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

Cross Asset Strategy

<div class="content-highlight">
The week that was in <a href="mailto:ASEAN@Smartkarma" target="_blank" rel="noopener">ASEAN@Smartkarma</a> is filled with another eclectic mix of differentiated, substantive, and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights over the past week.
We add below a NEW section, which includes emerging themes in ASEAN and selects important news flow or developments for commentary, which may impact SE Asian companies and markets.  
</div><h3>Macro Insights</h3>In <a href="https://www.smartkarma.com/insights/agong-asserts-himself-preventing-change-of-pm-but-disallowing-emergency-rule" target="_blank" data-smartkarma-citation="insights:44572" rel="noopener">Agong Asserts Himself, Preventing Change of PM but Disallowing Emergency Rule,</a> CrossASEAN Chief Economist <a href="https://www.smartkarma.com/profiles/prasenjit-k-basu" target="_blank" data-smartkarma-citation="accounts:612" rel="noopener">Prasenjit K. Basu</a> comments on the ongoing political upheaval in Malaysia. In <a href="https://www.smartkarma.com/insights/trouble-down-south-it-s-not-just-the-virus" target="_blank" data-smartkarma-citation="insights:44698" rel="noopener">Trouble Down South: It's Not Just the Virus,</a><a href="https://www.smartkarma.com/profiles/dr-jim-walker" target="_blank" data-smartkarma-citation="accounts:1628" rel="noopener">Dr. Jim Walker</a> gives his prescriptions on why South East Asia has been such a poor performer this year. In <a href="https://www.smartkarma.com/insights/thai-strategy-2021-part-1-key-themes" target="_blank" data-smartkarma-citation="insights:40842" rel="noopener">Thai Strategy 2021 (Part 1): Key Themes,</a> out Thai guru <a href="https://www.smartkarma.com/profiles/athaporn-arayasantiparb-cfa" target="_blank" data-smartkarma-citation="accounts:766" rel="noopener">Athaporn Arayasantiparb, CFA</a> lays out his thoughts for the outlook for the Thai market next year. <h3>Equity Bottom-Up Insights</h3>In his Indonesian Insight, <a href="https://www.smartkarma.com/insights/matahari-department-store-lppf-ij-too-early-to-be-early" target="_blank" data-smartkarma-citation="insights:44460" rel="noopener">Matahari Department Store (LPPF IJ) - Too Early to Be Early,</a> Cross ASEAN Insight Provider <a href="https://www.smartkarma.com/profiles/angus-mackintosh" target="_blank" data-smartkarma-citation="accounts:937" rel="noopener">Angus Mackintosh</a> circles back to the country's largest department store operator post its recent results. In <a href="https://www.smartkarma.com/insights/akr-corporindo-akra-ij-great-omnibus-expectations" target="_blank" data-smartkarma-citation="insights:44611" rel="noopener">AKR Corporindo (AKRA IJ) - Great Omnibus Expectations,</a> CrossASEAN insight provider <a href="https://www.smartkarma.com/profiles/angus-mackintosh" target="_blank" rel="noopener">Angus Mackintosh</a> revisits <a href="https://www.smartkarma.com/entities/akr-corporindo-tbk-pt" target="_blank" rel="noopener">AKR Corporindo (AKRA IJ)</a> after its recent 3Q2020 results that continued to demonstrate its resilience, with an across the board improvement in margins, despite a decline in sales.In a Malaysian Insight, <a href="https://www.smartkarma.com/insights/ql-resources-ql-take-profit" target="_blank" data-smartkarma-citation="insights:44598" rel="noopener">QL Resources (QL): Take Profit?,</a> CrossASEAN Insight Provider <a href="https://www.smartkarma.com/profiles/henry-soediarko" target="_blank" data-smartkarma-citation="accounts:1006" rel="noopener">Henry Soediarko</a> revisits this commodity turned retail play, through its Family Mart business. In <a