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> capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit Versus a Sovereign CDS Portfolio</a> for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than <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>.

Standard Chartered' s (StanLn) capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see Standard Chartered Credit Versus a Sovereign CDS Portfolio for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than HSBC Holdings' (HSBA LN).

Standard Chartered: Capital, Forbearance and CDS

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

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance.

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance. 

Bank of America – Driven Entirely By Credit

*Super Results And Will Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 4Q20 bottom-line results of USD 12.1 bn, increasing USD 2.7 bn (28.5%) linked quarter. On a core operating basis, we note an even stronger QOQ improvement, with numbers coming in at USD 12.1 bn or USD 3.1 bn (34.6%) higher than 3Q20. Results were essentially driven by a reserve reversal of USD 1.9 bn, which no doubt will be a consistent theme in 2021;*Credit Weakness Significantly Decelerates: We find that net new NPLs on a linked quarter amounted to only USD 1 mn or well under 1.0% on an annualized basis. The pace of increase has decelerated from the 7.0% and 26% posted in 3Q20 and 2Q20, respectively; and*Solid Share Buyback In Place: JPM noted that it could repurchase a maximum number of shares of USD 4.5 bn for 1Q21.

*Super Results And Will Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 4Q20 bottom-line results of USD 12.1 bn, increasing USD 2.7 bn (28.5%) linked quarter. On a core operating basis, we note an even stronger QOQ improvement, with numbers coming in at USD 12.1 bn or USD 3.1 bn (34.6%) higher than 3Q20. Results were essentially driven by a reserve reversal of USD 1.9 bn, which no doubt will be a consistent theme in 2021;*Credit Weakness Significantly Decelerates: We find that net new NPLs on a linked quarter amounted to only USD 1 mn or well under 1.0% on an annualized basis. The pace of increase has decelerated from the 7.0% and 26% posted in 3Q20 and 2Q20, respectively; and*Solid Share Buyback In Place: JPM noted that it could repurchase a maximum number of shares of USD 4.5 bn for 1Q21. 

*Results Supported By Lack Of Provisions: Citigroup (C.US) [Citi] reported 4Q20 bottom-line results of USD 4.6 bn, increasing USD 1.5 bn (47.2%) linked quarter. Citi did not provision in 4Q20 an reversed USD 46 mn – enabling its loss provision to decline USD 2.4 bn (101.9%) linked quarter;*Despite Reserve Release, Credit Materially Worse: Despite the perception of improved credit quality improvement in the US and in contravention to JPM, Citi’s NPLs increased USD 395 mn (7.4%) on a linked quarter basis to USD 5.7 bn. Net new NPLs increased USD 1.8 bn or 136.8% on an annualized basis – accelerating versus the 114.3% posted in 3Q20;*Problematic Cost Basis: Although expenses did exhibit a USD 250 mn (2.3%) linked quarter improvement. Despite the expense improvement, Citi’s C/I ratio continues to worsen – increasing 1.6% to 66.0%. We are hopeful that new CEO Jane Fraser can finally turn this ship around, and enable Citi to achieve its targeted 12% ROTCE over time.

*Results Supported By Lack Of Provisions: Citigroup (C.US) [Citi] reported 4Q20 bottom-line results of USD 4.6 bn, increasing USD 1.5 bn (47.2%) linked quarter. Citi did not provision in 4Q20 an reversed USD 46 mn – enabling its loss provision to decline USD 2.4 bn (101.9%) linked quarter;*Despite Reserve Release, Credit Materially Worse: Despite the perception of improved credit quality improvement in the US and in contravention to JPM, Citi’s NPLs increased USD 395 mn (7.4%) on a linked quarter basis to USD 5.7 bn. Net new NPLs increased USD 1.8 bn or 136.8% on an annualized basis – accelerating versus the 114.3% posted in 3Q20;*Problematic Cost Basis: Although expenses did exhibit a USD 250 mn (2.3%) linked quarter improvement. Despite the expense improvement, Citi’s C/I ratio continues to worsen – increasing 1.6% to 66.0%. We are hopeful that new CEO Jane Fraser can finally turn this ship around, and enable Citi to achieve its targeted 12% ROTCE over time.

