Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> and <a href="https://www.smartkarma.com/entities/kb-capital-co-ltd" target="_blank" data-smartkarma-citation="entities:3646:1" rel="noopener">KB Capital (021960 KS)</a> were the only financial institutions to access global capital market during the week. The <a href="https://www.smartkarma.com/entities/fbn-holdings-plc" target="_blank" data-smartkarma-citation="entities:27846:1" rel="noopener">First Bank of Nigeria (FBNH NL)</a> brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the <a href="https://www.smartkarma.com/entities/commercial-bank-of-dubai" target="_blank" data-smartkarma-citation="entities:29706:1" rel="noopener">Commercial Bank of Dubai's (CBD UH)</a> recently issued AT1 bond. For our thoughts on this security, please see: <a href="https://www.smartkarma.com/insights/commercial-bank-of-dubai-vs-bank-of-east-asia-a-tale-of-two-at1s-in-covid-19-uncertainty" target="_blank" data-smartkarma-citation="insights:44387" rel="noopener">Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty</a>.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBL TB)</a> notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> and <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>, respectively. As the week closed, <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Asia’s Additional Tier 1 (AT1) bonds outperformed Tier 2 and Senior Unsecured securities, despite rather constrained credit risk sentiment. In rate markets, US Treasury curve steepening roared back. Concurrently, interest rate futures rose considerably on even higher federal stimulus expectations. Rate markets may be over-pricing the potential for a "True Blue-Sweep". The risk at this point is an effectively split ticket in which Senate Republicans, aided by conservative-Democrats, water-down federal stimulus bills. Treasury yields may gap down as a result. Bank valuations could follow. The sell-off in US Treasuries was not met with increased buying in Emerging Market (EM) or High Yield (HY) markets. EM investors were more focused on early 2021 fund flows while risk-free rates rise. HY investors contemplated the potential for higher default rates over the next year. An unsynchronized global economic recovery will make single name selection more important over the near term.Asia’s HY markets slightly outperformed the US’ as both indexes tightened slightly during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.EM capital inflows and US dollar index levels were essentially unchanged during the week despite yuan appreciation. China’s yuan hit the strongest level against the US$ since 2018. As the week closed, a spokeswoman from China’s State Administration of Foreign Exchange suggested an official tolerance of the higher currency level. Lower US-China tensions under a Biden administration could push the yuan even stronger. This may be beneficial for regional banking systems.Financial institutions issued over US$14 billion in USD and Euros. Amongst Asia-headquartered banks, the Sumitomo Mitsui Financial Group (8316 JP) and KB Capital (021960 KS) were the only financial institutions to access global capital market during the week. The First Bank of Nigeria (FBNH NL) brought a five-year note with an 8.625% coupon for Frontier Market investors. Meanwhile, oversubscription  in the Investment Corporation of Dubai’s note suggests positive investor sentiment towards Dubai, which should be supportive for the Commercial Bank of Dubai's (CBD UH) recently issued AT1 bond. For our thoughts on this security, please see: Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty.   In terms of Q3 earnings, Thai banks reported mixed results and, despite missing expectations, Bangkok Bank's (BBL TB) notes outperformed other Thai Bank bonds, all of which, also tightened week-on-week. For our thoughts on Bangkok Bank and Thai banks more broadly, please see Bangkok Bank’s New AT1 – Overweight on Relative Value and Thai Bank Capital and Chronic COVID-19 Sensitivity, respectively. As the week closed, Yes Bank (YES IN) reported second quarter, to September, results which beat expectations. The bank managed to generate a profit, versus expectations of another loss, on positive operating jaws as interest and operating expense declines offset lower operating revenues. The bank reported a Common Equity Tier 1 ratio above its minimum requirement for the first time in one year following its capital raise in July and after incorporating the Reserve Bank of India’s recent asset risk-weight reductions. Yes Bank’s results should be positive for its 2023 US$-maturity note.Market Outlook: U.S. Treasury market moves this week suggest that the risk is now election outcome driven. The question is whether Democrats will truly sweep the Senate, House, and Presidency. Effectively conservative-Democrats could water-down federal stimulus efforts. At the same time, although stimulus may be positive for US risk assets, higher long-term rates may not be EM friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

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

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter of core operating results.

*Strong Results, But Managed: HDFC Bank (HDFCB.IN) [HDFCB] reported FY 2Q21 results of INR 770.3 bn, which increased INR 77.6 bn (11.2%) linked quarter. On a core operating basis, results improved INR 84.6 bn (14.5%) to INR 668.6 bn over the period. Other income drove the results outperformance;*Credit Still Breaking Down Ex-Supreme Court Ruling: The Supreme Court of India, in a public interest litigation directed that accounts which were not declared NPL through August 31, 2020 shall not be declared as such until further notice. On an apples-to-apples basis, we find that HDFCB’s gross NPLs increased 4.3% linked quarter. Inclusive of NCOs of INR 184 bn, we calculate that net new NPLs actually increased INR 765 bn or 22.4% on an annualized basis; and*Reserve Cover Needs Improvement: While provisions cover NCOs by 2.4x, we would be more comfortable if HDFCB was a bit more aggressive with its provisions – especially during periods when volatile sources of fee revenues gives HDFCB a gift to build reserves. By our calculation, reserves are currently short by nearly INR 680 bn or an entire quarter of core operating results.   

