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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Additional Tier 1 (AT1) bonds simultaneously issued by <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 (CBD)</a> and the <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> present a unique opportunity to trade on the macro and micro-economic impacts of the COVID-19 economic environment in the United Arab Emirates and Hong Kong SAR, respectively.  Issued on Monday, 12 October, CBD achieved a 6% coupon while BNKEA managed 5.825%. Both banks are tier 2 entities in their home markets. From our perspective, one, if not both, of these bonds was mispriced in the primary market.Having examined Bank of East Asia’s financial fundamentals in <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Strategic Review to Set AT1 Value</a>, we contrast what we like and dislike regarding CBD with BNKEA. As BNKEA’s AT1 is now trading around the fair value which we projected in <a href="https://www.smartkarma.com/insights/bank-of-east-asia-s-new-at1-likely-coupon-and-curve-impact" target="_blank" data-smartkarma-citation="insights:44112" rel="noopener">Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact</a>, we conclude with suggestions on how to trade this pair as a possible proxy on Dubai versus Hong Kong as well as how to trade CBD relative to other banks headquartered in the United Arab Emirates.Commercial Bank of Dubai – what we dislike:<ul>
<li>Commercial real estate exposure is high.</li>
<li>Legacy asset quality issues still haunt.</li>
</ul><ul><li>Capital buffer is adequate, but inflated by forbearance.</li></ul>Commercial Bank of Dubai – what we like:<ul>
<li>Distributable reserves should enable AT1 payments if capital buffers are depleted.</li>
<li>Ownership and connections suggest strong support.</li>
</ul>

Additional Tier 1 (AT1) bonds simultaneously issued by Commercial Bank of Dubai (CBD) and the Bank of East Asia (BNKEA) present a unique opportunity to trade on the macro and micro-economic impacts of the COVID-19 economic environment in the United Arab Emirates and Hong Kong SAR, respectively.  Issued on Monday, 12 October, CBD achieved a 6% coupon while BNKEA managed 5.825%. Both banks are tier 2 entities in their home markets. From our perspective, one, if not both, of these bonds was mispriced in the primary market.Having examined Bank of East Asia’s financial fundamentals in Strategic Review to Set AT1 Value, we contrast what we like and dislike regarding CBD with BNKEA. As BNKEA’s AT1 is now trading around the fair value which we projected in Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact, we conclude with suggestions on how to trade this pair as a possible proxy on Dubai versus Hong Kong as well as how to trade CBD relative to other banks headquartered in the United Arab Emirates.Commercial Bank of Dubai – what we dislike:
Commercial real estate exposure is high.
Legacy asset quality issues still haunt.
Capital buffer is adequate, but inflated by forbearance.Commercial Bank of Dubai – what we like:
Distributable reserves should enable AT1 payments if capital buffers are depleted.
Ownership and connections suggest strong support.


Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty

Asia High Yield Bond Index

Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty