ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

The Philippines has been of the worst-hit countries in South-East Asia by COVID-19, given its strict and lengthy lockdown. Its GDP growth declined by -16.5% in 2Q2020 versus an average growth rate of +6.4% between 2010 to 2019. Now the country is coming out of lockdown, we are seeing the first signs of recovery and look for a way to play this resurgence story. 
<a href="https://www.smartkarma.com/entities/gt-capital-holdings-inc" target="_blank" data-smartkarma-citation="entities:215:1" rel="noopener">GT Capital Holdings (GTCAP PM)</a> is an interesting proxy for post-COVID-19 recovery in the Philippines, as the distributor for Toyota vehicles in the country. It also has a controlling stake in <a href="https://www.smartkarma.com/entities/metropolitan-bank-trust" target="_blank" data-smartkarma-citation="entities:326:1" rel="noopener">Metropolitan Bank &amp; Trust (MBT PM)</a>, one of the nation's best quality banks. 
The most recent car sales numbers from the Philippines showed a slowing decline in auto sales in September of -22% versus a -44% decline YoY for 9M2020. Passenger cars saw a lesser decline of -12% YoY in September but saw a sharp rebound MoM of +54% in that month.
Subsidiary <a href="https://www.smartkarma.com/entities/metropolitan-bank-trust" target="_blank" data-smartkarma-citation="entities:326:1" rel="noopener">Metropolitan Bank &amp; Trust (MBT PM)</a> continues to shift its customers to digital channels, with 79% of total transactions in 2Q2020 online versus 69% a year ago, and continues to see strong underlying growth in PPOP. 
<a href="https://www.smartkarma.com/entities/gt-capital-holdings-inc" target="_blank" data-smartkarma-citation="entities:215:1" rel="noopener">GT Capital Holdings (GTCAP PM)</a> property arm Federal Land has been increasingly successfully marketing properties by digital means, whilst AXA Philippines is already performing well with most of its policies now being sold through digital channels. 
Its infrastructure exposure through <a href="https://www.smartkarma.com/entities/metro-pacific-investments-co" target="_blank" data-smartkarma-citation="entities:1054:1" rel="noopener">Metro Pacific Investments Co (MPI PM)</a> is also seeing a much-improved performance, with a pick up in toll-road traffic and electricity consumption. 
<a href="https://www.smartkarma.com/entities/gt-capital-holdings-inc" target="_blank" data-smartkarma-citation="entities:215:1" rel="noopener">GT Capital Holdings (GTCAP PM)</a> trades on 7.4x FY21E PER versus a 3-year average of 11.7x forward PER, and 0.5x FY2020 PBV versus a 3-year average of 1.1x PBV.  Better numbers should lead to a re-rating of the company back toward historical levels.

The Philippines has been of the worst-hit countries in South-East Asia by COVID-19, given its strict and lengthy lockdown. Its GDP growth declined by -16.5% in 2Q2020 versus an average growth rate of +6.4% between 2010 to 2019. Now the country is coming out of lockdown, we are seeing the first signs of recovery and look for a way to play this resurgence story. 
GT Capital Holdings (GTCAP PM) is an interesting proxy for post-COVID-19 recovery in the Philippines, as the distributor for Toyota vehicles in the country. It also has a controlling stake in Metropolitan Bank &amp; Trust (MBT PM), one of the nation's best quality banks. 
The most recent car sales numbers from the Philippines showed a slowing decline in auto sales in September of -22% versus a -44% decline YoY for 9M2020. Passenger cars saw a lesser decline of -12% YoY in September but saw a sharp rebound MoM of +54% in that month.
Subsidiary Metropolitan Bank &amp; Trust (MBT PM) continues to shift its customers to digital channels, with 79% of total transactions in 2Q2020 online versus 69% a year ago, and continues to see strong underlying growth in PPOP. 
GT Capital Holdings (GTCAP PM) property arm Federal Land has been increasingly successfully marketing properties by digital means, whilst AXA Philippines is already performing well with most of its policies now being sold through digital channels. 
Its infrastructure exposure through Metro Pacific Investments Co (MPI PM) is also seeing a much-improved performance, with a pick up in toll-road traffic and electricity consumption. 
GT Capital Holdings (GTCAP PM) trades on 7.4x FY21E PER versus a 3-year average of 11.7x forward PER, and 0.5x FY2020 PBV versus a 3-year average of 1.1x PBV.  Better numbers should lead to a re-rating of the company back toward historical levels. 

