Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: The experience of the last year has proven <a href="https://www.smartkarma.com/entities/barclays-plc" target="_blank" data-smartkarma-citation="entities:1121:1" rel="noopener">Barclays (BACR)</a> CEO’s assertion that it is better to be a combination of an investment, commercial and retail bank rather than only two of those three segments. <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> is similarly constructed, albeit with a broader geographic focus. Meanwhile, from a credit perspective, HSBC is clearly a better, more diversified, credit. Nonetheless, some of Barclays’ debt securities already trade at levels which suggest that a higher credit rating may be appropriate.Either Barclays is a stronger credit than reflected in its rating or the melt-up phenomena taking place in the rates market is also applicable to credit rating perceptions. We see a mixture of both.Despite having a lower credit rating, Barclays holding company Senior Unsecured debt trades at approximately the same level of HSBC at certain points along their respective credit curves. Concurrently, in the Tier 2 Subordinated debt space, Barclays offers considerably more value than HSBC.

Executive Summary: The experience of the last year has proven Barclays (BACR) CEO’s assertion that it is better to be a combination of an investment, commercial and retail bank rather than only two of those three segments. HSBC Holdings (HSBA LN) is similarly constructed, albeit with a broader geographic focus. Meanwhile, from a credit perspective, HSBC is clearly a better, more diversified, credit. Nonetheless, some of Barclays’ debt securities already trade at levels which suggest that a higher credit rating may be appropriate.Either Barclays is a stronger credit than reflected in its rating or the melt-up phenomena taking place in the rates market is also applicable to credit rating perceptions. We see a mixture of both.Despite having a lower credit rating, Barclays holding company Senior Unsecured debt trades at approximately the same level of HSBC at certain points along their respective credit curves. Concurrently, in the Tier 2 Subordinated debt space, Barclays offers considerably more value than HSBC.

Barclays: Bail-In Debt Value Relative to HSBC

Executive Summary: <a href="https://www.smartkarma.com/entities/banco-santander-sa" target="_blank" data-smartkarma-citation="entities:21296:1" rel="noopener">Banco Santander (SAN SM)</a> is one of the few institutions which did not engage in loan loss reserve releases this quarter. It did not even release reserves for the sake of appearance, as occurred at <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>. As regards credit quality, unfortunately, there is more than meets the eye and it is not spectacular. However, we believe that this is priced into the bank’s Additional Tier 1 (AT1) notes.The big issue for Santander is Brazil. Santander is essentially a Brazilian bank, headquartered in Madrid. Brazil contributes the largest amount of pre-provision profits amongst the bank’s well diversified franchise. Notably, the bank effectively managed to achieve an overall similar revenue result in the first quarter of this year as in last year, despite Brazil’s contribution declining by 16% year-on-year. This speaks to the diversification benefits inherent in the firm’s franchise. We believe this is undervalued by the market.Santander may face continuing revenue challenges in Brazil this year if the country is unable to tame its Coronavirus outbreaks. However, this appears to already be priced into Santander’s AT1 bonds.Santander’s longest dated AT1 bond trades 30 bps higher than the spread on <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> similar first call note, despite being higher rated and having an effective capital buffer which is greater than 200bps higher, relative to their respective risk-weighted assets. Santander’s longest-dated AT1 note also trades almost 100bps higher than <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> similar first call bond. Again, this is despite being higher rated and having a similar capital buffer. As such, we see more upside and recommend that investors overweight Santander’s AT1 notes.