href="https://www.smartkarma.com/insights/far-east-hospitality-trust-feht-beneficiary-of-opening-up" target="_blank" data-smartkarma-citation="insights:44649" rel="noopener">Far East Hospitality Trust (FEHT): Beneficiary of Opening Up,</a> CrossASEAN Insight Provider<a href="https://www.smartkarma.com/profiles/henry-soediarko" target="_blank" rel="noopener"> Henry Soediarko</a> takes an initial look at<a href="https://www.smartkarma.com/entities/far-east-hospitality-trust" target="_blank" rel="noopener"> Far East Hospitality Trust (FEHT SP),</a> the only hospitality REIT in Singapore with a 100% domestic hospitality exposure and a higher fixed rental component, offering a defensive exposure during this difficult market environment. In <a href="https://www.smartkarma.com/insights/bca-profit-returns" target="_blank" data-smartkarma-citation="insights:44605" rel="noopener">BCA – Profit Returns,</a> banking specialist <a href="https://www.smartkarma.com/profiles/daniel-tabbush" target="_blank" data-smartkarma-citation="accounts:12" rel="noopener">Daniel Tabbush</a> revisits <a href="https://www.smartkarma.com/entities/bank-central-asia-tbk-pt" target="_blank" data-smartkarma-citation="entities:440:1" rel="noopener">Bank Central Asia (BBCA IJ)</a> and finds the bank clawing back some of the ROA it lost during 2Q2020 in the most recent quarter. In <a href="https://www.smartkarma.com/insights/bts-potential-positive-catalysts-ahead" target="_blank" data-smartkarma-citation="insights:44691" rel="noopener">BTS: Potential Positive Catalysts Ahead,</a><a href="https://www.smartkarma.com/companies/country-group" target="_blank" data-smartkarma-citation="companies:965" rel="noopener">Country Group</a> revisit this Thai transportation play with a more positive slant.In <a href="https://www.smartkarma.com/insights/pttep-4q20-earnings-to-soften-from-lower-asp-and-volume-sales" target="_blank" data-smartkarma-citation="insights:44740" rel="noopener">PTTEP: 4Q20 Earnings to Soften from Lower ASP and Volume Sales,</a> our friends at <a href="https://www.smartkarma.com/companies/country-group" target="_blank" data-smartkarma-citation="companies:965" rel="noopener">Country Group</a> assess the prospects for <a href="https://www.smartkarma.com/entities/ptt-exploration-and-production-public-company-limited" target="_blank" data-smartkarma-citation="entities:261:1" rel="noopener">PTT E&amp;P (PTTEP TB)</a> going into the end of the year.<h3>Credit Insights</h3>In this Insight, <a href="https://www.smartkarma.com/insights/japfa-comfeed-earnings-flash-9m-fy-2020-results-lucror-analytics" target="_blank" data-smartkarma-citation="insights:44743" rel="noopener">Japfa Comfeed - Earnings Flash - 9M FY 2020 Results,</a> Senior Credit Analyst<a href="https://www.smartkarma.com/profiles/trung-nguyen" target="_blank" rel="noopener"> Trung Nguyen</a> discusses <a href="https://www.smartkarma.com/entities/japfa-comfeed-indonesia-tbk-pt" target="_blank" data-smartkarma-citation="entities:8258:1" rel="noopener">Japfa Comfeed Indonesia (JPFA IJ)'</a>s 9M2020 results, which came in worse than expected (following a dismal Q22020), as the impact of COVID-19 reduced consumers' purchasing power and hit demand. In <a href="https://www.smartkarma.com/insights/pan-brothers-earnings-flash-9m-fy-2020-results-lucror-analytics" target="_blank" data-smartkarma-citation="insights:44708" rel="noopener">Pan Brothers - Earnings Flash - 9M FY 2020 Results,</a><a href="https://www.smartkarma.com/companies/lucror-analytics" target="_blank" rel="noopener">Lucror Analytics</a> zeros in on the Pan Brothers’ Q3 and 9M2020 earnings. Pan Brothers’ cash flow generation remained poor, and it continued to report large working capital weakness. It appears unlikely that Pan Brothers will be able to increase the size of its syndication facility, given the low commitment from banks at the moment.


