Pakistan Financials: Jump in when Global Risk-Off Dissipates

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

The PH Score™ identifies fundamental momentum opportunity from more than 2000 shares globally on a quarterly basis, always focusing on the top and bottom deciles. We combine our PH Score™ with a technical indicator and additional valuation metrics to arrive at VFM (Valuation, Fundamentals, Momentum) which filters potential opportunities worthy of further due diligence and a deep-dive.The top PH and VFM decile can be a collection of the "good, bad, and the ugly". Current "winners" from the "good category" include <a href="https://www.smartkarma.com/entities/22956" target="_blank" data-smartkarma-citation="entities:22956:1">Asia Commercial Bank/Vietnam (ACB VN)</a> and <a href="https://www.smartkarma.com/entities/9102" target="_blank" data-smartkarma-citation="entities:9102:1">Bimb Holdings (BIMB MK)</a>. Both are not too cheap but not dear either given progress underway.For all its predictive strength, the PH Score™ does not capture earnings quality and non-NPL toxicity that may lie in SMLs or "stage-2" Loans. We thus sometimes get false signals from the "winners" due to earnings quality above all. This is the case for some Chinese banks for example (though not the "Big Four") which we have analysed in detail. The growth of impaired loans is a systemic challenge and it is not getting much better. This quarter, the high-yielding Chinese "Big Four" continue to stand out in Asia and globally with robust PH Scores, and especially on VFM given the oversold signals. They are arguably better value than <a href="https://www.smartkarma.com/entities/4452" target="_blank" data-smartkarma-citation="entities:4452:1">Bank Of Ningbo Co Ltd A (002142 CH)</a> and <a href="https://www.smartkarma.com/entities/714" target="_blank" data-smartkarma-citation="entities:714:1">China Merchants Bank A (600036 CH)</a> that are relatively strong narratives though the former is now looking more interesting than for some time. China's role in the global financial and economic system is now so pivotal that these signals better be right and the country manages to avoid a hard landing which remains a scary scenario as any viewer of YouTube can testify to.With altogether different technical characteristics to China, there is Argentina. This is a marginal part of the global ecosystem, something of a Frontier backwater. Perhaps it gets more coverage than it deserves. We are somewhat unsure though about how to assess the recent high PH Score™ out of Argentina, based on high earnings yields and concrete fundamental trends (and some non-recurring contributions), given elevated Franchise Valuations and asset quality erosion. This remains an extremely speculative market. (<a href="https://www.smartkarma.com/insights/2019-elections-part-6-argentina-macri-magic-and-the-peronist-spell" target="_blank" data-smartkarma-citation="insights:27792">2019 Elections - Part 6. Argentina: Macri Magic and the Peronist Spell</a>). Bank shares here have revived of late, in tune with elevated PH Scores, but we cannot but feel that further volatility lies ahead. While we still have some time before elections in October, some funds seem to be putting their money to work on the basis of an anti-Cristina Kirchner "shoe-in" thesis while others are trading the news. The bet here is despite the pervasive influence of anti-IMF Kirchnerismo, the population will choose not go the way of Venezuela and vote for a "tough on crime" candidate such as Macri as in Brazil. It may be too early to call but too late for a Macri economic bounce.Banks in Japan and India are more relevant cogs in the wheel of global finance and commerce. Here, we remain somewhat cautious and our readings are backed up by granular analysis by experts <a href="https://www.smartkarma.com/profiles/941" target="_blank" data-smartkarma-citation="accounts:941">Hemindra Hazari</a> and <a href="https://www.smartkarma.com/profiles/1459" target="_blank" data-smartkarma-citation="accounts:1459">J. Brian Waterhouse</a> and the noteworthy strategic thinking and insights of <a href="https://www.smartkarma.com/profiles/12" target="_blank" data-smartkarma-citation="accounts:12">Daniel Tabbush</a>. Japan seems to be cheap (on Franchise Valuation and P/B) for a reason while India is expensive for no reason. This is what our system seems to say too though Japan is always going to feature on VFM given our focus on FV and oversold