Silver Point

Thomas J. Monaco

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

*Poor Results: BDO Unibank (BDO.PM)[BDO] reported 4Q20 net income of PHP 11.3bn, a PHP 1.0 bn (8.5%) decline linked quarter. Highlighting the linked quarter result we note that loss provisions increased PHP 5.0 bn (360.8%) reflecting the continued breakdown in credit quality;  Credit Risk Rising: Not including the doubling of restructured loans, the level of net new NPLs increased PHP 17.8 bn or 115.8% on an annualized basis which is alarming considering the 67.9% annualized increase at 2Q20.  By our calculation, BDO’s reserves  - at a minimum  - are light in the neighborhood of PHP 66 bn or six quarters of bottom-line results.   This is particularly disturbing as BDO is amongst the most trusted banks in the Philippines and ASEAN, and this certainly calls into question what competitor loan and securities portfolios look like; and *Capital Raise Potential: Assuming that our provision analytics are correct, we find that BDO’s CET1 ratio would decline 13.2% to under 11.0% - raising concerns of a capital raise given BDO’s unrealized losses at hefty restructured loans, BDO Life, decelerating loan growth, narrowing margins, and trading volatility.

*Poor Results: BDO Unibank (BDO.PM)[BDO] reported 4Q20 net income of PHP 11.3bn, a PHP 1.0 bn (8.5%) decline linked quarter. Highlighting the linked quarter result we note that loss provisions increased PHP 5.0 bn (360.8%) reflecting the continued breakdown in credit quality;  Credit Risk Rising: Not including the doubling of restructured loans, the level of net new NPLs increased PHP 17.8 bn or 115.8% on an annualized basis which is alarming considering the 67.9% annualized increase at 2Q20.  By our calculation, BDO’s reserves  - at a minimum  - are light in the neighborhood of PHP 66 bn or six quarters of bottom-line results.   This is particularly disturbing as BDO is amongst the most trusted banks in the Philippines and ASEAN, and this certainly calls into question what competitor loan and securities portfolios look like; and *Capital Raise Potential: Assuming that our provision analytics are correct, we find that BDO’s CET1 ratio would decline 13.2% to under 11.0% - raising concerns of a capital raise given BDO’s unrealized losses at hefty restructured loans, BDO Life, decelerating loan growth, narrowing margins, and trading volatility.

BDO Unibank – With This Level Of Risk, A Capital Raise Can’t Be Too Far Behind

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered's (StanLn)</a> decision to restart its share-buyback program while simultaneously aiming to achieve a 10% Return on Tangible Equity (ROTE) is not creditor friendly. The share-buyback is also inconsistent with trying to grow revenues at a cumulative annual growth rate of 5% to 7% over the medium term, as capital constraints may mean missing revenue opportunities. This is at complete odds with <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> wise decision to forgo buybacks through this year. Taken together with management’s plans toward achieving a higher ROTE, this is not credit positive. Pre-Covid-19, Standard Chartered’s problem was excess capacity in a fragmented distribution network. Covid-19 accentuated other weaknesses, including oversized net interest income reliance as well as bancassurance growth sensitivity to border crossing constraints. Underpinned by cost containment difficulties, StanLn is lost at sea, hoping for a return to higher interest rates, open borders, and greater globalization. We are in a world comprised of the exact opposite these days.Within this insight, we review StanLn’s 2020 annual and Q4 results as well as assess the firm’s plans to achieve a higher ROTE over the medium term. Our conclusion is that it is difficult to get excited about Standard Chartered’s US$-denominated Additional Tier 1 (AT1) bonds. In our view, most of these notes trade right where they belong, if not too dear, relative to other banks. If we had to buy a StanLn bond, we would favor the Singapore-dollar denominated AT1 note, despite the results and targets going forward.

Standard Chartered's (StanLn) decision to restart its share-buyback program while simultaneously aiming to achieve a 10% Return on Tangible Equity (ROTE) is not creditor friendly. The share-buyback is also inconsistent with trying to grow revenues at a cumulative annual growth rate of 5% to 7% over the medium term, as capital constraints may mean missing revenue opportunities. This is at complete odds with HSBC Holdings' (HSBA LN) wise decision to forgo buybacks through this year. Taken together with management’s plans toward achieving a higher ROTE, this is not credit positive. Pre-Covid-19, Standard Chartered’s problem was excess capacity in a fragmented distribution network. Covid-19 accentuated other weaknesses, including oversized net interest income reliance as well as bancassurance growth sensitivity to border crossing constraints. Underpinned by cost containment difficulties, StanLn is lost at sea, hoping for a return to higher interest rates, open borders, and greater globalization. We are in a world comprised of the exact opposite these days.Within this insight, we review StanLn’s 2020 annual and Q4 results as well as assess the firm’s plans to achieve a higher ROTE over the medium term. Our conclusion is that it is difficult to get excited about Standard Chartered’s US$-denominated Additional Tier 1 (AT1) bonds. In our view, most of these notes trade right where they belong, if not too dear, relative to other banks. If we had to buy a StanLn bond, we would favor the Singapore-dollar denominated AT1 note, despite the results and targets going forward.

