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

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.   

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

HSBC Holdings Plc – Head Still Buried In The Sand

*Recent USA Branch Disposal: As announced on February 22, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]  announced that is set to withdraw from U.S. retail banking, seeking to dispose of a business that has long underperformed. On May 26, 2021 HSBC and Cathay General Bancorp (CATY.US) [Cathay] in Los Angeles announced that Cathay will acquire 10 retail branches in California from HSBC. Cathay also acquired USD 0.8 bn in loans - residential mortgage, retail business banking, and personal loans, along with USD 1.0 bn in deposits;  and*HSBCNA Still A Chronic Headache: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. HSBCNA’s operating costs exceed recurring revenues. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis.

*Recent USA Branch Disposal: As announced on February 22, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]  announced that is set to withdraw from U.S. retail banking, seeking to dispose of a business that has long underperformed. On May 26, 2021 HSBC and Cathay General Bancorp (CATY.US) [Cathay] in Los Angeles announced that Cathay will acquire 10 retail branches in California from HSBC. Cathay also acquired USD 0.8 bn in loans - residential mortgage, retail business banking, and personal loans, along with USD 1.0 bn in deposits;  and*HSBCNA Still A Chronic Headache: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. HSBCNA’s operating costs exceed recurring revenues. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Issuance expectations are often a topic of anxiety for actively trading investors. The concern is that if issuance is expected to be large, then the value of the currently on-the-run security may fall as the market moves into the new security. Our experience is that timing matters. Any decline generally represents a buying opportunity in the older security; however, it can take a week or two for the security to regain lost value. As such, unexpected debt issuance just before quarter-end can be painful.With leverage ratios yet to be a requirement for Eurozone area banks, risk-weighted asset (RWA) capital ratios remain the constraining capital measure. By this standard, <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/credit-agricole-sa" target="_blank" data-smartkarma-citation="entities:21373:1" rel="noopener">Credit Agricole Group (ACAFP)</a> remain underweight in Additional Tier 1 (AT1) bond issuance.Amongst UK banks, <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> looks to have a surplus of AT1 bonds from a RWA capital ratio perspective. However, we calculate a deficiency relative to its leverage capital ratio needs. Basel IV inflation may diminish the RWA-base surplus; but for now, HSBC’s leverage ratio is its AT1 governor.In terms of Tier 2 needs, Eurozone banks are largely where they need to be from an efficiency perspective with the main exception of <a href="https://www.smartkarma.com/entities/cooperatieve-rabobank-ua" target="_blank" data-smartkarma-citation="entities:28085:1" rel="noopener">Cooperative Rabobank UA (RABO NA)</a>. Meanwhile, HSBC may be in a position to reduce its Common Equity Tier 1 levels by issuing Tier 2 bonds while remaining well above minimum capital requirements. Concurrently, <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered's (STAN LN)</a> Tier 2 levels are materially more than minimum regulatory requirements. These look better value than HSBC’s.

Executive Summary: Issuance expectations are often a topic of anxiety for actively trading investors. The concern is that if issuance is expected to be large, then the value of the currently on-the-run security may fall as the market moves into the new security. Our experience is that timing matters. Any decline generally represents a buying opportunity in the older security; however, it can take a week or two for the security to regain lost value. As such, unexpected debt issuance just before quarter-end can be painful.With leverage ratios yet to be a requirement for Eurozone area banks, risk-weighted asset (RWA) capital ratios remain the constraining capital measure. By this standard, BNP Paribas (BNP FP) and Credit Agricole Group (ACAFP) remain underweight in Additional Tier 1 (AT1) bond issuance.Amongst UK banks, HSBC Holdings (HSBA LN) looks to have a surplus of AT1 bonds from a RWA capital ratio perspective. However, we calculate a deficiency relative to its leverage capital ratio needs. Basel IV inflation may diminish the RWA-base surplus; but for now, HSBC’s leverage ratio is its AT1 governor.In terms of Tier 2 needs, Eurozone banks are largely where they need to be from an efficiency perspective with the main exception of Cooperative Rabobank UA (RABO NA). Meanwhile, HSBC may be in a position to reduce its Common Equity Tier 1 levels by issuing Tier 2 bonds while remaining well above minimum capital requirements. Concurrently, Standard Chartered's (STAN LN) Tier 2 levels are materially more than minimum regulatory requirements. These look better value than HSBC’s. 

