully captured by current market prices in follow-up insights. These may include the level of capital at risk from COVID-19 forbearance as well as sufficiency of the provisioning overlay to reflect macroeconomic outlooks not captured in the bank’s provisioning model. Thereafter, we intent to revisit these levels from time-to-time towards identifying potential investment opportunities.

We examine Standard Chartered (StanLn) as a diversified portfolio of sovereign Credit Default Swaps (CDS) plus an element to represent non-sovereign risk. Potential investors have a choice of buying StanLn securities, including CDS, or buying securities issued by the countries that StanLn lends within. As such, we assess the additional pick-up that an investor gets from gaining exposure to StanLn via CDS versus buying CDS exposure to the main countries where StanLn operates.StanLn’s senior holding company CDS can vary considerably relative to the sovereign credit risk of the underlying portfolio. Although currently priced in-line with expectations, we think this is worth tracking. As such, we will consider the additional return obtained from investing in StanLn relative to potential risks which may not be fully captured by current market prices in follow-up insights. These may include the level of capital at risk from COVID-19 forbearance as well as sufficiency of the provisioning overlay to reflect macroeconomic outlooks not captured in the bank’s provisioning model. Thereafter, we intent to revisit these levels from time-to-time towards identifying potential investment opportunities.

Standard Chartered Credit Versus a Sovereign CDS Portfolio

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance.

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance. 

Bank of America – Driven Entirely By Credit

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)

Axis Bank – Evil Result

AXIS BANK: Axis reported a 33.8% decline in linked quarter FY 3Q21 results. Given the hefty increase in net new NPLs, results make little sense....

Thomas J. Monaco

Standard Chartered: Screening for AT1 Value, Post-Covid-19

We screen for value in StanLn’s AT1 curve, including the S$ bond, within a post-Covid-19 economic environment, and we determine StanLn’s capacity...

Hank Calenti, CFA

Standard Chartered: Capital, Forbearance and CDS

Standard Chartered’s capital ratios remain above regulatory minimums even after adjusting for Covid-19 forbearance. Limited aid to SMEs and...

Hank Calenti, CFA

Standard Chartered Credit Versus a Sovereign CDS Portfolio

We examine Standard Chartered as a diversified portfolio of sovereign CDS plus an element to represent non-sovereign risk. First, we decompose...

Hank Calenti, CFA

Bank of America – Driven Entirely By Credit

BANK OF AMERICA: BAC's 4Q20 bottom-line of USD 5.2 bn increased 17.3% driven by a USD 1.3 bn reduction in provisions. NPLs increased 8.2%, as did...

Thomas J. Monaco

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