GT Capital Holdings (GTCAP PM) - A Philippines Recovery Prospect

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank (KBANK TB)</a> issued an AT1 bond, following the successful placement two weeks ago by <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBL TB)</a>. We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see <a href="https://www.smartkarma.com/insights/thai-bank-capital-constraints-debt-capital-issuance-needs-and-potential-impacts" target="_blank" data-smartkarma-citation="insights:43884" rel="noopener">Thai Bank Capital Constraints and Debt Issuance Needs</a> as well as <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, Kasikornbank (KBANK TB) issued an AT1 bond, following the successful placement two weeks ago by Bangkok Bank (BBL TB). We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see Thai Bank Capital Constraints and Debt Issuance Needs as well as Thai Bank Capital and Chronic COVID-19 Sensitivity.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

With Thailand's tourism industry devastated by the lockdown imposed to contain the spread of COVID-19, Thailand's banks have been sold off due to their exposure to small and medium enterprises (SME) that have links to the tourism industry.The selloff has resulted in the Thai bank stocks trading at prices significantly lower than their book value, and at big discounts to their peers in Indonesia and the Philippines.With a larger exposure to SMEs, <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank PCL (KBANK TB)</a> has underperformed <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> and the gradual reopening of the borders could result in the stock outperforming in the near future. With the stock trading close to its lows versus <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> and <a href="https://www.smartkarma.com/entities/bank-negara-indonesia-persero" target="_blank" data-smartkarma-citation="entities:8285:1" rel="noopener">Bank Negara Indonesia Persero (BBNI IJ)</a>, we see the reward to risk of buying <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank PCL (KBANK TB)</a> vs its peers to be favourable.

With Thailand's tourism industry devastated by the lockdown imposed to contain the spread of COVID-19, Thailand's banks have been sold off due to their exposure to small and medium enterprises (SME) that have links to the tourism industry.The selloff has resulted in the Thai bank stocks trading at prices significantly lower than their book value, and at big discounts to their peers in Indonesia and the Philippines.With a larger exposure to SMEs, Kasikornbank PCL (KBANK TB) has underperformed Bangkok Bank Public (BBL TB) and the gradual reopening of the borders could result in the stock outperforming in the near future. With the stock trading close to its lows versus Bangkok Bank Public (BBL TB) and Bank Negara Indonesia Persero (BBNI IJ), we see the reward to risk of buying Kasikornbank PCL (KBANK TB) vs its peers to be favourable.

<a href="https://www.smartkarma.com/entities/bank-rakyat-indonesia-persero" target="_blank" data-smartkarma-citation="entities:484:1" rel="noopener">Bank Rakyat Indonesia Persero (BBRI IJ)</a> could price a potential five-year senior unsecured US$-bond at 200 basis points over similar maturity US Treasuries (T+200), based on current spread levels at which peer banks trade and relative to where Republic of Indonesia US$-bonds trade.  In early August, Indonesia’s Deputy Minister for State-Owned Enterprise stated that Bank Rakyat could issue up to US$1 billion in a global bond offering during the third quarter, according to a Bloomberg report. The Deputy Minister suggested that the company secure dollar liquidity now as pricing seems reasonable. We could not agree more.Despite considerable margin compression in recent results from Covid-19 impacts and a restructuring portfolio at over 21% of total loans, Bank Rakyat’s US$ bonds continue to be well bid in the market. Furthermore, in May, <a href="https://www.smartkarma.com/entities/bank-mandiri-persero-tbk-pt" target="_blank" data-smartkarma-citation="entities:441:1" rel="noopener">Bank Mandiri Persero (BMRI IJ)</a> issued a five year note at T+455bps. Bank Mandiri’s bond now trades at T+215bps. Investors have enjoyed 10 price points of performance in the Mandiri bond over the last 3+ months. We are not optimistic on obtaining the same level of performance from a Bank Rakyat bond in the current market. As such, with slightly more than one month to the end of Q3, we ponder the potential pricing on Rakyat’s promised new issue and consider if there could be any upside left for investors. The final price may prove attractive considering that the bank is 58% owned by the Republic of Indonesia. Even if the bond is priced at T+200bps, there may be as much as 50bps of upside overtime. We detail our fair value expectations within

