Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

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

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

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.

*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.

Bank of America – Not Exactly A Shining Result

United Kingdom

HSBC Holdings plc is a British universal bank and financial services group that provides banking and financial products and services worldwide. It offers retail, commercial and institutional banking, global banking and markets, wealth management, and private banking. The company was founded in 1865 and is headquartered in London, United Kingdom.

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HSBC (HSBC US)

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

Citigroup – Shifting Winds

CITIGROUP: Citi reported a QOQ 1Q21 bottom-line result increase of 89.0% due to provision reversals and principal transactions. Net new NPLs...

Thomas J. Monaco

Bank of America – Not Exactly A Shining Result

BANK OF AMERICA: BAC's QOQ 1Q21 bottom-line increased 45.2% driven by reserve releases and trading (not sustainable). Net new NPLs reversed course...

Thomas J. Monaco

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