The week that was in ASEAN@Smartkarma is filled with another eclectic mix of differentiated, substantive, and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights over the past week.
We add below a NEW section, which includes emerging themes in ASEAN and selects important news flow or developments for commentary, which may impact SE Asian companies and markets.  
Macro InsightsIn Agong Asserts Himself, Preventing Change of PM but Disallowing Emergency Rule, CrossASEAN Chief Economist Prasenjit K. Basu comments on the ongoing political upheaval in Malaysia. In Trouble Down South: It's Not Just the Virus,Dr. Jim Walker gives his prescriptions on why South East Asia has been such a poor performer this year. In Thai Strategy 2021 (Part 1): Key Themes, out Thai guru Athaporn Arayasantiparb, CFA lays out his thoughts for the outlook for the Thai market next year. Equity Bottom-Up InsightsIn his Indonesian Insight, Matahari Department Store (LPPF IJ) - Too Early to Be Early, Cross ASEAN Insight Provider Angus Mackintosh circles back to the country's largest department store operator post its recent results. In AKR Corporindo (AKRA IJ) - Great Omnibus Expectations, CrossASEAN insight provider Angus Mackintosh revisits AKR Corporindo (AKRA IJ) after its recent 3Q2020 results that continued to demonstrate its resilience, with an across the board improvement in margins, despite a decline in sales.In a Malaysian Insight, QL Resources (QL): Take Profit?, CrossASEAN Insight Provider Henry Soediarko revisits this commodity turned retail play, through its Family Mart business. In Far East Hospitality Trust (FEHT): Beneficiary of Opening Up, CrossASEAN Insight Provider Henry Soediarko takes an initial look at Far East Hospitality Trust (FEHT SP), the only hospitality REIT in Singapore with a 100% domestic hospitality exposure and a higher fixed rental component, offering a defensive exposure during this difficult market environment. In BCA – Profit Returns, banking specialist Daniel Tabbush revisits Bank Central Asia (BBCA IJ) and finds the bank clawing back some of the ROA it lost during 2Q2020 in the most recent quarter. In BTS: Potential Positive Catalysts Ahead,Country Group revisit this Thai transportation play with a more positive slant.In PTTEP: 4Q20 Earnings to Soften from Lower ASP and Volume Sales, our friends at Country Group assess the prospects for PTT E&amp;P (PTTEP TB) going into the end of the year.Credit InsightsIn this Insight, Japfa Comfeed - Earnings Flash - 9M FY 2020 Results, Senior Credit Analyst Trung Nguyen discusses Japfa Comfeed Indonesia (JPFA IJ)'s 9M2020 results, which came in worse than expected (following a dismal Q22020), as the impact of COVID-19 reduced consumers' purchasing power and hit demand. In Pan Brothers - Earnings Flash - 9M FY 2020 Results,Lucror Analytics zeros in on the Pan Brothers’ Q3 and 9M2020 earnings. Pan Brothers’ cash flow generation remained poor, and it continued to report large working capital weakness. It appears unlikely that Pan Brothers will be able to increase the size of its syndication facility, given the low commitment from banks at the moment. 

