Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. <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> and <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> bonds were among the few bonds that did not strengthen during the week. Meanwhile <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> 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> are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, <a href="https://www.smartkarma.com/entities/svenska-handelsbanken-ab" target="_blank" data-smartkarma-citation="entities:22480:1" rel="noopener">Svenska Handelsbanken's (SHBA SS)</a> 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" rel="noopener">Bank Macro Manifest</a> and <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" rel="noopener">Bank Credit Strategy</a> notes for more details.

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. Yes Bank (YES IN) and Indiabulls Housing Finance (IHFL IN) bonds were among the few bonds that did not strengthen during the week. Meanwhile HSBC Holdings (HSBA LN) and Standard Chartered (STAN LN) are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, Svenska Handelsbanken's (SHBA SS) 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent Bank Macro Manifest and Bank Credit Strategy notes for more details.

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

Thematic (Sector/Industry)

*NDAA Legislation: The US Congress is set to approve the annual National Defense Authorization Act (NDAA) legislation next week with bi-partisan support. Several provisions have targeted Turkey - only adding to its troubles; and *Halkbank Has A Target On It’s Back: There remain significant risks related to Halkbank’s (HALKB.TI) skirting Iran sanctions. Halkbank being removed from USD clearing system would be a very logical sanction, and could do significant damage to the Turkish financial system given how reliant the system is on USD.

*NDAA Legislation: The US Congress is set to approve the annual National Defense Authorization Act (NDAA) legislation next week with bi-partisan support. Several provisions have targeted Turkey - only adding to its troubles; and *Halkbank Has A Target On It’s Back: There remain significant risks related to Halkbank’s (HALKB.TI) skirting Iran sanctions. Halkbank being removed from USD clearing system would be a very logical sanction, and could do significant damage to the Turkish financial system given how reliant the system is on USD.  

*Strong Man Strikes Again: Central Bank of Turkey (CBT) Governor Murat Uysal has been released from his duties, and Naci Agbal has been appointed as the new CBT governor. President Erdogan abruptly fired former Governor Uysal after just 16 months, after he indicated that interest rates may increase again in 2020; and*Watch Your Risk: The TRY’s decline of 43% YTD is troublesome, and the potential for a TRY gray market would NOT be of surprise at this stage. We continue to worry about counterparty risks should defaults rise. It’s probably not a bad time to start thinking about purchasing CDS protection on single name securities and on the Turkish sovereign.

*Strong Man Strikes Again: Central Bank of Turkey (CBT) Governor Murat Uysal has been released from his duties, and Naci Agbal has been appointed as the new CBT governor. President Erdogan abruptly fired former Governor Uysal after just 16 months, after he indicated that interest rates may increase again in 2020; and*Watch Your Risk: The TRY’s decline of 43% YTD is troublesome, and the potential for a TRY gray market would NOT be of surprise at this stage. We continue to worry about counterparty risks should defaults rise. It’s probably not a bad time to start thinking about purchasing CDS protection on single name securities and on the Turkish sovereign.

*Train Wreck: The Central Bank of Turkey (CBT) is keeping interest rates low, and failed to raise interest rates at its latest meeting last week – against consensus of a 200 bp increase. In our view, low rates are likely to result in modest inflation. Despite what feel like punitive capital controls, the Turkish lira (TRY) actually declined 2% on day – nearing 8 TRY/USD achieving another record low and down 35% YTD versus the USD; *Artificially High Turkish Lira: CBT data exhibits that the easing of trading restrictions resulted in foreign investor selling nearly 70% of their previously held Turkish government bonds and equities YTD. Investors are likely to continue to take advantage of President Erdogan's ineptitude of an artificially high TRY by continuing to sell while the getting is still good; and *Continue Reducing Risk: Turkish banks and the Turkish economy should be sold, and if the former Vice President Joe Biden actually wins the White house this could be the end of the TRY.

*Train Wreck: The Central Bank of Turkey (CBT) is keeping interest rates low, and failed to raise interest rates at its latest meeting last week – against consensus of a 200 bp increase. In our view, low rates are likely to result in modest inflation. Despite what feel like punitive capital controls, the Turkish lira (TRY) actually declined 2% on day – nearing 8 TRY/USD achieving another record low and down 35% YTD versus the USD; *Artificially High Turkish Lira: CBT data exhibits that the easing of trading restrictions resulted in foreign investor selling nearly 70% of their previously held Turkish government bonds and equities YTD. Investors are likely to continue to take advantage of President Erdogan's ineptitude of an artificially high TRY by continuing to sell while the getting is still good; and *Continue Reducing Risk: Turkish banks and the Turkish economy should be sold, and if the former Vice President Joe Biden actually wins the White house this could be the end of the TRY.

