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Bangkok Bank’s New AT1 – Overweight on Relative Value

Thai Bank Capital Constraints, Debt Capital Issuance Needs, and Potential Impacts

Thai Bank Capital and Chronic COVID-19 Sensitivity

Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Underweight <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank's (KBANK)</a> inaugural Additional Tier 1 (AT1) bond on franchise challenges and valuation. Although Thailand is a long-term Coronavirus vaccine recovery play, we believe that KBANK’s SME emphasis is a franchise challenge that may extend the bank’s recovery timeframe. At the same time, trading at only 33bps higher than <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBLTB)</a> in Option Adjusted Spread terms, KBANK’s inaugural issue appears to be fully valued.Kasikornbank’s 5.275% coupon 2025 callable US$-AT1 bond was 3x over-subscribed with 25% of orders from outside Asia, according to Bloomberg. Asian investors were likely attracted by the coupon; however, we are not convinced they are prepared for a relatively higher risk outcome as the bond’s yield declines. As such, yield compression is likely to be capped. In addition to this technical trading aspect, we elaborate on what we like and dislike regarding the issuer and this security within this insight.  What we like:<ul>
<li>The 5+ percent coupon should attract investors searching for higher yielding product.</li>
<li>The relatively high coupon reset level at five-year US Treasuries plus 494 should enable call at first call date, absent considerable credit quality deterioration.</li>
<li>Lower lending concentrations than Bangkok Bank.</li>
<li>High net interest margins and fee income juice pre-provision revenue.</li>
<li>Highest buffers to minimum capital requirements amongst Thai banks.</li>
</ul>What we dislike:<ul>
<li>Thai bank AT1 is subject to tougher coupon payment requirements than in other countries.</li>
<li>Leadership in lending to small &amp; medium sized enterprises (SME) may result in higher loan restructuring needs in the COVID-19 operating environment.</li>
<li>Restructured loan recidivism is high and this is a primary risk to chronic COVID loan relief decay.</li>
<li>Net interest margin to be pressured from Bank of Thailand rate moves and programmes to lower interest rates on SME borrowers.</li>
<li>KBANK’s SME ecosystem is likely to be tested by fragile operating conditions in Thailand.</li>
</ul>Despite the challenges of operating an SME franchise during an economic crisis, KBANK achieved a relatively attractive coupon level in its inaugural AT1 bond. This bond may outperform the market over the very near term, due to global monetary accommodation that will push investors to this security and domestic loan forbearance measures that will mask the true financial condition of Thai banks for months. However, the market impact of these measures may diminish with time. As such, we are taking a longer-term view and believe that this security will underperform its peers. Taken together, we recommend that investors underweight KBANK’s AT1 bond given the franchise challenges that the firm faces and current valuation levels. Issued at T+494 and trading at around T+ 492, we suggest taking profits at T+540 and recommend a stop loss at T+440.

Underweight Kasikornbank's (KBANK) inaugural Additional Tier 1 (AT1) bond on franchise challenges and valuation. Although Thailand is a long-term Coronavirus vaccine recovery play, we believe that KBANK’s SME emphasis is a franchise challenge that may extend the bank’s recovery timeframe. At the same time, trading at only 33bps higher than Bangkok Bank (BBLTB) in Option Adjusted Spread terms, KBANK’s inaugural issue appears to be fully valued.Kasikornbank’s 5.275% coupon 2025 callable US$-AT1 bond was 3x over-subscribed with 25% of orders from outside Asia, according to Bloomberg. Asian investors were likely attracted by the coupon; however, we are not convinced they are prepared for a relatively higher risk outcome as the bond’s yield declines. As such, yield compression is likely to be capped. In addition to this technical trading aspect, we elaborate on what we like and dislike regarding the issuer and this security within this insight.  What we like:
The 5+ percent coupon should attract investors searching for higher yielding product.
The relatively high coupon reset level at five-year US Treasuries plus 494 should enable call at first call date, absent considerable credit quality deterioration.
Lower lending concentrations than Bangkok Bank.
High net interest margins and fee income juice pre-provision revenue.
Highest buffers to minimum capital requirements amongst Thai banks.
What we dislike:
Thai bank AT1 is subject to tougher coupon payment requirements than in other countries.
Leadership in lending to small &amp; medium sized enterprises (SME) may result in higher loan restructuring needs in the COVID-19 operating environment.
Restructured loan recidivism is high and this is a primary risk to chronic COVID loan relief decay.
Net interest margin to be pressured from Bank of Thailand rate moves and programmes to lower interest rates on SME borrowers.
KBANK’s SME ecosystem is likely to be tested by fragile operating conditions in Thailand.
Despite the challenges of operating an SME franchise during an economic crisis, KBANK achieved a relatively attractive coupon level in its inaugural AT1 bond. This bond may outperform the market over the very near term, due to global monetary accommodation that will push investors to this security and domestic loan forbearance measures that will mask the true financial condition of Thai banks for months. However, the market impact of these measures may diminish with time. As such, we are taking a longer-term view and believe that this security will underperform its peers. Taken together, we recommend that investors underweight KBANK’s AT1 bond given the franchise challenges that the firm faces and current valuation levels. Issued at T+494 and trading at around T+ 492, we suggest taking profits at T+540 and recommend a stop loss at T+440.

Kasikornbank’s Inaugural AT1 – Underweight on Franchise Challenges and Valuation

Kasikornbank PCL

Kasikornbank’s Inaugural AT1 – Underweight on Franchise Challenges and Valuation