Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at <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> to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">India Bank Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a> for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies.

In this, the second of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratio (LCR) assumptions regarding likely deposit flight to the reality of what occurred at Yes Bank (YES IN) to derive “Yes-Stressed” resultant LCRs for each institution. We then assess this “Yes-Stressed” LCR relative to US$-denominated securities to see if this real liquidity is priced-in, from a credit perspective. We also consider the implications of it not being priced and conclude with whether it was Yes Bank’s missing LCR deposits that broke the bank.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in India Bank Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted.In our first insight on this matter, we derived the amount of stable deposits and compared this to deposit costs at each major India-headquartered bank. We then assessed these items relative to US$-denominated securities to see if they are priced-in, from a credit perspective. Please see India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run for more details. In follow-up insights, we intent to incorporate deposits that are not captured in LCR reports and then further stress the reported LCRs for possible Covid-19 related payment delinquencies. 

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

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

Approximately one-year ago, India-headquartered <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> began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

Approximately one-year ago, India-headquartered Yes Bank (YES IN) began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. <a href="https://www.smartkarma.com/entities/bank-of-china-ltd" target="_blank" data-smartkarma-citation="entities:24574:1" rel="noopener">Bank Of China (BCHINA)</a>AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC's (H) (1398 HK)</a> new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that <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> new issue bond will tighten by at least 10bps relatively quickly. Please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> for our views on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, 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.

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. Bank Of China (BCHINA)AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect ICBC's (H) (1398 HK) new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that HSBC Holdings' (HSBA LN) new issue bond will tighten by at least 10bps relatively quickly. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, 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 Sentiment Returns as Markets Ignore FOMC Disappointment

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank's shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&amp;A/capital raising activities; and*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

India

Canara Bank Ltd. provides a full range of banking services throughout India. The Group's activities include retail banking, commercial and personal banking, investment management, treasury & NRI services, cash management and assorted ATM facilities.

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Canara Bank (CBK IN)

India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

In this 2'nd insight in our Yes Bank Deposit Run Anniversary Series, we apply Yes Bank deposit flight rates to derive “Yes-Stressed” LCRs at India...

Hank Calenti, CFA

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

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary,...

Hank Calenti, CFA

Bank Credit Weekly: Risk Sentiment Returns as Markets Ignore FOMC Disappointment

The lack of shock and awe outcome from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income...

Hank Calenti, CFA

ICICI Bank – Insurance Waiver In Reality Is Capital Forbearance

*Ownership Waiver Received On Insurance: On September 14th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on...

Thomas J. Monaco

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