Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS Group's (UBSG VX)</a> Archegos surprise provides three lessons for credit investors. The net result is that it is time to lighten exposure to this financial institution.First, the firm is much more than a simple asset manager, it is a material off-balance sheet leverage provider to wealth management clients. Second, this risk, although not incorporated in risk management disclosures, is the reason why UBS’ capital constraint is leverage ratio driven. Third, broader financial market risk exposure may be the biggest risk for credit investors at current trading levels. We elaborate more on each within.UBS’ Additional Tier 1 bonds trade at a material premium to other firms. Considering that UBS is exposed by more than the market expected to idiosyncratic events impacting other banks, juxtaposed with a low capital buffer relative to firms with much less market exposure, and given that financial market conditions are about as good as it can get for investment banking and asset managers, now is the time to lighten exposure to firms like UBS.In light of today’s announcement and the path forward from a financial market perspective, we recommend that investors Underweight exposure to UBS.

Executive Summary: UBS Group's (UBSG VX) Archegos surprise provides three lessons for credit investors. The net result is that it is time to lighten exposure to this financial institution.First, the firm is much more than a simple asset manager, it is a material off-balance sheet leverage provider to wealth management clients. Second, this risk, although not incorporated in risk management disclosures, is the reason why UBS’ capital constraint is leverage ratio driven. Third, broader financial market risk exposure may be the biggest risk for credit investors at current trading levels. We elaborate more on each within.UBS’ Additional Tier 1 bonds trade at a material premium to other firms. Considering that UBS is exposed by more than the market expected to idiosyncratic events impacting other banks, juxtaposed with a low capital buffer relative to firms with much less market exposure, and given that financial market conditions are about as good as it can get for investment banking and asset managers, now is the time to lighten exposure to firms like UBS.In light of today’s announcement and the path forward from a financial market perspective, we recommend that investors Underweight exposure to UBS.

UBS: Archegos Surprise; Underweight on Three Lessons Learned

Executive Summary: US investment banking Q1 results set us up for an interesting European bank earnings season. After reserve releases, investment banking revenues were the second largest driver of net revenues as compared to the prior year.The upcoming set of European bank results may be as good as it gets for this year. As each bank may release reserves, investment banking specialization may be the differentiating factor in terms of revenue results.With US banks noting that their more macro-related trading activities were lower than in the prior year, we consider which European banks may report similar activity. We suspect that the French institutions, Société Générale in particular, could benefit most from their investment banking results provided their real economy activity continues to strengthen.

Executive Summary: US investment banking Q1 results set us up for an interesting European bank earnings season. After reserve releases, investment banking revenues were the second largest driver of net revenues as compared to the prior year.The upcoming set of European bank results may be as good as it gets for this year. As each bank may release reserves, investment banking specialization may be the differentiating factor in terms of revenue results.With US banks noting that their more macro-related trading activities were lower than in the prior year, we consider which European banks may report similar activity. We suspect that the French institutions, Société Générale in particular, could benefit most from their investment banking results provided their real economy activity continues to strengthen.

US Investment Bank Results and Upcoming European Bank Earnings

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 Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

*Archegos Charges Higher, 1Q21 Results Reduce Capital Raise Risk: The immediate financial impact from Archegos is larger than expected (USD 4.7 bn). The combination of stellar 1Q21 results plus the decision to manage 1H21 capital charges has allowed Credit Suisse Group (CSGN.VX) [Credit Suisse] to preserve its a 2020 dividend. Fortunately, the big profit beat has cushioned the blow from poor risk management allowing CET1 to remain above 12%. The fear of an equity capital raise seems to have abated for the moment; and *Outclassed By US Counterparts: Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse which didn’t have close to the full Archegos picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos.

*Archegos Charges Higher, 1Q21 Results Reduce Capital Raise Risk: The immediate financial impact from Archegos is larger than expected (USD 4.7 bn). The combination of stellar 1Q21 results plus the decision to manage 1H21 capital charges has allowed Credit Suisse Group (CSGN.VX) [Credit Suisse] to preserve its a 2020 dividend. Fortunately, the big profit beat has cushioned the blow from poor risk management allowing CET1 to remain above 12%. The fear of an equity capital raise seems to have abated for the moment; and *Outclassed By US Counterparts: Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse which didn’t have close to the full Archegos picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos.

Switzerland

UBS Group AG provides financial services to private, corporate and institutional clients. The Company offers investment banking, retail banking, corporate and institutional banking, as well as holistic wealth management planning and asset management services. UBS also offers securities services such as fund administration and third-party fund management.

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UBS Group AG (UBSG VX)

UBS: Archegos Surprise; Underweight on Three Lessons Learned

The Archegos surprise provides three lessons for credit investors. The net result is that it is time to lighten exposure to UBS.

Hank Calenti, CFA

US Investment Bank Results and Upcoming European Bank Earnings

Upcoming European bank results may be as good as it gets for this year. As each bank should release reserves, investment bank specialization may be...

Hank Calenti, CFA

Citigroup – Shifting Winds

CITIGROUP: Citi reported a QOQ 1Q21 bottom-line result increase of 89.0% due to provision reversals and principal transactions. Net new NPLs...

Thomas J. Monaco

J.P Morgan Chase & Co. – Well On Track

JP MORGAN CHASE: JPM 1Q21 bottom-line results increased 18.4% linked quarter due to principal transactions and provision reversals. This should...

Thomas J. Monaco

Credit Suisse Group – Painful To Watch

CREDIT SUISSE GROUP: The immediate impact from Archegos is larger than expected. However, the stellar 1Q21 results plus managing 1H21 capital...

Thomas J. Monaco

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