Executive Summary: Banco Santander (SAN SM) is one of the few institutions which did not engage in loan loss reserve releases this quarter. It did not even release reserves for the sake of appearance, as occurred at HSBC Holdings (HSBA LN). As regards credit quality, unfortunately, there is more than meets the eye and it is not spectacular. However, we believe that this is priced into the bank’s Additional Tier 1 (AT1) notes.The big issue for Santander is Brazil. Santander is essentially a Brazilian bank, headquartered in Madrid. Brazil contributes the largest amount of pre-provision profits amongst the bank’s well diversified franchise. Notably, the bank effectively managed to achieve an overall similar revenue result in the first quarter of this year as in last year, despite Brazil’s contribution declining by 16% year-on-year. This speaks to the diversification benefits inherent in the firm’s franchise. We believe this is undervalued by the market.Santander may face continuing revenue challenges in Brazil this year if the country is unable to tame its Coronavirus outbreaks. However, this appears to already be priced into Santander’s AT1 bonds.Santander’s longest dated AT1 bond trades 30 bps higher than the spread on Credit Suisse Group's (CSGN VX) similar first call note, despite being higher rated and having an effective capital buffer which is greater than 200bps higher, relative to their respective risk-weighted assets. Santander’s longest-dated AT1 note also trades almost 100bps higher than Standard Chartered's (STAN LN) similar first call bond. Again, this is despite being higher rated and having a similar capital buffer. As such, we see more upside and recommend that investors overweight Santander’s AT1 notes.

Executive Summary:<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> Q1 performance looked good optically, when seen from a sharp angle, but the issue is whether this is sustainable. We think not for three reasons.First, StanLn was rather coy regarding the likely impact on revenues and reserving from the on-going Covid-19 disaster in India. Second, aside from the potentially negative revenue impact from India, StanLn does not anticipate an increase in revenues overall until next year, despite the phantom 4% increase in Q1 lending quarter-on-quarter. Third, expenses rose faster than revenues during the quarter. We would not be surprised to see another costly restructuring announcement before year-end.To its credit, Standard Chartered’s expected credit loss reserve release is better substantiated than that undertaken by <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>.Nonetheless, management’s unchanged revenue expectations juxtaposed with inorganic regional growth opportunities creates a situation which may be unpleasant for credit investors. Given the double jeopardy facing StanLn’s capital buffer and near-term loss absorbing ability, we would prefer to position within less event sensitive securities, such as StanLn’s Tier 2 bonds.

Executive Summary:Standard Chartered's (STAN LN) Q1 performance looked good optically, when seen from a sharp angle, but the issue is whether this is sustainable. We think not for three reasons.First, StanLn was rather coy regarding the likely impact on revenues and reserving from the on-going Covid-19 disaster in India. Second, aside from the potentially negative revenue impact from India, StanLn does not anticipate an increase in revenues overall until next year, despite the phantom 4% increase in Q1 lending quarter-on-quarter. Third, expenses rose faster than revenues during the quarter. We would not be surprised to see another costly restructuring announcement before year-end.To its credit, Standard Chartered’s expected credit loss reserve release is better substantiated than that undertaken by HSBC Holdings (HSBA LN).Nonetheless, management’s unchanged revenue expectations juxtaposed with inorganic regional growth opportunities creates a situation which may be unpleasant for credit investors. Given the double jeopardy facing StanLn’s capital buffer and near-term loss absorbing ability, we would prefer to position within less event sensitive securities, such as StanLn’s Tier 2 bonds.

Standard Chartered Q1 Results: Unsustainable and Event Risk Is Not Priced In

Executive Summary: <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> Q1 earnings release was one part theater, one part reality and in a large part more of the same. This may be a long and slow recovery and transformation for this institution. Time is not on its side from a debt rating perspective.With respect to reality, there is a glimmer of hope for revenues as HSBC reported an increase in the pipeline of loan applications.  As regards theater, HSBC’s loan loss reserve release appears to be largely signaling, rather than driven by an actual improvement in asset quality. Additional theater is provided in the way HSBC’s underlying profits are calculated.More of the same was seen in that HSBC cannot immediately escape its predicament of being a large conventional lender as opposed to a significant fee generating wealth and asset manager. This may be a long and slow recovery and transformation for this institution.Time is not on its side from a debt rating perspective. Moody’s review for a possible downgrade should be concluded before the end of Q2.  Notably, HSBC’s Additional Tier 1 (AT1) bonds are not at risk of a downgrade. They currently represent a safe harbor from downgrade risk and remain supported by a large buffer of capital. Most of these securities also trade at a meaningful discount, in spread and multiple terms, to the higher seniority Tier 2 securities.Concurrently, HSBC’s Tier 2 bonds trade extremely tight relative to the higher seniority Senior Unsecured bonds issued by HSBC Holdings.  For investors that cannot hold AT1 bonds, given the downgrade risk and the fact that there is little upside to be gained from owning HSBC’s Tier 2 bonds, our general preference would be to own HSBC’s holding company issued Senior Unsecured notes.

