Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. <a href="https://www.smartkarma.com/entities/bank-of-china-ltd" target="_blank" data-smartkarma-citation="entities:24574:1" rel="noopener">Bank Of China (BCHINA)</a>AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC's (H) (1398 HK)</a> new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that <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> new issue bond will tighten by at least 10bps relatively quickly. 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> for our views on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. Bank Of China (BCHINA)AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect ICBC's (H) (1398 HK) new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that HSBC Holdings' (HSBA LN) new issue bond will tighten by at least 10bps relatively quickly. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk Sentiment Returns as Markets Ignore FOMC Disappointment

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.

Thematic (Sector/Industry)

We sometimes view state banks as lethargic and prone to higher bad loans than other banks.  In the current world, it is worth assessing how some of Asia’s largest state banks compare with one another, and disregarding the normal bias against state banks. We look at <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>, <a href="https://www.smartkarma.com/entities/bank-mandiri-persero-tbk-pt" target="_blank" data-smartkarma-citation="entities:441:1" rel="noopener">Bank Mandiri Persero (BMRI IJ)</a> and <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 Pub (KTB TB)</a>. It may be surprising to many, which of these three is likely to show the best profit profile in coming quarters.

We sometimes view state banks as lethargic and prone to higher bad loans than other banks.  In the current world, it is worth assessing how some of Asia’s largest state banks compare with one another, and disregarding the normal bias against state banks. We look at State Bank Of India (SBIN IN), Bank Mandiri Persero (BMRI IJ) and Krung Thai Bank Pub (KTB TB). It may be surprising to many, which of these three is likely to show the best profit profile in coming quarters.

India Financials

Saumya Agarwal

Capital is King, more so in times of crisis and uncertainty. With the pandemic showing no signs of abating, Banks have been conserving capital to withstand any potential adverse impact. Higher the ‘Excess capital’ (i.e. capital over and above the regulatory threshold), greater will be the capital cushion available to Banks to absorb any potential losses.Our analysis suggests Top Indian Banks hold more than Rs 8Trillion of “Excess capital”. However,  Banks will have to set aside around Rs 500 Billion for the last tranche of Capital Conservation Buffer (CCB), which kicks-in from September 30, 2020.

Capital is King, more so in times of crisis and uncertainty. With the pandemic showing no signs of abating, Banks have been conserving capital to withstand any potential adverse impact. Higher the ‘Excess capital’ (i.e. capital over and above the regulatory threshold), greater will be the capital cushion available to Banks to absorb any potential losses.Our analysis suggests Top Indian Banks hold more than Rs 8Trillion of “Excess capital”. However,  Banks will have to set aside around Rs 500 Billion for the last tranche of Capital Conservation Buffer (CCB), which kicks-in from September 30, 2020.

Capital Is King: Top Indian Banks Hold ~Rs 8 Trillion of Excess Capital

We wonder if those banks that saw radical growth of impairment costs during FY20 will see the most improvement in the current year? We can look to some, with reported first quarter data to see if there is any sign of this occurring already. While India moved into shutdown while in its own banking and economic crisis, there can be some relief for banks and specialty finance companies with re-opening and with an improving economy, especially where impairment costs were very high. And it may be the type of credit that each company emphasizes that is key to differentiate amongst India’s lenders.

We wonder if those banks that saw radical growth of impairment costs during FY20 will see the most improvement in the current year? We can look to some, with reported first quarter data to see if there is any sign of this occurring already. While India moved into shutdown while in its own banking and economic crisis, there can be some relief for banks and specialty finance companies with re-opening and with an improving economy, especially where impairment costs were very high. And it may be the type of credit that each company emphasizes that is key to differentiate amongst India’s lenders.

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

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

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: Risk Sentiment Returns as Markets Ignore FOMC Disappointment

The lack of shock and awe outcome from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income...

Hank Calenti, CFA

South Asian Banks - State Banks Differ

We sometimes view state banks as lethargic and prone to higher bad loans than other banks. In the current world, it is worth assessing how some of...

Daniel Tabbush

Capital Is King: Top Indian Banks Hold ~Rs 8 Trillion of Excess Capital

Capital is King, more so in times of crisis and uncertainty. With the pandemic showing no signs of abating, Banks have been conserving capital to...

Saumya Agarwal

India Banks – Weak Turn Strong?

We wonder if those banks that saw radical growth of impairment costs during FY20 will see the most improvement in the current year? We have the...

Daniel Tabbush

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)