Standard Chartered Results: Lost at Sea with No Credit Catalyst

*Poor Set Of Results, Which Should Have Been Worse: Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and*Credit Challenges Are Top Of Mind As Well: STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.

*Poor Set Of Results, Which Should Have Been Worse: Standard Chartered Plc (STAN.LN/2888.HK) [STAN] reported 2H20 losses of USD 315 mn, declining USD 1.4 bn (122.5%) HOH as it struggled across the board. Negative operating jaws for STAN are troublesome to say the least, as HOH we note that STAN’s revenues declined USD 1.4 bn (16.0%) whilst expenses increased USD 1.0 bn (20.4%); and*Credit Challenges Are Top Of Mind As Well: STAN had a HOH increase in unmarkable Level 3 assets of (20.1%), and level of net new NPLs during 2H20 amounted to USD 1.0 bn – increasing 23.8% on an annualized basis. By our analysis, STAN should not have cut provisions and instead should have ‘manned-up’and taken an addition USD 4.8 bn in provisions. This is prior to any risk assessment for its increasing level of Level 3 assets. The shortfall represents 10% of stated equity, which begs the question of why it’s paying dividends and buying back shares in this condition.     

*Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and*Did HSBC Overstate Results?:While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.

*Poor Showing: Hang Seng Bank (11.HK) [Hang Seng] reported both a weak and low quality 2H20 result of HKD 7.5 bn, declining HKD 1.6 bn (17.5%) HOH. The decline in earnings was attributed to net interest income decline due to loan contraction, and NIM compression; and*Did HSBC Overstate Results?:While the current NPL ratio is not alarming, the HOH increase in net new NPLs is at HKD 3.0 bn  - which amounts to an alarming 201% increase on an annualized basis. This is not the first major subsidiary that HSBC is allowing to fall into the abys from a credit perspective, with HSBC North America (HSBCNA) posting net new problem loan growth at 155.4%. Like HSBCNA, we calculate Hang Seng under-provided for to the tune of HKD 6.3 bn or nearly 75% of the bank’s PBT. Combining both subsidiaries, we find that HSBC Holdings Plc overstated 2H20 results (adjusted for ownership) to the tune of USD 4.3 bn – just on these two subsidiaries alone.  

Hang Seng Bank – HSBC Fingerprints All Over This Print

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> and <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> bonds were among the few bonds that did not strengthen during the week. Meanwhile <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> and <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, <a href="https://www.smartkarma.com/entities/svenska-handelsbanken-ab" target="_blank" data-smartkarma-citation="entities:22480:1" rel="noopener">Svenska Handelsbanken's (SHBA SS)</a> 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" rel="noopener">Bank Macro Manifest</a> and <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" rel="noopener">Bank Credit Strategy</a> notes for more details.

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. Yes Bank (YES IN) and Indiabulls Housing Finance (IHFL IN) bonds were among the few bonds that did not strengthen during the week. Meanwhile HSBC Holdings (HSBA LN) and Standard Chartered (STAN LN) are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, Svenska Handelsbanken's (SHBA SS) 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent Bank Macro Manifest and Bank Credit Strategy notes for more details.

United Kingdom

Standard Chartered PLC is an international banking group operating principally in Asia, Africa, and the Middle East. The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

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Standard Chartered (STAN LN)

BDO Unibank – With This Level Of Risk, A Capital Raise Can’t Be Too Far Behind

BDO UNIBANK: BDO reported a 4Q20 net income decline of 8.5% linked quarter. The level of net new NPLs increased 116% with reserves light by PHP 66...

Thomas J. Monaco

Standard Chartered Results: Lost at Sea with No Credit Catalyst

StanLn’s need to focus on the E in ROTE is not creditor friendly. Recent results and exposures also do not offer comfort. It is difficult to get...

Hank Calenti, CFA

Standard Chartered - What A Mess

STANDARD CHARTERED: STAN reported 2H20 losses of USD 315 mn, declining 122.5% HOH as it struggled across the board. Negative operating jaws for...

Thomas J. Monaco

Hang Seng Bank – HSBC Fingerprints All Over This Print

HANG SENG BANK: Hang Seng reported both a weak and low quality 2H20 result - declining 17.5% HOH due loan contraction and NIM compression. The...

Thomas J. Monaco

Bank Credit Weekly: Duration Admiration

We moved from melt-up to full risk-on duration admiration. Almost all bank bonds tightened globally. Given the rate of change, there are mispriced...

Hank Calenti, CFA

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