The Week that Was in ASEAN@Smartkarma - South East Asia Lags, the Bank's Return, and Nimble Staples

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/industrial-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:19515:1" rel="noopener">Industrial Bank Co Ltd A (601166 CH)</a> and Kookmin Bank (<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">KB Financial Group (105560 KS))</a> were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see <a href="https://www.smartkarma.com/insights/kotak-indusind-happy-indusind-bondholders-move-to-overweight" target="_blank" data-smartkarma-citation="insights:44542" rel="noopener">Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight</a> for more details. On Friday, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the Industrial Bank Co Ltd A (601166 CH) and Kookmin Bank (KB Financial Group (105560 KS)) were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that Kotak Mahindra Bank (KMB IN) is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight for more details. On Friday, Indusind Bank (IIB IN) reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

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 & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>Our 2Q20 screens reveal the wide range in cost of risk amongst EM banks</li>
<li>We screen for banks that are well capitalised and have ”kitchen sinked” loan provision charges, even though this potentially sacrifices near term returns</li>
<li>We also take into account valuation versus returns metrics</li>
<li>Our analysis picks are skewed towards LatAm, with <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a> and <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a> at the top of the attractive pile, and <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener">Banco Do Brasil Sa (BBAS3 BZ)</a> also screening well on value, albeit to a lesser degree</li>
<li>Outside of LatAm, <a href="https://www.smartkarma.com/entities/commercial-international-bank" target="_blank" data-smartkarma-citation="entities:27625:1" rel="noopener">Commercial International Bank (COMI EY)</a>  screens well, along with <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:714:1" rel="noopener">China Merchants Bank A (600036 CH)</a> and – one newcomer since our July report – <a href="https://www.smartkarma.com/entities/bdo-unibank-inc" target="_blank" data-smartkarma-citation="entities:329:1" rel="noopener">BDO Unibank Inc (BDO PM)</a> </li>
<li>Names to watch include <a href="https://www.smartkarma.com/entities/sberbank-of-russia-pjsc-cde59529-fb78-4659-85d0-127942b44ba7" target="_blank" data-smartkarma-citation="entities:27581:1" rel="noopener">Sberbank of Russia PJSC (SBER RM)</a>, <a href="https://www.smartkarma.com/entities/banco-bradesco-sa" target="_blank" data-smartkarma-citation="entities:24569:1" rel="noopener">Banco Bradesco Sa (BBDC4 BZ)</a> and – even though outside the value spectrum – <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> </li>
<li>Risks to our view include a protracted downturn that warrants further large loan loss provisioning charges going forward, which suppress profitability</li>
</ul>


Our 2Q20 screens reveal the wide range in cost of risk amongst EM banks
We screen for banks that are well capitalised and have ”kitchen sinked” loan provision charges, even though this potentially sacrifices near term returns
We also take into account valuation versus returns metrics
Our analysis picks are skewed towards LatAm, with Credicorp Ltd (BAP US) and Grupo Financiero Banorte-O (GFNORTEO MF) at the top of the attractive pile, and Banco Do Brasil Sa (BBAS3 BZ) also screening well on value, albeit to a lesser degree
Outside of LatAm, Commercial International Bank (COMI EY)  screens well, along with China Merchants Bank A (600036 CH) and – one newcomer since our July report – BDO Unibank Inc (BDO PM) 
Names to watch include Sberbank of Russia PJSC (SBER RM), Banco Bradesco Sa (BBDC4 BZ) and – even though outside the value spectrum – Bank Rakyat Indonesia Persero (BBRI IJ) 
Risks to our view include a protracted downturn that warrants further large loan loss provisioning charges going forward, which suppress profitability


