Standard Chartered: Capital, Forbearance and CDS

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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p>We examine <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (StanLn)</a> as a diversified portfolio of sovereign Credit Default Swaps (CDS) plus an element to represent non-sovereign risk. Potential investors have a choice of buying StanLn securities, including CDS, or buying securities issued by the countries that StanLn lends within. As such, we assess the additional pick-up that an investor gets from gaining exposure to StanLn via CDS versus buying CDS exposure to the main countries where StanLn operates.</p><p>StanLn’s senior holding company CDS can vary considerably relative to the sovereign credit risk of the underlying portfolio. Although currently priced in-line with expectations, we think this is worth tracking. As such, we will consider the additional return obtained from investing in StanLn relative to potential risks which may not be fully captured by current market prices in follow-up insights. These may include the level of capital at risk from COVID-19 forbearance as well as sufficiency of the provisioning overlay to reflect macroeconomic outlooks not captured in the bank’s provisioning model. Thereafter, we intent to revisit these levels from time-to-time towards identifying potential investment opportunities.</p>

We examine Standard Chartered (StanLn) as a diversified portfolio of sovereign Credit Default Swaps (CDS) plus an element to represent non-sovereign risk. Potential investors have a choice of buying StanLn securities, including CDS, or buying securities issued by the countries that StanLn lends within. As such, we assess the additional pick-up that an investor gets from gaining exposure to StanLn via CDS versus buying CDS exposure to the main countries where StanLn operates.StanLn’s senior holding company CDS can vary considerably relative to the sovereign credit risk of the underlying portfolio. Although currently priced in-line with expectations, we think this is worth tracking. As such, we will consider the additional return obtained from investing in StanLn relative to potential risks which may not be fully captured by current market prices in follow-up insights. These may include the level of capital at risk from COVID-19 forbearance as well as sufficiency of the provisioning overlay to reflect macroeconomic outlooks not captured in the bank’s provisioning model. Thereafter, we intent to revisit these levels from time-to-time towards identifying potential investment opportunities.

Standard Chartered Credit Versus a Sovereign CDS Portfolio