Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: A Goldilocks scenario outcome whereby President Trump loses the election, but Joe Biden does not win a mandate led to material US High Yield (HY) index spread tightening, driven by Caa-rated entities.Markets were overpricing a Blue Democratic Party sweep prior to the US election, as we predicted. Now they are overpricing an inhibited tax and regulatory agenda under a Biden Presidency and Republican Senate. The run-off for two Senate seats in Georgia could see Republicans’ lose the Senate. As such, the amount of potential fiscal stimulus under the new administration remains difficult to handicap. Plus, regulatory changes are now largely driven by Executive Orders.In Asia, despite improving Purchasing Managers Index results and an unexpected acceleration in China’s October exports, Asia’s HY market underperformed the US on global economic growth concerns. Increasing Coronavirus cases in Europe and a pre-Christmas lock-down are a headwind for Asia’s export growth and tourism over the near term. Concurrently, Biden’s Coronavirus plan also adds to uncertainty. Furthermore, expectations that Joe Biden may be less confrontational than President Trump with China may prove wrong as the new President would focus on mid-term elections and the need to prove himself where he won narrowly. However, despite these potential negatives, Asia’s HY index looks oversold particularly relative to US Caa-rated index levels.The suspension of Ant Financial’s (<a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> )initial public offering (IPO) in China and Hong Kong also negatively affected Asia’s risk sentiment and raised serious questions on China’s regulatory due process. <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's (HSBA LN)</a> shares sold-off following the Ant Financial announcement despite the firm not waiving interest charges on margin borrowing for the suspended IPO. With a China-centric growth strategy, HSBC’s business model is increasingly caught in the middle of a developing bi-polar world.Nonetheless, never missing an opportunity to test the market, HSBC Holdings was the only financial institution to issue debt in the global capital markets this week. We assess the attractiveness of these Euro-denominated bonds within. In Asia, primary US$-bond sales plunged to just US$0.9b from US$6.8 billion in the prior week as borrowers awaited the U.S presidential election outcome. With interest rates diving lower, we anticipate additional issuance over the next few weeks as issuers fill 2021 borrowing needs early.Against this background, Asia’s lower duration Senior Unsecured bonds outperformed Tier 2 and Additional Tier 1 securities, in concert with concerns surrounding global economic growth potential over the near term. The top performing and underperforming bonds were short- and long-duration in nature, respectively.  Market Outlook: A less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including Emerging Markets (EM) fixed income securities over time. In the near term, risk asset and bank valuations may remain volatile through the year-end as large levels of cash remain on the sidelines.

Executive Summary: A Goldilocks scenario outcome whereby President Trump loses the election, but Joe Biden does not win a mandate led to material US High Yield (HY) index spread tightening, driven by Caa-rated entities.Markets were overpricing a Blue Democratic Party sweep prior to the US election, as we predicted. Now they are overpricing an inhibited tax and regulatory agenda under a Biden Presidency and Republican Senate. The run-off for two Senate seats in Georgia could see Republicans’ lose the Senate. As such, the amount of potential fiscal stimulus under the new administration remains difficult to handicap. Plus, regulatory changes are now largely driven by Executive Orders.In Asia, despite improving Purchasing Managers Index results and an unexpected acceleration in China’s October exports, Asia’s HY market underperformed the US on global economic growth concerns. Increasing Coronavirus cases in Europe and a pre-Christmas lock-down are a headwind for Asia’s export growth and tourism over the near term. Concurrently, Biden’s Coronavirus plan also adds to uncertainty. Furthermore, expectations that Joe Biden may be less confrontational than President Trump with China may prove wrong as the new President would focus on mid-term elections and the need to prove himself where he won narrowly. However, despite these potential negatives, Asia’s HY index looks oversold particularly relative to US Caa-rated index levels.The suspension of Ant Financial’s (Ant Group (6688 HK) )initial public offering (IPO) in China and Hong Kong also negatively affected Asia’s risk sentiment and raised serious questions on China’s regulatory due process. HSBC's (HSBA LN) shares sold-off following the Ant Financial announcement despite the firm not waiving interest charges on margin borrowing for the suspended IPO. With a China-centric growth strategy, HSBC’s business model is increasingly caught in the middle of a developing bi-polar world.Nonetheless, never missing an opportunity to test the market, HSBC Holdings was the only financial institution to issue debt in the global capital markets this week. We assess the attractiveness of these Euro-denominated bonds within. In Asia, primary US$-bond sales plunged to just US$0.9b from US$6.8 billion in the prior week as borrowers awaited the U.S presidential election outcome. With interest rates diving lower, we anticipate additional issuance over the next few weeks as issuers fill 2021 borrowing needs early.Against this background, Asia’s lower duration Senior Unsecured bonds outperformed Tier 2 and Additional Tier 1 securities, in concert with concerns surrounding global economic growth potential over the near term. The top performing and underperforming bonds were short- and long-duration in nature, respectively.  Market Outlook: A less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including Emerging Markets (EM) fixed income securities over time. In the near term, risk asset and bank valuations may remain volatile through the year-end as large levels of cash remain on the sidelines.