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</div><div>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/smoore-international" target="_blank" data-smartkarma-citation="entities:28241:1" rel="noopener">Smoore International (6969 HK)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a> and <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a> while there was short covering on <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>, <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing-international-corp-smic" target="_blank" data-smartkarma-citation="entities:14231:1" rel="noopener">Semiconductor Manufacturing International Corp (SMIC) (981 HK)</a>, <a href="https://www.smartkarma.com/entities/china-mobile-ltd" target="_blank" data-smartkarma-citation="entities:27:1" rel="noopener">China Mobile (941 HK)</a> and <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc" target="_blank" data-smartkarma-citation="entities:516:1" rel="noopener">HSBC Holdings (5 HK)</a>. Shorts increased on Real Estate, Consumer Discretionary, Consumer Staples and Materials, and decreased on Financials , Information Technology, Health Care and Communication Services.</div><div>In Japan, stocks that saw the most shorts were <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" data-smartkarma-citation="entities:18448:1" rel="noopener">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/trend-micro-inc" target="_blank" data-smartkarma-citation="entities:13172:1" rel="noopener">Trend Micro Inc (4704 JP)</a>, <a href="https://www.smartkarma.com/entities/seiko-epson-corp" target="_blank" data-smartkarma-citation="entities:16793:1" rel="noopener">Seiko Epson (6724 JP)</a> and <a href="https://www.smartkarma.com/entities/bank-of-kyoto-ltd" target="_blank" data-smartkarma-citation="entities:5248:1" rel="noopener">Bank Of Kyoto (8369 JP)</a> while shorts decreased on <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a>, <a href="https://www.smartkarma.com/entities/ana-holdings-inc" target="_blank" data-smartkarma-citation="entities:5308:1" rel="noopener">Ana Holdings (9202 JP)</a>, <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> and <a href="https://www.smartkarma.com/entities/kubota-corp" target="_blank" data-smartkarma-citation="entities:12926:1" rel="noopener">Kubota Corp (6326 JP)</a>. Sectorally, shorts increased on Information Technology and Financials, while decreasing on Consumer Discretionary,  Industrials, Consumer Staples and Real Estate.</div><div>In Korea, there were short positions put on in <a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a>, <a href="https://www.smartkarma.com/entities/hyundai-motor-co" target="_blank" data-smartkarma-citation="entities:155:1" rel="noopener">Hyundai Motor Co (005380 KS)</a>, <a href="https://www.smartkarma.com/entities/kakao-corp" target="_blank" data-smartkarma-citation="entities:15002:1" rel="noopener">Kakao Corp (035720 KS)</a> and <a href="https://www.smartkarma.com/entities/lg-display-co-ltd" target="_blank" data-smartkarma-citation="entities:7145:1" rel="noopener">LG Display (034220 KS)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/s-oil-corp" target="_blank" data-smartkarma-citation="entities:1667:1" rel="noopener">S Oil Corp (010950 KS)</a>, <a href="https://www.smartkarma.com/entities/mirae-asset-daewoo-co-ltd-b50c4d95-1687-46cb-9b58-f79ce0e72670" target="_blank" data-smartkarma-citation="entities:12061:1" rel="noopener">Mirae Asset Daewoo (006800 KS)</a>, <a href="https://www.smartkarma.com/entities/hanwha-life-insurance-co-ltd" target="_blank" data-smartkarma-citation="entities:2163:1" rel="noopener">Hanwha Life Insurance (088350 KS)</a> and <a href="https://www.smartkarma.com/entities/doosan-infracore-co-ltd" target="_blank" data-smartkarma-citation="entities:3982:1" rel="noopener">Doosan Infracore (042670 KS)</a>. </div><div>Stocks in Taiwan that saw the highest increase in shorts were <a href="https://www.smartkarma.com/entities/pegatron-corp" target="_blank" data-smartkarma-citation="entities:12852:1" rel="noopener">Pegatron Corp (4938 TT)</a>, <a href="https://www.smartkarma.com/entities/foxconn-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:11950:1" rel="noopener">Foxconn Technology (2354 TT)</a>, <a href="https://www.smartkarma.com/entities/yageo-corporation" target="_blank" data-smartkarma-citation="entities:13212:1" rel="noopener">Yageo Corporation (2327 TT)</a> and <a href="https://www.smartkarma.com/entities/unimicron-technology-corp" target="_blank" data-smartkarma-citation="entities:18778:1" rel="noopener">Unimicron Technology (3037 TT)</a> while shorts were covered on <a href="https://www.smartkarma.com/entities/united-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:6450:1" rel="noopener">United Microelectronics Corp (2303 TT)</a>, <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>, <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a> and <a href="https://www.smartkarma.com/entities/delta-electronics-inc" target="_blank" data-smartkarma-citation="entities:12688:1" rel="noopener">Delta Electronics (2308 TT)</a>.</div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on Smoore International (6969 HK), Tencent Holdings (700 HK), JD.com (HK) (9618 HK) and Haidilao (6862 HK) while there was short covering on Ping An Insurance (H) (2318 HK), Semiconductor Manufacturing International Corp (SMIC) (981 HK), China Mobile (941 HK) and HSBC Holdings (5 HK). Shorts increased on Real Estate, Consumer Discretionary, Consumer Staples and Materials, and decreased on Financials , Information Technology, Health Care and Communication Services.In Japan, stocks that saw the most shorts were Itochu Corp (8001 JP), Trend Micro Inc (4704 JP), Seiko Epson (6724 JP) and Bank Of Kyoto (8369 JP) while shorts decreased on Honda Motor (7267 JP), Ana Holdings (9202 JP), Kao Corp (4452 JP) and Kubota Corp (6326 JP). Sectorally, shorts increased on Information Technology and Financials, while decreasing on Consumer Discretionary,  Industrials, Consumer Staples and Real Estate.In Korea, there were short positions put on in Samsung Electronics (005930 KS), Hyundai Motor Co (005380 KS), Kakao Corp (035720 KS) and LG Display (034220 KS) while shorts were covered in S Oil Corp (010950 KS), Mirae Asset Daewoo (006800 KS), Hanwha Life Insurance (088350 KS) and Doosan Infracore (042670 KS). Stocks in Taiwan that saw the highest increase in shorts were Pegatron Corp (4938 TT), Foxconn Technology (2354 TT), Yageo Corporation (2327 TT) and Unimicron Technology (3037 TT) while shorts were covered on United Microelectronics Corp (2303 TT), TSMC (2330 TT), Evergreen Marine Corp (2603 TT) and Delta Electronics (2308 TT).