technical signals.Brazil remains a complex political challenge with Bolsonaro's honeymoon well and truly over, and commentators now talking about the "emperor's clothes". <a href="https://www.smartkarma.com/entities/27709" target="_blank" data-smartkarma-citation="entities:27709:1">Banco Santander Brasil SA (SANB11 BZ)</a> scores well on our PH system though shares are far from cheap. <a href="https://www.smartkarma.com/profiles/3251" target="_blank" data-smartkarma-citation="accounts:3251">Victor Galliano</a> here, in an original and logical way, has pinpointed opportunities in the credit operations of retailers across Brazil and within LATAM which may well be a better way to play consumer finance opportunity than with pure banks. On a separate note, it is a pity that Ecuador is such a small banking market as trends are compelling.In Europe, the UK (not the scandal-ridden Metro but <a href="https://www.smartkarma.com/entities/21009" target="_blank" data-smartkarma-citation="entities:21009:1">Lloyds Banking (LLOY LN)</a>, <a href="https://www.smartkarma.com/entities/1121" target="_blank" data-smartkarma-citation="entities:1121:1">Barclays Plc (BARC LN)</a> and <a href="https://www.smartkarma.com/entities/21008" target="_blank" data-smartkarma-citation="entities:21008:1">Royal Bank Of Scotland (RBS LN)</a>) and French banks score well too which again challenges our thinking given the current political stasis in the former (with the electorate split in three) with FX implications as well as the uncertain backdrop in the latter. <a href="https://www.smartkarma.com/entities/22590" target="_blank" data-smartkarma-citation="entities:22590:1">UBS Group AG (UBSG VX)</a> and <a href="https://www.smartkarma.com/entities/27915" target="_blank" data-smartkarma-citation="entities:27915:1">Credit Suisse Group AG (CSGN SW)</a> seem to be moving in the right direction and valuations are hardly stretched.CP published a note recently about inward-looking Polish lenders which exhibit subpar scores. (<a href="https://www.smartkarma.com/insights/polish-banks-latest-fundamental-trends-and-valuations-instil-caution" target="_blank" data-smartkarma-citation="insights:29744">Polish Banks: Latest Fundamental Trends and Valuations Instil Caution</a>). We believe trends and valuation are not benign in Poland though <a href="https://www.smartkarma.com/entities/27842" target="_blank" data-smartkarma-citation="entities:27842:1">Bank Ochrony Srodowiska SA (BOS PW)</a>, a smaller lender with almost Greek-style Asset Quality issues, exhibits both positive trends and a low valuation.We await Greek numbers to see whether trends are beginning to tick upwards given the probable election of a more pro-market government and low valuations. (<a href="https://www.smartkarma.com/insights/2019-elections-part-5-greece-new-democracy-promises-magic-makeover" target="_blank" data-smartkarma-citation="insights:27788">2019 Elections - Part 5. Greece: New Democracy Promises Magic Makeover</a>).Then there is beleaguered Turkey. Trends are not as strong as they were (maybe artificially so) though some PH Score™ would be lower but for valuations. Expert <a href="https://www.smartkarma.com/profiles/2911" target="_blank" data-smartkarma-citation="accounts:2911">Ercan Uysal</a> paints quite a bleak picture here and his arguments are both convincing and pertinent. While there may be trading opportunities ahead, amidst the volatility, the fabric of the system is being unravelled by toxic loans and the probability of capital raising is high. Overriding corporate leverage is now being accompanied by concern with consumer indebtedness as joblessness rises. Given key valuation metrics and oversold signals in some cases, selective Turkish banks do score well on VFM with fundamental trends perhaps still not fully reflecting the underlying picture as detailed by <a href="https://www.smartkarma.com/profiles/2911" target="_blank" data-smartkarma-citation="accounts:2911">Ercan Uysal</a>.Russia remains an interesting Banking jurisdiction despite its systemic issues and restructuring. There are some pockets of value here though core EM favourite, <a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">Sberbank Of Russia Pjsc (SBER LI)</a>, commands a premium rating with a below average PH Score. Sberbank shares a similar profile to <a href="https://www.smartkarma.com/entities/25963" target="_blank" data-smartkarma-citation="entities:25963:1">Credicorp Ltd (BAP US)</a>, <a