Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in February. Global monetary accommodation is in large part responsible for recent outperformance. Credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. Continued performance, however, cannot be ruled out as credit tourists crowd-in and markets melt-up.Asia’s US$-denominated bank bonds (x-Japan) had an outstanding month with each of the +100 bonds that we track tightening during the month of February, in Z-spread terms. The return of the economic reflation trade, with rising long-term rates on increased economic growth expectations, and short-term levels anchored by central banks globally, pushed investors to grab low risk, high duration securities. This could unwind spectacularly when real inflation concerns appear.Short duration, non-investment grade bond lagged with lower rated bonds at the bottom in terms of performance. Fundamental concerns remain regarding the weakest financial credits in Asia and these remain concentrated in India. At the same time, extension risk concerns may be overdone amongst the callable bonds which underperformed in February.In addition to identifying the bonds which out- and under-performed in February, we dive deeper into the Philippine banks which outperformed, despite starting at already tight spread levels, and we consider if extension risk being priced into the short-callable, China-centric, bonds is appropriate.

Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in February. Global monetary accommodation is in large part responsible for recent outperformance. Credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. Continued performance, however, cannot be ruled out as credit tourists crowd-in and markets melt-up.Asia’s US$-denominated bank bonds (x-Japan) had an outstanding month with each of the +100 bonds that we track tightening during the month of February, in Z-spread terms. The return of the economic reflation trade, with rising long-term rates on increased economic growth expectations, and short-term levels anchored by central banks globally, pushed investors to grab low risk, high duration securities. This could unwind spectacularly when real inflation concerns appear.Short duration, non-investment grade bond lagged with lower rated bonds at the bottom in terms of performance. Fundamental concerns remain regarding the weakest financial credits in Asia and these remain concentrated in India. At the same time, extension risk concerns may be overdone amongst the callable bonds which underperformed in February.In addition to identifying the bonds which out- and under-performed in February, we dive deeper into the Philippine banks which outperformed, despite starting at already tight spread levels, and we consider if extension risk being priced into the short-callable, China-centric, bonds is appropriate.

Bank Credit Compass: High Duration, Low Risk Notes Outperform in Feb.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

The capital markets continue to reward private sector banks with rich valuations, benefitting shareholders. But larger stakeholders such as bank customers are registering a steep increase in complaints to the banks’ ombudsman. For the year July 1, 2019 to June 30, 2020, customer <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51095" target="_blank" rel="noopener">complaints</a> (per branch and per 1,000 accounts) in the entire banking industry rose, but the complaint rate for private sector banks increased significantly, and remain higher than the industry. In FY2020 (July-June), while the disposal rate for complaints for the industry was 92.4%, it has been coming down from 96.5% in FY2018. It is likely that the Covid19 pandemic and the severe lockdown in India inconvenienced banking customers, resulting in a rise in industry complaints. It is also possible that since private sector banks are concentrated in urban India and have a younger customer age profile more familiar with digital operations their customers find it easier to file complaints digitally but, nevertheless, stakeholders should be concerned about the alarming rise in complaints for the much fancied private sector banks.  It is unfortunate, though not surprising, that sell-side research regularly highlights the high CASA (current and saving account deposits), substantial fee income and other positive features of private sector banks, but steadfastly refuses to even acknowledge the growing customer complaints, which are a creditable documentation of customer dis-satisfaction with the banking services. Since few customers are motivated and informed enough to register a complaint, such complaints are the tip of the iceberg of customer dissatisfaction. In banking, customers by number are much larger stakeholders than shareholders, and when customer complaints report not just a sharp increase but also a rising trend, it needs to be highlighted by the sell-side, business media, credit rating agencies and the banking regulator.Customer dis-satisfaction at the private sector banks is a highly relevant issue as the general perception is that customer service is superior to the government banks which this data contradicts. Furthermore, if banks such as HDFC Bank and Kotak Mahindra Bank continue to report higher customer complaints and since the customer profile is common to all new generation private sector banks there is a concern that their customers can shift to other private sector banks offering better customer service.Pressure must be brought on senior management of banks to address this issue. Merely focusing on superior profitability enriching valuations, and ignoring the rise in customer complaints, can undermine any business model over the medium term, and shareholders need to take cognisance of such an important issue.