Bank Credit Weekly: Election Goldilocks Priced-In as Growth Concerns Increase

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

*Results Supported By Premature Provision Cut: State Bank of India (SBIN.IN) [SBI] reported FY 2Q21 results of INR 45.7 bn, increasing INR 3.8 bn (9.2%) linked quarter. Results were even better when we exclude the FY 1Q21 exceptional gain of INR 15.4 bn – increasing INR 19.2 bn or 72.6% linked quarter. Results were driven by three factors: a) net interest income improvement of INR 15.4 bn (5.8%) due primarily to NIM improvement of 8 bp to 2.96%; b) a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics; and c) non-interest income improvement of INR 5.7 bn (7.2%); and* Credit Risk and Weak Cover: By our calculation, we find net new NPL growth of INR 144.0 bn or 44.4% on an annualized basis and that the annualized NCO rate of 66 bp – which are quite troublesome even for an SOE bank. We also find that reserves are light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap.

*Results Supported By Premature Provision Cut: State Bank of India (SBIN.IN) [SBI] reported FY 2Q21 results of INR 45.7 bn, increasing INR 3.8 bn (9.2%) linked quarter. Results were even better when we exclude the FY 1Q21 exceptional gain of INR 15.4 bn – increasing INR 19.2 bn or 72.6% linked quarter. Results were driven by three factors: a) net interest income improvement of INR 15.4 bn (5.8%) due primarily to NIM improvement of 8 bp to 2.96%; b) a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics; and c) non-interest income improvement of INR 5.7 bn (7.2%); and* Credit Risk and Weak Cover: By our calculation, we find net new NPL growth of INR 144.0 bn or 44.4% on an annualized basis and that the annualized NCO rate of 66 bp – which are quite troublesome even for an SOE bank. We also find that reserves are light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – Credit Continues To Fall Off A Cliff

India Financials

Saumya Agarwal

SBI, India’s largest Bank, reported its Q2FY21 results today. Net Profit was up 52% y-o-y and 9% q-o-q, despite the presence of stake sale gains in Q2FY20 and Q1FY21. There was no stake sale gain this quarter. Loan growth showed some signs of picking up, mainly driven by Retail and Agri. However, fresh slippages have increased multi-fold and are a cause of concern

SBI, India’s largest Bank, reported its Q2FY21 results today. Net Profit was up 52% y-o-y and 9% q-o-q, despite the presence of stake sale gains in Q2FY20 and Q1FY21. There was no stake sale gain this quarter. Loan growth showed some signs of picking up, mainly driven by Retail and Agri. However, fresh slippages have increased multi-fold and are a cause of concern

SBI Q2FY21 Results: Good Show on Profits but High Slippages a Concern

*All Good: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 2Q21 bottom-line results of INR 33.7 bn - increasing INR 3.8 bn (12.6%) linked quarter. From a core operating perspective, we note that HDFC came in at INR 32.0 bn, a whopping INR 15.5 bn (93.4%) increase over FY 1Q21.*Credit Risk Decelerating: The trend in annualized NCOs has declined, by our calculation, to 16 bp from 21 bp in the previous quarter. In addition, the level of net new NPLs has also decelerated to INR 3.6 bn or 14.2% on an annualized basis versus 46.6% in FY 1Q21. We would have preferred that HDFC remained more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 68 bn or just over two quarters of core operating results; and*Positive Operating Jaws: . Key to core operating result performance was: a) net interest income improvement of INR 2.8 bn (8.3%) led by both linked quarter loan growth of 2.0% and NIM improvement of 17 bp to 2.75%; b) an INT 306 mn (7.7%) decline in operating expenses which pushed HDFC’s C/I ratio even lower by 160 bp to 9.2%.