href="https://www.smartkarma.com/entities/440" target="_blank" data-smartkarma-citation="entities:440:1">Bank Central Asia (BBCA IJ)</a> and <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a> in this respect. We caution against chasing quality and would recommend considering these banks at lower levels though in the case of BBCA in particular it would be a much lower rating.We continue to remain highly sceptical of Australia and Canada  - partly in relation to real estate asset bubbles. While trends are eroding in Australia, with its China interconnections, Canadian banks seem to be still bucking the trend, defying gravity with "as good as it gets" readings. They have been high scorers for some time -maybe artificially so.Scandinavian banks, especially <a href="https://www.smartkarma.com/entities/22336" target="_blank" data-smartkarma-citation="entities:22336:1">Danske Bank A/S (DANSKE DC)</a> and <a href="https://www.smartkarma.com/entities/22495" target="_blank" data-smartkarma-citation="entities:22495:1">Swedbank AB (SWEDA SS)</a>, are on a repair mission -amidst high household leverage- that will take time given the reputational damage suffered. PH Scores in Denmark and at <a href="https://www.smartkarma.com/entities/22438" target="_blank" data-smartkarma-citation="entities:22438:1">Nordea Bank AB (NDA SS)</a> are especially subpar.Asia-Pacific remains the jurisdiction with the softest fundamental momentum -though China and Japan command very different headline trends. While Profitability trends are mixed, Asset Quality, and Liquidity -as opposed to NIM and Efficiency- are not moving in the right direction. We are awaiting some key data out of South Korea but recent high rankings seem to be coming under more pressure and valuations have remained low for sometime as the market searches for a catalyst. An interesting opportunity may lie in unloved Pakistan with <a href="https://www.smartkarma.com/entities/21038" target="_blank" data-smartkarma-citation="entities:21038:1">Bank Alfalah (BAFL PA)</a>.Regionally, in terms of trends, Europe is not much better than Asia-Pacific, though -as mentioned- the UK, France and the large Swiss Groups appear to be making headway. Italian and Spanish banks, the latter heavily exposed to EM, present a mixed picture in terms of fundamental trends. Germany remains very much all about <a href="https://www.smartkarma.com/entities/526" target="_blank" data-smartkarma-citation="entities:526:1">Deutsche Bank Ag Registered (DBK GR)</a> which trades on a par with Japanese banks on a FV basis. In Europe, while Profitability trends are mixed, NIM, Asset Quality, Capital Adequacy, and Provisioning are not moving in the right direction.Fundamental trends in the Middle East are on a par with LATAM. Here profitability, NIM, CIR, and Capital Adequacy are all moving in the right direction though Liquidity, Provisioning, and Asset Quality are eroding. In LATAM, there is an even bigger jump in Profitability (as in US) though it is Asset Quality and Liquidity rather than Efficiency or Provisioning that exhibit positive change.The regional jurisdictions with the best fundamental momentum remain the US and Africa. While valuations can be elevated in the latter, (some less liquid players are very cheap), they are not excessive at the former. Some positive standouts from the larger players are <a href="https://www.smartkarma.com/entities/279" target="_blank" data-smartkarma-citation="entities:279:1">Citigroup Inc (C US)</a> and <a href="https://www.smartkarma.com/entities/1020" target="_blank" data-smartkarma-citation="entities:1020:1">State Street (STT US)</a>. In the US, Profitability, NIM, Efficiency, Asset Quality and Capitalisation exhibit progression. (In Africa, improvement is seen in Asset Quality, Liquidity, Provisioning, and NIM). The US does have issues (such as student loans and credit cards) like everyone else, just less so it seems. The banking sector stands out in the US on a relative value basis (what this says about other sectors is a moot point) but continues to be subverted by yield curve movements just as it looks primed for a move higher. The fact that shares seem unable to put together a discrete and sustained run should be a concern for us all. (<a href="https://www.smartkarma.com/insights/us-banks-the-least-dirty-laundry-in-the-neighbourhood-though-check-under-the-hood" target="_blank" data-smartkarma-citation="insights:29550">US Banks: The "Least Dirty Laundry" In the Neighbourhood Though Check Under the Hood</a>).