The capital markets continue to reward private sector banks with rich valuations, benefitting shareholders. But larger stakeholders such as bank customers are registering a steep increase in complaints to the banks’ ombudsman. For the year July 1, 2019 to June 30, 2020, customer complaints (per branch and per 1,000 accounts) in the entire banking industry rose, but the complaint rate for private sector banks increased significantly, and remain higher than the industry. In FY2020 (July-June), while the disposal rate for complaints for the industry was 92.4%, it has been coming down from 96.5% in FY2018. It is likely that the Covid19 pandemic and the severe lockdown in India inconvenienced banking customers, resulting in a rise in industry complaints. It is also possible that since private sector banks are concentrated in urban India and have a younger customer age profile more familiar with digital operations their customers find it easier to file complaints digitally but, nevertheless, stakeholders should be concerned about the alarming rise in complaints for the much fancied private sector banks.  It is unfortunate, though not surprising, that sell-side research regularly highlights the high CASA (current and saving account deposits), substantial fee income and other positive features of private sector banks, but steadfastly refuses to even acknowledge the growing customer complaints, which are a creditable documentation of customer dis-satisfaction with the banking services. Since few customers are motivated and informed enough to register a complaint, such complaints are the tip of the iceberg of customer dissatisfaction. In banking, customers by number are much larger stakeholders than shareholders, and when customer complaints report not just a sharp increase but also a rising trend, it needs to be highlighted by the sell-side, business media, credit rating agencies and the banking regulator.Customer dis-satisfaction at the private sector banks is a highly relevant issue as the general perception is that customer service is superior to the government banks which this data contradicts. Furthermore, if banks such as HDFC Bank and Kotak Mahindra Bank continue to report higher customer complaints and since the customer profile is common to all new generation private sector banks there is a concern that their customers can shift to other private sector banks offering better customer service.Pressure must be brought on senior management of banks to address this issue. Merely focusing on superior profitability enriching valuations, and ignoring the rise in customer complaints, can undermine any business model over the medium term, and shareholders need to take cognisance of such an important issue.

Does Customer Satisfaction Matter to the Share Valuations of Private Sector Banks?

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Bank Of Queensland / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/bank-of-queensland-ltd" target="_blank" data-smartkarma-citation="entities:16606:1" rel="noopener">Bank Of Queensland (BOQ AU)</a> plans to raise around US$276m (A$350m) via an institutional placement and another US$790m (A$1bn) via an entitlement offering to fund its purchase of ME bank. We have covered the prior placement as well in Nov 2019, <a href="https://www.smartkarma.com/insights/bank-of-queensland-placement-discount-looks-enticing-but-the-deal-appears-opportunistic" target="_blank" rel="noopener">Bank of Queensland Placement - Discount Looks Enticing but the Deal Appears Opportunistic.</a>

Bank Of Queensland (BOQ AU) plans to raise around US$276m (A$350m) via an institutional placement and another US$790m (A$1bn) via an entitlement offering to fund its purchase of ME bank. We have covered the prior placement as well in Nov 2019, Bank of Queensland Placement - Discount Looks Enticing but the Deal Appears Opportunistic.

Bank of Queensland Placement - Is Transformative but Might Not Be as Great in the Short-Term

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.

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.

In this Insight, we look at Asian financial pairs that normally trade in a tight band versus each other and are now trading at levels that are close to an extreme, making it likely that there could be a short term reversal.These are all large cap financials that trade in excess of US$20m a day, so implementing the strategy should be possible using stock borrow or single stock futures.These ideas are based purely off the stock price history and we recommend investors use a fundamental overlay to determine if the price action is reflective of changes in the sector that benefit one company at the expense of the other, or benefit one company more than the other.

India

ICICI Bank Limited operates as a bank. The Bank offers saving accounts, loans, debit, credit cards, insurance, investments, mortgages, and online banking services. ICICI Bank serves customers worldwide.

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ICICI Bank Ltd (ICICIBC IN)

Bank Credit Compass: High Duration, Low Risk Notes Outperform in Feb.

Lower risk tolerance combined with duration desires to drive performance in Feb. Continued performance cannot be ruled out as credit tourists crowd...

Hank Calenti, CFA

Bank of Queensland Placement - Is Transformative but Might Not Be as Great in the Short-Term

Bank Of Queensland (BOQ AU) plans to raise around US$276m via an institutional placement and another US$790m via an entitlement offering to fund...

Sumeet Singh

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

Pairs Trading Ideas - Asian Financials

We look at liquid and large cap pairs from the financials sector that exhibit mean-reversion and are currently trading at or near an extreme based...

Brian Freitas

Price Gauge

52-week Range

Market Cap (USDm)

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Dividend (Yield)

Bank Credit Compass: High Duration, Low Risk Notes Outperform in Feb.

Lower risk tolerance combined with duration desires to drive performance in Feb. Continued performance cannot be ruled out as credit tourists crowd...

Hank Calenti, CFA

Does Customer Satisfaction Matter to the Share Valuations of Private Sector Banks?

That customer grievances are growing is of less importance when shareholders are being rewarded today. But the durability of a business depends on...

Hemindra Hazari

Bank of Queensland Placement - Is Transformative but Might Not Be as Great in the Short-Term

Bank Of Queensland (BOQ AU) plans to raise around US$276m via an institutional placement and another US$790m via an entitlement offering to fund...

Sumeet Singh

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

Pairs Trading Ideas - Asian Financials

We look at liquid and large cap pairs from the financials sector that exhibit mean-reversion and are currently trading at or near an extreme based...

Brian Freitas