Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group's (CSGN VX)</a> press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in <a href="https://www.smartkarma.com/compose/insight/49970/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a>, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Executive Summary: Credit Suisse Group's (CSGN VX) press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in Credit Suisse: Where There’s Smoke, There’s a Capital Raise, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Credit Suisse: Skating on a Thin Layer of Capital

Executive Summary: The <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group (CSGN VX)</a> requires between CHF4 to 8bn in additional Common Equity Tier 1 (CET1) to remain competitive and bring its capital buffer in-line with peers. We noted several week ago that the firm’s capital buffer was too thin to absorb large losses while its Contingent Capital (CoCo) securities continued to trade rich relative to peers. The thin, and likely declining, buffer may now affect its ability to compete. In our view, the issue is quickly moving from damage control towards a capital raise.We derive our capital estimates by starting with the amount required to bring the CET1 buffer up to peer levels. To this we add various exceptional charges which are increasing every other week. Details within.We were ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $95. Our recommendation was based on a fundamental assessment of CS’ business model, risk tolerance and capitalization. Please see: <a href="https://www.smartkarma.com/compose/insight/49775/Credit%20Suisse%20%E2%80%93%20Perfection%20Priced%20into%20Long-Dated%20AT1.%20Read%20more:%20https:/skr.ma/7w5Cm" target="_blank" rel="noopener">Credit Suisse – Perfection Priced into Long-Dated AT1</a> for more details. These negative factors were magnified by the Greensill episode. Please see: <a href="https://www.smartkarma.com/compose/insight/49775/Credit%20Suisse:%20Greensill%20Sows%20Reputation%20Risks,%20Underweight%20CS%20Bonds.%20Read%20more:%20https:/skr.ma/tq31o" target="_blank" rel="noopener">Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds</a> and <a href="https://www.smartkarma.com/compose/insight/49775/Credit%20Suisse:%20Greensill's%20Capital%20Implications%20Outweigh%20Asset%20Management%20Corrective%20Action.%20Read%20more:%20https:/skr.ma/WWiXU" target="_blank" rel="noopener">Credit Suisse: Greensill's Capital Implications Outweigh Asset Management Corrective Action</a>. The Archegos affair adds fuel to this fire.It is too early to consider this a buying opportunity. While we believe in our recapitalization call, we do not anticipate an immediate move towards improving the firms’ competitive position. The flames are rising and more fuel could be added before the capital blanket is applied. As such, we believe CS’ bonds may continue to lag that of its peers.However, the Swiss regulator may be unwilling to wait for the smoke to dampen and the arrival of a new Board Chairman should create the opportunity to clear the air at Credit Suisse. Obviously in addition to raising equity, CS would need to take serious action concerning its risk management and tolerance. Risk tolerance needs to be reduced until risk management is improved as these are the embers which stated this fire. This should be beneficial to AT1 investors over the long-run.

Executive Summary: The Credit Suisse Group (CSGN VX) requires between CHF4 to 8bn in additional Common Equity Tier 1 (CET1) to remain competitive and bring its capital buffer in-line with peers. We noted several week ago that the firm’s capital buffer was too thin to absorb large losses while its Contingent Capital (CoCo) securities continued to trade rich relative to peers. The thin, and likely declining, buffer may now affect its ability to compete. In our view, the issue is quickly moving from damage control towards a capital raise.We derive our capital estimates by starting with the amount required to bring the CET1 buffer up to peer levels. To this we add various exceptional charges which are increasing every other week. Details within.We were ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $95. Our recommendation was based on a fundamental assessment of CS’ business model, risk tolerance and capitalization. Please see: Credit Suisse – Perfection Priced into Long-Dated AT1 for more details. These negative factors were magnified by the Greensill episode. Please see: Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds and Credit Suisse: Greensill's Capital Implications Outweigh Asset Management Corrective Action. The Archegos affair adds fuel to this fire.It is too early to consider this a buying opportunity. While we believe in our recapitalization call, we do not anticipate an immediate move towards improving the firms’ competitive position. The flames are rising and more fuel could be added before the capital blanket is applied. As such, we believe CS’ bonds may continue to lag that of its peers.However, the Swiss regulator may be unwilling to wait for the smoke to dampen and the arrival of a new Board Chairman should create the opportunity to clear the air at Credit Suisse. Obviously in addition to raising equity, CS would need to take serious action concerning its risk management and tolerance. Risk tolerance needs to be reduced until risk management is improved as these are the embers which stated this fire. This should be beneficial to AT1 investors over the long-run. 