The PH Score™ identifies fundamental momentum opportunity from more than 2000 shares globally on a quarterly basis, always focusing on the top and bottom deciles. We combine our PH Score™ with a technical indicator and additional valuation metrics to arrive at VFM (Valuation, Fundamentals, Momentum) which filters potential opportunities worthy of further due diligence and a deep-dive.The top PH and VFM decile can be a collection of the "good, bad, and the ugly". Current "winners" from the "good category" include Asia Commercial Bank/Vietnam (ACB VN) and Bimb Holdings (BIMB MK). Both are not too cheap but not dear either given progress underway.For all its predictive strength, the PH Score™ does not capture earnings quality and non-NPL toxicity that may lie in SMLs or "stage-2" Loans. We thus sometimes get false signals from the "winners" due to earnings quality above all. This is the case for some Chinese banks for example (though not the "Big Four") which we have analysed in detail. The growth of impaired loans is a systemic challenge and it is not getting much better. This quarter, the high-yielding Chinese "Big Four" continue to stand out in Asia and globally with robust PH Scores, and especially on VFM given the oversold signals. They are arguably better value than Bank Of Ningbo Co Ltd A (002142 CH) and China Merchants Bank A (600036 CH) that are relatively strong narratives though the former is now looking more interesting than for some time. China's role in the global financial and economic system is now so pivotal that these signals better be right and the country manages to avoid a hard landing which remains a scary scenario as any viewer of YouTube can testify to.With altogether different technical characteristics to China, there is Argentina. This is a marginal part of the global ecosystem, something of a Frontier backwater. Perhaps it gets more coverage than it deserves. We are somewhat unsure though about how to assess the recent high PH Score™ out of Argentina, based on high earnings yields and concrete fundamental trends (and some non-recurring contributions), given elevated Franchise Valuations and asset quality erosion. This remains an extremely speculative market. (2019 Elections - Part 6. Argentina: Macri Magic and the Peronist Spell). Bank shares here have revived of late, in tune with elevated PH Scores, but we cannot but feel that further volatility lies ahead. While we still have some time before elections in October, some funds seem to be putting their money to work on the basis of an anti-Cristina Kirchner "shoe-in" thesis while others are trading the news. The bet here is despite the pervasive influence of anti-IMF Kirchnerismo, the population will choose not go the way of Venezuela and vote for a "tough on crime" candidate such as Macri as in Brazil. It may be too early to call but too late for a Macri economic bounce.Banks in Japan and India are more relevant cogs in the wheel of global finance and commerce. Here, we remain somewhat cautious and our readings are backed up by granular analysis by experts Hemindra Hazari and J. Brian Waterhouse and the noteworthy strategic thinking and insights of Daniel Tabbush. Japan seems to be cheap (on Franchise Valuation and P/B) for a reason while India is expensive for no reason. This is what our system seems to say too though Japan is always going to feature on VFM given our focus on FV and oversold technical signals.Brazil remains a complex political challenge with Bolsonaro's honeymoon well and truly over, and commentators now talking about the "emperor's clothes". Banco Santander Brasil SA (SANB11 BZ) scores well on our PH system though shares are far from cheap. Victor Galliano here, in an original and logical way, has pinpointed opportunities in the credit operations of retailers across Brazil and within LATAM which may well be a better way to play consumer finance opportunity than with pure banks. On a separate note, it is a pity that Ecuador is such a small banking market as trends are compelling.In Europe, the UK (not the scandal-ridden Metro but Lloyds Banking (LLOY LN), Barclays Plc (BARC LN) and Royal Bank Of Scotland (RBS LN)) and French banks score well too which again challenges our thinking given the current political stasis in the former (with the electorate split in three) with FX implications as well as the uncertain backdrop in the latter. UBS Group AG (UBSG VX) and Credit Suisse Group AG (CSGN SW) seem to be moving in the right direction and valuations are hardly stretched.CP published a note recently about inward-looking Polish lenders which exhibit subpar scores. (Polish Banks: Latest Fundamental Trends and Valuations Instil Caution). We believe trends and valuation are not benign in Poland though Bank Ochrony Srodowiska SA (BOS PW), a smaller lender with almost