Bank Rakyat Indonesia Persero (BBRI IJ) could price a potential five-year senior unsecured US$-bond at 200 basis points over similar maturity US Treasuries (T+200), based on current spread levels at which peer banks trade and relative to where Republic of Indonesia US$-bonds trade.  In early August, Indonesia’s Deputy Minister for State-Owned Enterprise stated that Bank Rakyat could issue up to US$1 billion in a global bond offering during the third quarter, according to a Bloomberg report. The Deputy Minister suggested that the company secure dollar liquidity now as pricing seems reasonable. We could not agree more.Despite considerable margin compression in recent results from Covid-19 impacts and a restructuring portfolio at over 21% of total loans, Bank Rakyat’s US$ bonds continue to be well bid in the market. Furthermore, in May, Bank Mandiri Persero (BMRI IJ) issued a five year note at T+455bps. Bank Mandiri’s bond now trades at T+215bps. Investors have enjoyed 10 price points of performance in the Mandiri bond over the last 3+ months. We are not optimistic on obtaining the same level of performance from a Bank Rakyat bond in the current market. As such, with slightly more than one month to the end of Q3, we ponder the potential pricing on Rakyat’s promised new issue and consider if there could be any upside left for investors. The final price may prove attractive considering that the bank is 58% owned by the Republic of Indonesia. Even if the bond is priced at T+200bps, there may be as much as 50bps of upside overtime. We detail our fair value expectations within

Bank Rakyat Indonesia: Pondering Pricing on a Promised New Issue

Debt Capital Markets

Rizal Commercial Banking / Debt Capital Markets

Caveat emptor. That is, let the buyer beware.  <a href="https://www.smartkarma.com/entities/rizal-commercial-banking-corp" target="_blank" data-smartkarma-citation="entities:23143:1" rel="noopener">Rizal Commercial Bank's (RCB PM)</a> Additional Tier 1 (AT1) bond should be un-investable for many. This is unfortunate as this issuance represents the Philippine’s inaugural AT1 bond, both in local and hard currency.We are extremely disappointed by the quantity and quality of disclosure by the firm in advance of its inaugural AT1 bond. It may have been poorly advised. The known unknowns remain unanswered while the second quarter financial report brings more questions than answers. For more on this, please see <a href="https://www.smartkarma.com/insights/rizal-commercial-bank-the-known-unknowns-in-advance-of-its-at1-issuance" target="_blank" data-smartkarma-citation="insights:41425" rel="noopener">Rizal Commercial Bank: The Known Unknowns in Advance of Its AT1 Issuance</a>.Reliance on the Ba3 Moody’s rating requires a large leap of faith. There is no publicly available presentation regarding Q2 results, nor can we find a prospectus for the inaugural AT1 bond on the firm’s website. However, a list of cars and properties for sale is readily available. Material financial information is either mistakenly missing or purposefully not provided. For more on this shortfall, please see <a href="https://www.smartkarma.com/insights/philippine-bank-asset-quality-reported-versus-reality-and-relative-value" target="_blank" data-smartkarma-citation="insights:41710" rel="noopener">Philippine Bank Asset Quality: Reported Versus Reality and Relative Value</a> and also <a href="https://www.smartkarma.com/insights/philippine-banks-a-related-party" target="_blank" data-smartkarma-citation="insights:41194" rel="noopener">Philippine Banks: A Related Party</a>. There may be no Regulation FD (fair disclosure) in the Philippines, but investors should be treated better. The AT1 security may be listed on the Singapore Stock Exchange. We are hopeful that this leads to an improved disclosure regime at Rizal.Priced with a 6.5% coupon, which equates to T+623.6 basis points, the bond is priced tight relative to institutions that produce more valuable financial information. It is also tight given a potentially low Common Equity Tier 1 capital buffer to a coupon suspension. In addition, from what we can piece together from half-year and year-end financials, there is little to no forward earnings momentum and capital appears inadequate for the institution’s risk profile. Taken together, we expect Rizal’s Senior Unsecured bonds to perform due to the AT1 bond issuance, rather than the AT1 note itself.Since it is not possible to fully assess the performance of this institution, from a credit perspective, on a quarterly or semi-annual basis, we believe that if you own this AT1 bond either you have access to privileged information or you do not know what you own. Caveat emptor.