Credit Suisse: Where There’s Smoke, There’s a Capital Raise

<a href="https://www.smartkarma.com/entities/jpmorgan-chase-co" target="_blank" data-smartkarma-citation="entities:277:1" rel="noopener">JPMorgan Chase &amp; Co's (JPM US)</a> fortress foundation needs repair. Rather than a rock-solid balance sheet, JPM’s capital foundation needs to be strengthened to handle the leverage load. It has the lowest Supplementary Leverage Ratio (SLR) amongst the largest US banks and its Tier 1 securities suffer, in part, due to this. It is time to lighten the leverage exposure and add a layer of capital. This creates an investment opportunity.As the pandemic-induced economic crisis unfolded last year, we noted that JPM Tier 1 securities were over-bought relative to the leverage exposure risk at the institution. Please see: <a href="https://www.smartkarma.com/compose/insight/49670/Bank%20Credit%20Weekly:%20US%20Capital%20Buffer%20Risk%20&amp;%20Q1%20Earnings%20Reports-%20JPMorgan%20Looks%20Slightly%20Overbought.%20Read%20more:%20https:/skr.ma/uQHaQ" target="_blank" rel="noopener">Bank Credit Weekly: US Capital Buffer Risk &amp; Q1 Earnings Reports- JPMorgan Looks Slightly Overbought.</a>The Fed exemption of Treasury securities and deposits with the central bank from the SLR bought JPM time. Fast forward one year later to the expiration of these exemptions and, despite ample opportunity, JPMorgan did not issue Tier 1 securities until only two weeks ago when it brought a $25 par security. In additional to raising needed capital, the firm recently threatened to stop taking deposits. It may price itself out of the deposit market, temporarily, but this is not a long-term strategy. The SLR is the binding capital constrain on the firm’s asset growth. JPM needs to obtain or retain more Tier 1 capital. We quantify this within.We believe that JPM could easily bring a 10-year Tier 1 bond to the market and find between US$2 to US$3bn in demand, thereby taking the total Tier 1 financing needs, or balance sheet optimization equivalent, down materially for the remainder of the year. Based on its recently issued Preferred, we believe JPM could achieve a price of Treasuries plus circa 300bps in a 10-year Tier 1 note.Aside from its SLR level, JPMorgan’s credit metrics are on-par with, if not superior to, most other large systemically important financial institutions. And yet, as we present within, JPM’s Tier 1 bonds trade at a discount to materially weaker banks located outside the US. Furthermore, we find that JPMorgan’s 2025 callable Tier 1 bond is at least 40bps oversold as, in our view, its call option is overvalued by the same amount.JPM faces an inflection point with respect to its capital adequacy. Concurrently, the Fed may re-adjust the SLR requirements before year-end; however, we believe it would be foolish of JPM not to take the opportunity to increase its SLR in an improving economic environment. It should re-enforce the foundation of its fortress balance sheet. We believe investors should pre-position for this eventuality. We recommend overweighting JPMorgan’s Tier 1 securities.

JPMorgan Chase &amp; Co's (JPM US) fortress foundation needs repair. Rather than a rock-solid balance sheet, JPM’s capital foundation needs to be strengthened to handle the leverage load. It has the lowest Supplementary Leverage Ratio (SLR) amongst the largest US banks and its Tier 1 securities suffer, in part, due to this. It is time to lighten the leverage exposure and add a layer of capital. This creates an investment opportunity.As the pandemic-induced economic crisis unfolded last year, we noted that JPM Tier 1 securities were over-bought relative to the leverage exposure risk at the institution. Please see: Bank Credit Weekly: US Capital Buffer Risk &amp; Q1 Earnings Reports- JPMorgan Looks Slightly Overbought.The Fed exemption of Treasury securities and deposits with the central bank from the SLR bought JPM time. Fast forward one year later to the expiration of these exemptions and, despite ample opportunity, JPMorgan did not issue Tier 1 securities until only two weeks ago when it brought a $25 par security. In additional to raising needed capital, the firm recently threatened to stop taking deposits. It may price itself out of the deposit market, temporarily, but this is not a long-term strategy. The SLR is the binding capital constrain on the firm’s asset growth. JPM needs to obtain or retain more Tier 1 capital. We quantify this within.We believe that JPM could easily bring a 10-year Tier 1 bond to the market and find between US$2 to US$3bn in demand, thereby taking the total Tier 1 financing needs, or balance sheet optimization equivalent, down materially for the remainder of the year. Based on its recently issued Preferred, we believe JPM could achieve a price of Treasuries plus circa 300bps in a 10-year Tier 1 note.Aside from its SLR level, JPMorgan’s credit metrics are on-par with, if not superior to, most other large systemically important financial institutions. And yet, as we present within, JPM’s Tier 1 bonds trade at a discount to materially weaker banks located outside the US. Furthermore, we find that JPMorgan’s 2025 callable Tier 1 bond is at least 40bps oversold as, in our view, its call option is overvalued by the same amount.JPM faces an inflection point with respect to its capital adequacy. Concurrently, the Fed may re-adjust the SLR requirements before year-end; however, we believe it would be foolish of JPM not to take the opportunity to increase its SLR in an improving economic environment. It should re-enforce the foundation of its fortress balance sheet. We believe investors should pre-position for this eventuality. We recommend overweighting JPMorgan’s Tier 1 securities.

US Banks and the SLR Situation: Overweight JPM Tier 1 Securities

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.

