Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. <a href="https://www.smartkarma.com/entities/vietnam-prosperity-jsc-bank" target="_blank" data-smartkarma-citation="entities:26914:1" rel="noopener">Vietnam Prosperity Bank (VPB VN)</a> and <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance (IIFL IN)</a>, a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, 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> complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-move-to-overweight-the-capital-inefficient-securities-from-buy" target="_blank" data-smartkarma-citation="insights:45652" rel="noopener">Move to Overweight the Capital Inefficient Securities, from Buy</a> for more details. In addition, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank Public (BBL TB)</a> continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank (TMB TB)</a> widened 2bps. Please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> for our views. Finally, amongst Asia-centric banks, certain <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> bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. Vietnam Prosperity Bank (VPB VN) and IIFL Finance (IIFL IN), a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the Bank of East Asia (BNKEA) complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see Move to Overweight the Capital Inefficient Securities, from Buy for more details. In addition, Bangkok Bank Public (BBL TB) continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while TMB Bank (TMB TB) widened 2bps. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views. Finally, amongst Asia-centric banks, certain Standard Chartered (STAN LN) bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Equity Bottom-Up

The Reserve Bank of India (RBI) has approved the take over of <a href="https://www.smartkarma.com/entities/lakshmi-vilas-bank-ltd" target="_blank" data-smartkarma-citation="entities:17552:1" rel="noopener">Lakshmi Vilas Bank (LVB IN)</a> by <a href="https://www.smartkarma.com/entities/dbs-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:22:1" rel="noopener">DBS Group Holdings (DBS SP)</a>. We believe that this is transformational for DBS where growth prospects in India are infinitely higher than in Singapore. One aspect of this take-over may not be well understood, which is all about improved funding - growth prospects is clearer.

The Reserve Bank of India (RBI) has approved the take over of Lakshmi Vilas Bank (LVB IN) by DBS Group Holdings (DBS SP). We believe that this is transformational for DBS where growth prospects in India are infinitely higher than in Singapore. One aspect of this take-over may not be well understood, which is all about improved funding - growth prospects is clearer.

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (StanLn)</a> Legacy Tier 1 is on fire. This is in keeping with a mad bid for anything trading below par, including some of our recent favorites such as <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 the Turkish Bank complex.  However, while other bonds are getting a bid from the incongruous combination of lower-forever interest rates and vaccine now expectations, the rationale for the StanLn Legacy Tier 1 bonds is different. That is correct, it’s different this time. Famous last words?StanLn Legacy Tier 1 instruments are increasingly trading on the expectation of a tender offer. These securities are ineligible as Additional Tier 1 instruments post 2021 and have less than perfect Libor replacement language in their prospectuses. This is raising expectations that investors will be paid to tender their securities.A tender offer, albeit more likely than not, is not a certainty. The potential timing of any offer is also highly uncertain, although higher interest rates negatively impact the value of potential interest rate swap gains in each security. The swap gain argument suggests a tender offer sooner rather than later.We see additional price upside, albeit limited. At the same time, these bonds could underperform materially if not subject to a tender offer within the next 18 months.

Standard Chartered (StanLn) Legacy Tier 1 is on fire. This is in keeping with a mad bid for anything trading below par, including some of our recent favorites such as Yes Bank (YES IN) and the Turkish Bank complex.  However, while other bonds are getting a bid from the incongruous combination of lower-forever interest rates and vaccine now expectations, the rationale for the StanLn Legacy Tier 1 bonds is different. That is correct, it’s different this time. Famous last words?StanLn Legacy Tier 1 instruments are increasingly trading on the expectation of a tender offer. These securities are ineligible as Additional Tier 1 instruments post 2021 and have less than perfect Libor replacement language in their prospectuses. This is raising expectations that investors will be paid to tender their securities.A tender offer, albeit more likely than not, is not a certainty. The potential timing of any offer is also highly uncertain, although higher interest rates negatively impact the value of potential interest rate swap gains in each security. The swap gain argument suggests a tender offer sooner rather than later.We see additional price upside, albeit limited. At the same time, these bonds could underperform materially if not subject to a tender offer within the next 18 months.

Standard Chartered Legacy Tier 1 Is on Fire

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

Thematic (Sector/Industry)

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme. 

Reserve Bank of India – The Fun Never Stops

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.  

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)

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

The risk-wave caught a bid in Asia HY while positive momentum in US Caa-rated credits slowed. We are set-up for buy-the-rumor, sell-the-fact profit...

Hank Calenti, CFA

DBS – India Merger Approved

We believe that this is transformational for DBS where growth prospects in India are infinitely higher than in Singapore, but funding benefits can...

Daniel Tabbush

Standard Chartered Legacy Tier 1 Is on Fire

Standard Chartered Legacy Tier 1 are catching a bid on tender offer expectations. Ineligible as capital post 2021, imperfect Libor replacement...

Hank Calenti, CFA

Reserve Bank of India – The Fun Never Stops

RESERVE BANK OF INDIA: Certain Borrowers Are Dis-Satisfied With "Interest On Interest Waiver" And Proposed Additional Modifications To RBI...

Thomas J. Monaco

DBS Group Holdings – Dumb India Deal

DBS GROUP HOLDINGS: Transaction For Lakshmi Vilas Bank In India At INR 25 BN Is Way Too Pricey For Risk DBS Is Taking On. Price Will Ultimately Be...

Thomas J. Monaco

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