Greek-style Asset Quality issues, exhibits both positive trends and a low valuation.We await Greek numbers to see whether trends are beginning to tick upwards given the probable election of a more pro-market government and low valuations. (2019 Elections - Part 5. Greece: New Democracy Promises Magic Makeover).Then there is beleaguered Turkey. Trends are not as strong as they were (maybe artificially so) though some PH Score™ would be lower but for valuations. Expert Ercan Uysal paints quite a bleak picture here and his arguments are both convincing and pertinent. While there may be trading opportunities ahead, amidst the volatility, the fabric of the system is being unravelled by toxic loans and the probability of capital raising is high. Overriding corporate leverage is now being accompanied by concern with consumer indebtedness as joblessness rises. Given key valuation metrics and oversold signals in some cases, selective Turkish banks do score well on VFM with fundamental trends perhaps still not fully reflecting the underlying picture as detailed by Ercan Uysal.Russia remains an interesting Banking jurisdiction despite its systemic issues and restructuring. There are some pockets of value here though core EM favourite, Sberbank Of Russia Pjsc (SBER LI), commands a premium rating with a below average PH Score. Sberbank shares a similar profile to Credicorp Ltd (BAP US), Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB4 BZ) in this respect. We caution against chasing quality and would recommend considering these banks at lower levels though in the case of BBCA in particular it would be a much lower rating.We continue to remain highly sceptical of Australia and Canada  - partly in relation to real estate asset bubbles. While trends are eroding in Australia, with its China interconnections, Canadian banks seem to be still bucking the trend, defying gravity with "as good as it gets" readings. They have been high scorers for some time -maybe artificially so.Scandinavian banks, especially Danske Bank A/S (DANSKE DC) and Swedbank AB (SWEDA SS), are on a repair mission -amidst high household leverage- that will take time given the reputational damage suffered. PH Scores in Denmark and at Nordea Bank AB (NDA SS) are especially subpar.Asia-Pacific remains the jurisdiction with the softest fundamental momentum -though China and Japan command very different headline trends. While Profitability trends are mixed, Asset Quality, and Liquidity -as opposed to NIM and Efficiency- are not moving in the right direction. We are awaiting some key data out of South Korea but recent high rankings seem to be coming under more pressure and valuations have remained low for sometime as the market searches for a catalyst. An interesting opportunity may lie in unloved Pakistan with Bank Alfalah (BAFL PA).Regionally, in terms of trends, Europe is not much better than Asia-Pacific, though -as mentioned- the UK, France and the large Swiss Groups appear to be making headway. Italian and Spanish banks, the latter heavily exposed to EM, present a mixed picture in terms of fundamental trends. Germany remains very much all about Deutsche Bank Ag Registered (DBK GR) which trades on a par with Japanese banks on a FV basis. In Europe, while Profitability trends are mixed, NIM, Asset Quality, Capital Adequacy, and Provisioning are not moving in the right direction.Fundamental trends in the Middle East are on a par with LATAM. Here profitability, NIM, CIR, and Capital Adequacy are all moving in the right direction though Liquidity, Provisioning, and Asset Quality are eroding. In LATAM, there is an even bigger jump in Profitability (as in US) though it is Asset Quality and Liquidity rather than Efficiency or Provisioning that exhibit positive change.The regional jurisdictions with the best fundamental momentum remain the US and Africa. While valuations can be elevated in the latter, (some less liquid players are very cheap), they are not excessive at the former. Some positive standouts from the larger players are Citigroup Inc (C US) and State Street (STT US). In the US, Profitability, NIM, Efficiency, Asset Quality and Capitalisation exhibit progression. (In Africa, improvement is seen in Asset Quality, Liquidity, Provisioning, and NIM). The US does have issues (such as student loans and credit cards) like everyone else, just less so it seems. The banking sector stands out in the US on a relative value basis (what this says about other sectors is a moot point) but continues to be subverted by yield curve movements just as it looks primed for a move higher. The fact that shares seem unable to put together a discrete and sustained run should be a concern for us all. (US Banks: The "Least Dirty Laundry" In the Neighbourhood Though Check Under the Hood).

Global Banking Trends: Trusting the Signals