Caveat emptor. That is, let the buyer beware.  Rizal Commercial Bank's (RCB PM) Additional Tier 1 (AT1) bond should be un-investable for many. This is unfortunate as this issuance represents the Philippine’s inaugural AT1 bond, both in local and hard currency.We are extremely disappointed by the quantity and quality of disclosure by the firm in advance of its inaugural AT1 bond. It may have been poorly advised. The known unknowns remain unanswered while the second quarter financial report brings more questions than answers. For more on this, please see Rizal Commercial Bank: The Known Unknowns in Advance of Its AT1 Issuance.Reliance on the Ba3 Moody’s rating requires a large leap of faith. There is no publicly available presentation regarding Q2 results, nor can we find a prospectus for the inaugural AT1 bond on the firm’s website. However, a list of cars and properties for sale is readily available. Material financial information is either mistakenly missing or purposefully not provided. For more on this shortfall, please see Philippine Bank Asset Quality: Reported Versus Reality and Relative Value and also Philippine Banks: A Related Party. There may be no Regulation FD (fair disclosure) in the Philippines, but investors should be treated better. The AT1 security may be listed on the Singapore Stock Exchange. We are hopeful that this leads to an improved disclosure regime at Rizal.Priced with a 6.5% coupon, which equates to T+623.6 basis points, the bond is priced tight relative to institutions that produce more valuable financial information. It is also tight given a potentially low Common Equity Tier 1 capital buffer to a coupon suspension. In addition, from what we can piece together from half-year and year-end financials, there is little to no forward earnings momentum and capital appears inadequate for the institution’s risk profile. Taken together, we expect Rizal’s Senior Unsecured bonds to perform due to the AT1 bond issuance, rather than the AT1 note itself.Since it is not possible to fully assess the performance of this institution, from a credit perspective, on a quarterly or semi-annual basis, we believe that if you own this AT1 bond either you have access to privileged information or you do not know what you own. Caveat emptor.

Rizal Commercial Bank’s Inaugural AT1 Bond: Caveat Emptor

Philippines

Bank of the Philippine Islands (BPI) is a universal bank offering a wide range of financial products and solutions to retail and corporate clients. Its services include consumer banking and lending, asset management, insurance, securities brokerage, foreign exchange, leasing, and corporate and investment banking. BPI is headquartered in Makati City, Philippines, and was founded on August 1, 1851.

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Bank of the Philippine Islands (BPI PM)

GT Capital Holdings (GTCAP PM) - A Philippines Recovery Prospect

GT Capital provides high-quality, yet high beta exposure to the Philippines recovery though banking, autos, utilities, and property

Angus Mackintosh

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

A concise must-read on US$-risk sentiment derived from equity markets, rates, issuance, dollar levels and capital flows to frame near term Asia...

Hank Calenti, CFA

Thai Banks: Down But Coming Back

With Thailand's tourism industry devastated by the lockdown imposed to contain the spread of COVID-19,

Brian Freitas

Bank Rakyat Indonesia: Pondering Pricing on a Promised New Issue

Bank Rakyat Indonesia Persero (BBRI IJ) could price a potential five-year senior unsecured US$-bond at 200 basis points over similar maturity US...

Hank Calenti, CFA

Rizal Commercial Bank’s Inaugural AT1 Bond: Caveat Emptor

Caveat emptor. That is, let the buyer beware. Rizal Commercial Bank's (RCB PM) Additional Tier 1 (AT1) bond should be un-investable for many. This...

Hank Calenti, CFA

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