EM Banks Through the Credit Quality and Value Lens

We may be closer to market tights in terms of credit spreads than we expected one week ago. We are not convinced that the Fed can meet its new policy objective and keep long-term interest rates low enough to continue to weaken the US dollar, thereby stoking imported inflation. We suspect that credit spreads may start calm and then become more volatile as September passes.In this environment, holdings of cross-over rated Senior Unsecured bonds may be best for defensive positioning during periods of volatility. However, over time, and if the Fed delivers on a controlled interest rate environment, a more selective portfolio of higher beta Senior Unsecured as well as longer duration high yield and cross-over Subordinated and Additional Tier 1 debt should generate increased returns. We identify several of our recent top picks and pans within.   One upcoming announcement in September stands out amongst Asia-headquartered banks. 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 (23 HK)</a> will update the market on the status of its strategic review before the end of the month. This may have an outsized valuation impact on the firm’s Additional Tier 1 (AT1) securities. For our views on the potential business development outcomes from this review, please see: <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Bank of East Asia: Strategic Review to Set AT1 Value; Forewarned Is Forearmed</a>. For our views on how the strategic review may also result in a decision to better optimize the capital structure, please see: <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Bank of East Asia: Buy the Inefficient Capital Securities</a>. Globally, upside valuation impacts may also arise from new AT1 issuance as we detail in :<a href="https://www.smartkarma.com/insights/bank-credit-strategy-pre-positioning-for-at1-price-accretion" target="_blank" data-smartkarma-citation="insights:42050" rel="noopener">Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion</a>.During August, risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan). In fact, only 12 securities widened in option adjusted spread terms out of the 107 bonds that we track in the region. Put another way, for every bank bond that weakened, over 8 strengthened during the month in credit spread terms. Meanwhile, only two bonds widened by double digit levels month-on-month.China-centric bank bonds led in terms of spread tightening, including, and excluding, Hong Kong-based banks. High yield rated securities comprised six of the top ten with only one Senior Unsecured bond amongst the leaders. Additional Tier1 bonds issued by <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> stand out in terms of their over generous performance as we detail within. Meanwhile, India’s non-bank finance companies dominate the list of bonds underperforming over the month.

We may be closer to market tights in terms of credit spreads than we expected one week ago. We are not convinced that the Fed can meet its new policy objective and keep long-term interest rates low enough to continue to weaken the US dollar, thereby stoking imported inflation. We suspect that credit spreads may start calm and then become more volatile as September passes.In this environment, holdings of cross-over rated Senior Unsecured bonds may be best for defensive positioning during periods of volatility. However, over time, and if the Fed delivers on a controlled interest rate environment, a more selective portfolio of higher beta Senior Unsecured as well as longer duration high yield and cross-over Subordinated and Additional Tier 1 debt should generate increased returns. We identify several of our recent top picks and pans within.   One upcoming announcement in September stands out amongst Asia-headquartered banks. The Bank of East Asia (23 HK) will update the market on the status of its strategic review before the end of the month. This may have an outsized valuation impact on the firm’s Additional Tier 1 (AT1) securities. For our views on the potential business development outcomes from this review, please see: Bank of East Asia: Strategic Review to Set AT1 Value; Forewarned Is Forearmed. For our views on how the strategic review may also result in a decision to better optimize the capital structure, please see: Bank of East Asia: Buy the Inefficient Capital Securities. Globally, upside valuation impacts may also arise from new AT1 issuance as we detail in :Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion.During August, risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan). In fact, only 12 securities widened in option adjusted spread terms out of the 107 bonds that we track in the region. Put another way, for every bank bond that weakened, over 8 strengthened during the month in credit spread terms. Meanwhile, only two bonds widened by double digit levels month-on-month.China-centric bank bonds led in terms of spread tightening, including, and excluding, Hong Kong-based banks. High yield rated securities comprised six of the top ten with only one Senior Unsecured bond amongst the leaders. Additional Tier1 bonds issued by China Construction Bank H (939 HK) stand out in terms of their over generous performance as we detail within. Meanwhile, India’s non-bank finance companies dominate the list of bonds underperforming over the month.

Bank Credit Compass: September Expectations and August Performance in Asia

Philippines

BDO Unibank Inc provides banking services. The Bank offers saving accounts, investment, loans, credit and debit cards, remittance, insurance, and trade financing services. BDO Unibank serves customers in Philippines.

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BDO Unibank Inc (BDO PM)

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We may be closer to market tights in terms of credit spreads than we expected one week ago. We are not convinced that the Fed can meet its new.. .

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