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">India Bank Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a> for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies.

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank (YES IN) to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in India Bank Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies. 

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

Thematic (Sector/Industry)

*Capital Forbearance and Liquidity Moves: The Reserve Bank of India (RBI) announced several measures designed to further improve banking system liquidity and capital at its latest monetary policy meeting; and *Additional Measures: The RBI was kind enough to extend other programs as well: a) Real Time Gross Settlement System (RTGS), used for large value transactions, is to be made available 24 hours per day; extension of the 2018 co-origination scheme; and the granting of a certificate of authorization to all PSOs (both new and existing) on a perpetual basis.

*Capital Forbearance and Liquidity Moves: The Reserve Bank of India (RBI) announced several measures designed to further improve banking system liquidity and capital at its latest monetary policy meeting; and *Additional Measures: The RBI was kind enough to extend other programs as well: a) Real Time Gross Settlement System (RTGS), used for large value transactions, is to be made available 24 hours per day; extension of the 2018 co-origination scheme; and the granting of a certificate of authorization to all PSOs (both new and existing) on a perpetual basis. 

Reserve Bank of India – Greasing The Skid

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Media commentators analysing the tenure (October 7, 2017 to October 6, 2020) of Rajnish Kumar as chairman of the <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank Of India (SBIN IN)</a> (SBI), India’s largest bank by assets, have commented on the sharp decline in gross non-performing assets (GNPAs) in absolute and in percentage terms during his leadership. SBI’s GNPAs declined from Rs 2.2 trillion (10.9% of gross loans) in FY2018 to Rs 1.3 trillion (5.4% of gross loans) by 1QFY2021. However, the decline in NPAs was primarily due to write-offs, which are an accounting entry requiring minimal management intervention. If the improvement in asset quality had been primarily the result of recovery and upgradation of accounts, management would deserve to be commended, as strenuous efforts are required by bank staff to recover bad debts from defaulters. As the bulk of write-offs in government banks relate to corporate accounts, where promoters/founders have siphoned off funds by inflating project costs, or have diverted funds to other purposes, recovery from such defaulters is unlikely to be significant (accounts like Essar Steel are an exception). The trend of declining NPAs is likely to be reversed when another tsunami of bad debts from the Covid-19-induced lockdown hits the banking sector; banks would require massive recapitalisation as they write off bad loans. In SBI this round of write-offs will be managed by Dinesh Kumar Khara, who succeeded Rajnish Kumar as chairman on October 7, 2020.

Media commentators analysing the tenure (October 7, 2017 to October 6, 2020) of Rajnish Kumar as chairman of the State Bank Of India (SBIN IN) (SBI), India’s largest bank by assets, have commented on the sharp decline in gross non-performing assets (GNPAs) in absolute and in percentage terms during his leadership. SBI’s GNPAs declined from Rs 2.2 trillion (10.9% of gross loans) in FY2018 to Rs 1.3 trillion (5.4% of gross loans) by 1QFY2021. However, the decline in NPAs was primarily due to write-offs, which are an accounting entry requiring minimal management intervention. If the improvement in asset quality had been primarily the result of recovery and upgradation of accounts, management would deserve to be commended, as strenuous efforts are required by bank staff to recover bad debts from defaulters. As the bulk of write-offs in government banks relate to corporate accounts, where promoters/founders have siphoned off funds by inflating project costs, or have diverted funds to other purposes, recovery from such defaulters is unlikely to be significant (accounts like Essar Steel are an exception). The trend of declining NPAs is likely to be reversed when another tsunami of bad debts from the Covid-19-induced lockdown hits the banking sector; banks would require massive recapitalisation as they write off bad loans. In SBI this round of write-offs will be managed by Dinesh Kumar Khara, who succeeded Rajnish Kumar as chairman on October 7, 2020.

SBI’s NPA Reduction Was Largely On Account of Write-Offs, Not Better Management

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.

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State Bank Of India (SBIN IN)

Bank Credit Weekly: Election Risk Rises as Asia’s AT1s Outperform

A must-read on US$-risk sentiment derived from high yield and equity markets, interest rates, dollar levels, capital flows and issuance to frame...

Hank Calenti, CFA

HDFC Bank – Not A Great Quarter

HDFC Bank: Improved Bottom-line Clouded By Supreme Court Ruling On Credit Quality Calculations. Reserve Cover Lower Than On/Off Balance Sheet Risk...

Thomas J. Monaco

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

In this 2'nd insight in our Yes Bank Deposit Run Anniversary Series, we apply Yes Bank deposit flight rates to derive “Yes-Stressed” LCRs at India...

Hank Calenti, CFA

Reserve Bank of India – Greasing The Skid

*Capital Forbearance and Liquidity Moves: The Reserve Bank of India (RBI) announced several measures designed to further improve banking system...

Thomas J. Monaco

SBI’s NPA Reduction Was Largely On Account of Write-Offs, Not Better Management

Media commentators analysing the tenure (October 7, 2017 to October 6, 2020) of Rajnish Kumar as chairman of the State Bank of India , India’s...

Hemindra Hazari

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