*All Good: Housing Development Finance Corp. (HDFC.IN) [HDFC] reported FY 2Q21 bottom-line results of INR 33.7 bn - increasing INR 3.8 bn (12.6%) linked quarter. From a core operating perspective, we note that HDFC came in at INR 32.0 bn, a whopping INR 15.5 bn (93.4%) increase over FY 1Q21.*Credit Risk Decelerating: The trend in annualized NCOs has declined, by our calculation, to 16 bp from 21 bp in the previous quarter. In addition, the level of net new NPLs has also decelerated to INR 3.6 bn or 14.2% on an annualized basis versus 46.6% in FY 1Q21. We would have preferred that HDFC remained more vigilant given the continued uncertainty with COVID-19. As such, we still find that HDFC’s reserve still needs shoring up by another INR 68 bn or just over two quarters of core operating results; and*Positive Operating Jaws: . Key to core operating result performance was: a) net interest income improvement of INR 2.8 bn (8.3%) led by both linked quarter loan growth of 2.0% and NIM improvement of 17 bp to 2.75%; b) an INT 306 mn (7.7%) decline in operating expenses which pushed HDFC’s C/I ratio even lower by 160 bp to 9.2%.

Housing Development Finance Corp. – “Great Quarter Guys”

*Manufactured Improvement: IndusInd Bank (IIB.IB) [IndusInd] reported FY 2Q21 bottom-line results of INR 6.5 bn, improving INR 1.9 bn (40.5%) linked quarter. Like most other banks in India, IndusInd cut its loan loss provision INR 2.9 bn or 13.0% on a linked quarter basis – driving FY2Q21 bottom-line – a bizarre move given the accelerated levels of NPL creation which no doubt will be reversed going forward; and*Credit Weaker, Not Better: You can dress IndusInd up and put as much make-up on as you like but at the end of the day – credit is ugly. NCOs of INR 18.4 bn amount to 3.72% on an annualized basis, while net new NPLs are increasing at a 117.5%. From our vantage point, we find that IndusInd’s reserve needs to be more than tripled with a shortfall of INR 75.7 bn – representing nine quarters of pre-tax results if you believe the FY 2Q21 result wasn’t manufactured – or 17.0% of market cap. This is a problem, as IndusInd’s CET 1 at 14.5% is substantially still lower than the CET 1 ratio of the large private banks (18% on an average).

*Manufactured Improvement: IndusInd Bank (IIB.IB) [IndusInd] reported FY 2Q21 bottom-line results of INR 6.5 bn, improving INR 1.9 bn (40.5%) linked quarter. Like most other banks in India, IndusInd cut its loan loss provision INR 2.9 bn or 13.0% on a linked quarter basis – driving FY2Q21 bottom-line – a bizarre move given the accelerated levels of NPL creation which no doubt will be reversed going forward; and*Credit Weaker, Not Better: You can dress IndusInd up and put as much make-up on as you like but at the end of the day – credit is ugly. NCOs of INR 18.4 bn amount to 3.72% on an annualized basis, while net new NPLs are increasing at a 117.5%. From our vantage point, we find that IndusInd’s reserve needs to be more than tripled with a shortfall of INR 75.7 bn – representing nine quarters of pre-tax results if you believe the FY 2Q21 result wasn’t manufactured – or 17.0% of market cap. This is a problem, as IndusInd’s CET 1 at 14.5% is substantially still lower than the CET 1 ratio of the large private banks (18% on an average).

IndusInd Bank – Now Dealing With Negative Operating Jaws

India

State Bank of India provides a wide range of banking and financial services to corporate, institutional, commercial, agricultural, industrial and individual customers throughout India.  The Bank also provides international banking to its Indian customers and has operations in other countries.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

State Bank Of India (SBIN IN)

Bank Credit Weekly: Election Goldilocks Priced-In as Growth Concerns Increase

A Goldilocks outcome resulted in excessive Caa-spread tightening. Markets are now overpricing an inhibited regulatory and China agenda. Asia’s...

Hank Calenti, CFA

State Bank of India – Credit Continues To Fall Off A Cliff

STATE BANK OF INDIA: Costs Increasing, Credit Deteriorating, Reserve Cover Declining. This Is A Recipe For A Massive Capital Raise.

Thomas J. Monaco

SBI Q2FY21 Results: Good Show on Profits but High Slippages a Concern

SBI, reported a robust growth in Q2 Net profit , But fresh slippages have increased multi-fold and are a cause of concern.

Saumya Agarwal

Housing Development Finance Corp. – “Great Quarter Guys”

HOUSING DEVELOPMENT FINANCE CORP: Positive Operating Jaws Were Just An Outgrowth Of This Well Oiled Machine. Credit Risk Too Substantially...

Thomas J. Monaco

IndusInd Bank – Now Dealing With Negative Operating Jaws

INDUSIND BANK: IndusInd Remains Challenged With Accelerating NPL Formation, And Poor Coverage. However, Negative Operating Jaws Are Now A New Twist.

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)