Roses are red, liquidity rings true. Although we agree with Guggenheim Partners chief investment officer Scott Minerd’s perspective that “yields are low, spreads are tight and risk assets remain priced to perfection”, we believe that liquidity rules. As such, despite increasing evidence of regional economic decline from the coronavirus, credit markets remained broadly positive. Weak Greek banks continue to access the primary market at attractive terms while previously defaulted institutions such as Iceland’s Kaupthing, now Arion Bank, get ready to issue Additional Tier 1 debt. Even the Royal Bank of Scotland will be no more as it rebrands itself as NatWest. Although the market is less attractive, we believe that pockets of opportunity remain.Amongst Asia-headquartered banks, Yes Bank’s US$-bond outperformed all others by tightening 161bps during the week. We see further upside potential in this credit. Meanwhile, investors rotated out of higher-beta Additional Tier 1 (AT1) bonds of mainland China banks and ventured into callable and bullet maturity Tier 2 instruments of the same institutions. This suggests increasing risk-aversion, but it does not suggest risk-avoidance, and this is a theme that may remain until coronavirus uncertainty fades.We are splitting the credit weekly in half to hopefully give a more insightful perspective into market movements concerning the banks that we follow. This will also allow for a deeper analysis of new issue market conditions and their implications for secondary market trading.  We note that there may not be new issuance activity in some weeks and, as such, that note will become more of an occasional report, although it may appear almost weekly.

Roses are red, liquidity rings true. Although we agree with Guggenheim Partners chief investment officer Scott Minerd’s perspective that “yields are low, spreads are tight and risk assets remain priced to perfection”, we believe that liquidity rules. As such, despite increasing evidence of regional economic decline from the coronavirus, credit markets remained broadly positive. Weak Greek banks continue to access the primary market at attractive terms while previously defaulted institutions such as Iceland’s Kaupthing, now Arion Bank, get ready to issue Additional Tier 1 debt. Even the Royal Bank of Scotland will be no more as it rebrands itself as NatWest. Although the market is less attractive, we believe that pockets of opportunity remain.Amongst Asia-headquartered banks, Yes Bank’s US$-bond outperformed all others by tightening 161bps during the week. We see further upside potential in this credit. Meanwhile, investors rotated out of higher-beta Additional Tier 1 (AT1) bonds of mainland China banks and ventured into callable and bullet maturity Tier 2 instruments of the same institutions. This suggests increasing risk-aversion, but it does not suggest risk-avoidance, and this is a theme that may remain until coronavirus uncertainty fades.We are splitting the credit weekly in half to hopefully give a more insightful perspective into market movements concerning the banks that we follow. This will also allow for a deeper analysis of new issue market conditions and their implications for secondary market trading.  We note that there may not be new issuance activity in some weeks and, as such, that note will become more of an occasional report, although it may appear almost weekly.

Asian Bank HY Credit Weekly: Pockets of Opportunity

Turkey

Turkiye Is Bankasi A.S. (Isbank) provides banking services to retail and corporate customers and to public sector. Isbank also offers asset and wealth management, capital markets, securities brokerage and insurance services throughout Turkey. Isbank holds equity investments in Turkish companies mainly in glass industries.

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Turkiye Is Bankasi (ISCTR TI)

Bank Credit Weekly: Duration Admiration

We moved from melt-up to full risk-on duration admiration. Almost all bank bonds tightened globally. Given the rate of change, there are mispriced...

Hank Calenti, CFA

Turkey - Add NDAA Sanctions To The List

TURKEY: The US Congress is set to approve the annual NDAA) next week - several provisions target Turkey. There remain significant risks related to...

Thomas J. Monaco

Turkey – Off With His Head…Again

TURKEY: Central Bank of Turkey Has A New Governor As President Erdogan Removes His Previous Hand-picked Successor. Erdogsnomics Are Not Working.

Thomas J. Monaco

Turkey – Choo Choo

TURKEY: A Crisis Is Coming As a Result of Strongman President Erdogan's Inability to See The forest From The Trees. Rates Too High, Artificially...

Thomas J. Monaco

Asian Bank HY Credit Weekly: Pockets of Opportunity

Roses are red, liquidity rings true. Although we agree with Guggenheim Partners chief investment officer Scott Minerd’s perspective that “yields...

Hank Calenti, CFA

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