Executive Summary: HSBC Holdings' (HSBA LN) Q1 earnings release was one part theater, one part reality and in a large part more of the same. This may be a long and slow recovery and transformation for this institution. Time is not on its side from a debt rating perspective.With respect to reality, there is a glimmer of hope for revenues as HSBC reported an increase in the pipeline of loan applications.  As regards theater, HSBC’s loan loss reserve release appears to be largely signaling, rather than driven by an actual improvement in asset quality. Additional theater is provided in the way HSBC’s underlying profits are calculated.More of the same was seen in that HSBC cannot immediately escape its predicament of being a large conventional lender as opposed to a significant fee generating wealth and asset manager. This may be a long and slow recovery and transformation for this institution.Time is not on its side from a debt rating perspective. Moody’s review for a possible downgrade should be concluded before the end of Q2.  Notably, HSBC’s Additional Tier 1 (AT1) bonds are not at risk of a downgrade. They currently represent a safe harbor from downgrade risk and remain supported by a large buffer of capital. Most of these securities also trade at a meaningful discount, in spread and multiple terms, to the higher seniority Tier 2 securities.Concurrently, HSBC’s Tier 2 bonds trade extremely tight relative to the higher seniority Senior Unsecured bonds issued by HSBC Holdings.  For investors that cannot hold AT1 bonds, given the downgrade risk and the fact that there is little upside to be gained from owning HSBC’s Tier 2 bonds, our general preference would be to own HSBC’s holding company issued Senior Unsecured notes.

HSBC’s Q1 Results: One Part Theater and One Part Reality as We Move To a Downgrade

Executive Summary: US investment banking Q1 results set us up for an interesting European bank earnings season. After reserve releases, investment banking revenues were the second largest driver of net revenues as compared to the prior year.The upcoming set of European bank results may be as good as it gets for this year. As each bank may release reserves, investment banking specialization may be the differentiating factor in terms of revenue results.With US banks noting that their more macro-related trading activities were lower than in the prior year, we consider which European banks may report similar activity. We suspect that the French institutions, Société Générale in particular, could benefit most from their investment banking results provided their real economy activity continues to strengthen.

Executive Summary: US investment banking Q1 results set us up for an interesting European bank earnings season. After reserve releases, investment banking revenues were the second largest driver of net revenues as compared to the prior year.The upcoming set of European bank results may be as good as it gets for this year. As each bank may release reserves, investment banking specialization may be the differentiating factor in terms of revenue results.With US banks noting that their more macro-related trading activities were lower than in the prior year, we consider which European banks may report similar activity. We suspect that the French institutions, Société Générale in particular, could benefit most from their investment banking results provided their real economy activity continues to strengthen.

US Investment Bank Results and Upcoming European Bank Earnings

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.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

HSBC Holdings (HSBC US)

Barclays: Bail-In Debt Value Relative to HSBC

Either Barclays is a stronger credit than reflected in its rating or the melt-up phenomena taking place in the rates market is also applicable to...

Hank Calenti, CFA

Banco Santander: Undervalued AT1

Santander’s AT1 is undervalued. There is considerably more upside from these securities than at other globally diversified, and EM-centric,...

Hank Calenti, CFA

Standard Chartered Q1 Results: Unsustainable and Event Risk Is Not Priced In

Standard Chartered’s Q1 performance looked good optically, when seen from a sharp angle. Is this sustainable? We think not for 3 reasons and prefer...

Hank Calenti, CFA

HSBC’s Q1 Results: One Part Theater and One Part Reality as We Move To a Downgrade

HSBC’s earnings release was one part theater, one part reality and in a large part more of the same. This may be a long and slow recovery and...

Hank Calenti, CFA

US Investment Bank Results and Upcoming European Bank Earnings

Upcoming European bank results may be as good as it gets for this year. As each bank should release reserves, investment bank specialization may be...

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)