Thematic (Sector/Industry)

<ul>
<li>The removal of the Central Bank governor by President Erdogan flies in the face of orthodox monetary policy</li>
<li>The TRY and Turkish assets are being hit hard; in this note, we focus on <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> , <a href="https://www.smartkarma.com/entities/turkiye-garanti-bankasi-as" target="_blank" data-smartkarma-citation="entities:25026:1" rel="noopener">Turkiye Garanti Bankasi As (GARAN TI)</a> , <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> , <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas (BNP FP)</a> and <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> </li>
<li>Garanti and its domestic peers could see worsening delinquency, especially on FX loan balances, as well as tougher terms for refinancing their FX funding needs</li>
<li>We look at the capital impacts of TRY depreciation, as well as the earnings exposure of the three international banks</li>
<li>In conclusion, we see limited impact on Unicredit and especially HSBC from the Turkish turbulence, with a clearly bigger adverse impact for BBVA, especially on earnings; the impact of TEB on BNP Paribas should be modest too</li>
<li>We reiterate our positive opinions on HSBC and Unicredit; we are more cautious on BBVA in the near term</li>
<li>Risks to our view include a further heavy depreciation of the TRY, resulting from any potential sharp cuts to the Turkish benchmark interest rate</li>
</ul>


The removal of the Central Bank governor by President Erdogan flies in the face of orthodox monetary policy
The TRY and Turkish assets are being hit hard; in this note, we focus on Banco Bilbao Vizcaya Argentari (BBVA SM) , Turkiye Garanti Bankasi As (GARAN TI) , UniCredit SpA (UCG IM) , BNP Paribas (BNP FP) and HSBC Holdings (HSBA LN) 
Garanti and its domestic peers could see worsening delinquency, especially on FX loan balances, as well as tougher terms for refinancing their FX funding needs
We look at the capital impacts of TRY depreciation, as well as the earnings exposure of the three international banks
In conclusion, we see limited impact on Unicredit and especially HSBC from the Turkish turbulence, with a clearly bigger adverse impact for BBVA, especially on earnings; the impact of TEB on BNP Paribas should be modest too
We reiterate our positive opinions on HSBC and Unicredit; we are more cautious on BBVA in the near term
Risks to our view include a further heavy depreciation of the TRY, resulting from any potential sharp cuts to the Turkish benchmark interest rate


Turkey – Erdogan Creates More Market Turbulence, Again

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

*Strong Man Strikes Again: Lighting has struck again, not five months since his hiring, Central Bank of Turkey (CBT) Governor Agbal has now been dismissed for raising interest rates. President Erdogan handpicked Sahap Kavcioglu as new CBT Governor. He is the fourth CBT Governor in two years, and a banking professor and newspaper columnist who has argued for lower interest rates, after serving a a lawmaker in Erdogan’s AKP party. We all know what happens when academics are in charge; and*Watch Your Risk: The TRL’s decline is troublesome, and the potential for a TRL gray market would NOT be of surprise at this stage. We continue to worry about counterparty risks should defaults rise. It’s probably not a bad time to start thinking about purchasing CDS protection on single name securities and on the Turkish sovereign.

*Strong Man Strikes Again: Lighting has struck again, not five months since his hiring, Central Bank of Turkey (CBT) Governor Agbal has now been dismissed for raising interest rates. President Erdogan handpicked Sahap Kavcioglu as new CBT Governor. He is the fourth CBT Governor in two years, and a banking professor and newspaper columnist who has argued for lower interest rates, after serving a a lawmaker in Erdogan’s AKP party. We all know what happens when academics are in charge; and*Watch Your Risk: The TRL’s decline is troublesome, and the potential for a TRL gray market would NOT be of surprise at this stage. We continue to worry about counterparty risks should defaults rise. It’s probably not a bad time to start thinking about purchasing CDS protection on single name securities and on the Turkish sovereign.

France

BNP Paribas S.A. attracts deposits and offers commercial, retail, investment, private and corporate banking services.  The Bank also provides asset management and investment advisory services to institutions and individuals in Europe, the United States, Asia and the Emerging Markets.

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BNP Paribas (BNP FP)

Credit Suisse: Skating on a Thin Layer of Capital

CS is skating on thin ice from a capital perspective while its risk management blade is dulled. Asset bubbles could crack the ice. A loss of less...

Hank Calenti, CFA

Credit Suisse: Where There’s Smoke, There’s a Capital Raise

CS needs as much as CHF8bn in common equity to bring its capital buffer in-line with peers. The Archegos affair adds fuel to risk management and...

Hank Calenti, CFA

US Banks and the SLR Situation: Overweight JPM Tier 1 Securities

JPM’s fortress foundation needs repair. It has the lowest SLR buffer, and its Tier 1 suffers from this. Leverage slimming and a deeper capital...

Hank Calenti, CFA

Turkey – Erdogan Creates More Market Turbulence, Again

Central bank chief removal heightens market risk with the TRY and Turkish assets being hit. For the banks, we feel there are mitigating factors...

Victor Galliano

Turkey - YELP!

TURKEY: Not five months since his hiring, the CBT Governor has been replaced. The TRL’s decline is troublesome, and a TRL gray market would NOT be...

Thomas J. Monaco

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