Debt Capital Surplus (Shortfall) And Trading Opportunities in European Banks

Executive Summary: Given its business model, juxtaposed with its Additional Tier 1 (AT1) security ratings and capital buffer above which AT1 coupons may be suspended, <a href="https://www.smartkarma.com/entities/barclays-plc" target="_blank" data-smartkarma-citation="entities:1121:1" rel="noopener">Barclays' (BACR)</a> AT1 seems to trade in-line with its peers in the 2025 first call area. However, most of Barclays current stack of AT1 bonds does not look good value when considered relative to the level at which its Tier2 Subordinated debt trades.Barclays holding company Senior Unsecured debt trades at approximately the same level of <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> at certain points along their respective credit curves, despite having a lower credit rating.  Concurrently, in the Tier 2 Subordinated debt space, Barclays offers considerably more value than HSBC. Please see <a href="https://www.smartkarma.com/insights/barclays-bail-in-debt-value-relative-to-hsbc" target="_blank" data-smartkarma-citation="insights:52135" rel="noopener">Barclays: Bail-In Debt Value Relative to HSBC</a> for more details. In the AT1 area, the roles are reversed.Loaded with shorter first call dated AT1 notes, Barclays has yet to benefit from materially lower interest costs within its AT1 stack. Barclays was an early adopter in the AT1 issuance space. This aided it in bringing other AT1 issuers to the primary market. However, it also effectively created a first mover disadvantage given the level to which risk premiums and interest rates fell since the Covid-19 health crisis erupted. We expect that Barclays will greatly extend the maturity of its AT1 curve as its shorter maturity bonds are called.  Until then, we anticipate that HSBC’s AT1 notes may offer a more attractive spread pick-up.

Executive Summary: Given its business model, juxtaposed with its Additional Tier 1 (AT1) security ratings and capital buffer above which AT1 coupons may be suspended, Barclays' (BACR) AT1 seems to trade in-line with its peers in the 2025 first call area. However, most of Barclays current stack of AT1 bonds does not look good value when considered relative to the level at which its Tier2 Subordinated debt trades.Barclays holding company Senior Unsecured debt trades at approximately the same level of HSBC Holdings (HSBA LN) at certain points along their respective credit curves, despite having a lower credit rating.  Concurrently, in the Tier 2 Subordinated debt space, Barclays offers considerably more value than HSBC. Please see Barclays: Bail-In Debt Value Relative to HSBC for more details. In the AT1 area, the roles are reversed.Loaded with shorter first call dated AT1 notes, Barclays has yet to benefit from materially lower interest costs within its AT1 stack. Barclays was an early adopter in the AT1 issuance space. This aided it in bringing other AT1 issuers to the primary market. However, it also effectively created a first mover disadvantage given the level to which risk premiums and interest rates fell since the Covid-19 health crisis erupted. We expect that Barclays will greatly extend the maturity of its AT1 curve as its shorter maturity bonds are called.  Until then, we anticipate that HSBC’s AT1 notes may offer a more attractive spread pick-up.  

Barclays: AT1 Value Points Relative to HSBC

United Kingdom

HSBC Holdings plc is the holding company for the HSBC Group. The Company provides a variety of international banking and financial services, including retail and corporate banking, trade, trusteeship, securities, custody, capital markets, treasury, private and investment banking, and insurance. HSBC Holdings operates worldwide.

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HSBC Holdings (HSBC US)

HSBC Holdings Plc – Banana Peal

HSBC HOLDINGS: HSBC announced the disposal of French retail bank at a loss of USD 2.3 bn. The HSBC France sale suggests HSBC US disposal could...

Thomas J. Monaco

HSBC Holdings Plc – Head Still Buried In The Sand

HSBC HOLDINGS: A competitor call with management centered on benign Hong Kong/Asia. The Group aim is a CET1 of 14-14.5%. No mention HSBC North...

Thomas J. Monaco

HSBC Holdings Plc – And So It Begins

HSBC HOLDINGS: HSBC is withdrawing from U.S. retail banking, and recently announced that it will sell 10 branches to Cathay General Bancorp in Los...

Thomas J. Monaco

Debt Capital Surplus (Shortfall) And Trading Opportunities in European Banks

Timing matters. A price decline in an on-the-run bond due to issuance represents a buying opportunity; however, it can take time to regain value....

Hank Calenti, CFA

Barclays: AT1 Value Points Relative to HSBC

Barclays current stack of AT1 bonds does not look good value when considered relative to the level at which its Tier2 Subordinated debt trades....

Hank Calenti, CFA

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