Asia Short Interest: Smoore, JD, SMIC, China Mobile, Itochu, Honda, Ana, Samsung, Pegatron, TSMC

United Kingdom

HSBC Holdings plc is the holding company for the HSBC Group. The Company provides a variety of international banking and financial services, including retail and corporate banking, trade, trusteeship, securities, custody, capital markets, treasury, private and investment banking, and insurance.  The Group operates worldwide.

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HSBC Holdings (5 HK)

Standard Chartered: Capital, Forbearance and CDS

Standard Chartered’s capital ratios remain above regulatory minimums even after adjusting for Covid-19 forbearance. Limited aid to SMEs and...

Hank Calenti, CFA

Bank of America – Driven Entirely By Credit

BANK OF AMERICA: BAC's 4Q20 bottom-line of USD 5.2 bn increased 17.3% driven by a USD 1.3 bn reduction in provisions. NPLs increased 8.2%, as did...

Thomas J. Monaco

JP Morgan Chase & Co. – Just Wow

JP MORGAN CHASE: JPM] reported 4Q20 bottom-line results increased 28.5% linked quarter, driven by a reserve reversal. Net new NPLs on a linked...

Thomas J. Monaco

Citigroup – Massive Clean Up Required

CITIGROUP: Citi reported 4Q20 results of USD 4.6 bn, increasing USD 1.5 bn (47.2%) linked quarter due to a 102% provision decline. Net new NPLs...

Thomas J. Monaco

Asia Short Interest: Smoore, JD, SMIC, China Mobile, Itochu, Honda, Ana, Samsung, Pegatron, TSMC

The Insight looks at large short interest movements across HK, Japan, Korea and Taiwan stocks and highlights large increases/decreases in shorts to...

Brian Freitas

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