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.

Equity Bottom-Up

<ul>
<li>
<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> delivered an encouraging set of results, driven primarily by lower expected credit losses and a very healthy core capital ratio</li>
<li>In addition, there was positive progress in the European and US restructuring, and in the group’s cost reduction programme</li>
<li>Updates on the strategic review of HSBC France retail and the US operations will be provided by management in February 2021</li>
<li>On the negative side, there was Asian interest margin erosion in the quarter due largely to the lower HIBOR, HSBC MENA loss deepened and the group’s 3Q20 cost of risk may be unsustainably low</li>
<li>HSBC Mexico offers some constructive read across for <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a> 3Q20 results on cost of risk and also on revenues</li>
<li>HSBC has a very strong and liquid balance sheet, and has contained credit delinquency while maintaining NPL coverage</li>
<li>We are cautiously optimistic that medium term returns will exceed consensus expectations, on the back of management’s non-core business restructurings and cost attrition supported by growth in fee generating business in Asia</li>
<li>Risks to our view include worse than expected credit quality, intensifying competition in Asia putting pressure on fees and loan margins and slower than expected execution on restructurings</li>
</ul>



HSBC Holdings (HSBA LN) delivered an encouraging set of results, driven primarily by lower expected credit losses and a very healthy core capital ratio
In addition, there was positive progress in the European and US restructuring, and in the group’s cost reduction programme
Updates on the strategic review of HSBC France retail and the US operations will be provided by management in February 2021
On the negative side, there was Asian interest margin erosion in the quarter due largely to the lower HIBOR, HSBC MENA loss deepened and the group’s 3Q20 cost of risk may be unsustainably low
HSBC Mexico offers some constructive read across for Grupo Financiero Banorte-O (GFNORTEO MF) 3Q20 results on cost of risk and also on revenues
HSBC has a very strong and liquid balance sheet, and has contained credit delinquency while maintaining NPL coverage
We are cautiously optimistic that medium term returns will exceed consensus expectations, on the back of management’s non-core business restructurings and cost attrition supported by growth in fee generating business in Asia
Risks to our view include worse than expected credit quality, intensifying competition in Asia putting pressure on fees and loan margins and slower than expected execution on restructurings


HSBC (HSBA LN): Signs of Progress, Within a Mixed Set of 3Q20 Results

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

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

*Don’t Be Fooled: Citigroup (C.US) [Citi] reported 3Q20 earnings of USD 3.2 bn (EPS of USD 1.40) – increasing USD 1.9 bn (145.4%) on a linked quarter basis and coming in well head of consensus of USD 0.89 per share. Core operating results were even more impressive at Citi, improving USD 2.3 bn or 3.6x linked quarter. Citi cut its loss provisioning effort by USD 5.6 bn (71.4%) during the period despite net new NPLs remaining on an aggressive upswing;*Getting Squeezed From Every Angle: Citi’s operating revenues declined driven by both the decline in principal transactions revenue of USD 1.6 bn (39.7%) and NIM pressures. Expenses were problematic for Citi as well, increasing USD 589 mn (5.7%) over the same period and pushed its C&amp;I ratio higher by 10.1% to 64.4%; and  *Consent Order: On October 7, 2020, Citi announced a Consent Order with the Federal Reserve Bank of New York  and the Office of the Comptroller to take action to improve its risk management, data governance, and internal controls. There was also a USD 400 mn penalty.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Asia’s Additional Tier 1 bonds underperformed as investors shifted into High Yield and X-over rated Senior Unsecured notes. <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group's (3333 HK)</a> attempts to restore investor confidence disappointed and negatively impacted risk sentiment. China’s US$6 billion in issuance also likely absorbed excess US$ liquidity, despite the low yields on offer.   US high yield markets continued to outperform Asia’s, and the relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. Asia’s recent index widening appears to be Evergrande driven and a reduction in this company’s financial distress could have a materially positive impact on Asia’s HY index.In rate markets, US Treasury curve steepening paused as investors digested negative stimulus, vaccine, and Covid-19 news in Europe. US Treasury Secretary Mnuchin affirmed market sentiment that a stimulus package was unlikely to be agreed before the November 3 election. The reaction was limited by expectations that a stimulus agreement will be agreed at some point before the end of the winter. Nonetheless, short-term interest rate futures fell slightly as expectations of increased near-term monetary accommodation combined with limited near-term stimulus growth to lower rising rate expectations.In US equity markets, November futures on the Chicago Board of Options Exchange Volatility Index (VIX) were unchanged week-on-week as election result outcomes continued to point to a less contentious result than anticipated a few weeks ago. Meanwhile the spot VIX Index rose 2 index points on slightly higher perceived downside risks from rising Coronavirus cases in Europe as well as setbacks in stimulus and vaccine developments.Emerging market capital inflows were essentially unchanged during the week as US dollar safe-haven strength returned to the market on weaker economic expectations in Europe and as Brexit negotiations continued to disappoint. 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. More immediately, the Evergrande situation, Brexit negotiation uncertainty and Coronavirus resurgence may offset dollar weakness in safe-haven dollar flight. This may limit EM inflows.Financial institutions issued over US$16 billion in USD and Euros. Amongst Asia-headquartered banks, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> issued an Additional Tier 1 bond while the <a href="https://www.smartkarma.com/entities/agricultural-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1120:1" rel="noopener">Agricultural Bank of China (1288 HK)</a>, <a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank of China Ltd (H) (3988 HK)</a>, <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Bank (1988 HK)</a>, and <a href="https://www.smartkarma.com/entities/unionbank-of-the-philippines" target="_blank" data-smartkarma-citation="entities:23192:1" rel="noopener">UnionBank of the Philippines (UBP PM)</a> brought Senior Unsecured bonds of various maturities. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-s-new-at1-likely-coupon-and-curve-impact" target="_blank" data-smartkarma-citation="insights:44112" rel="noopener">Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact</a> for our pre-issuance valuation thoughts on BNKEA's new AT1 bond.  Concurrently, China saw interest of over US$27 billion for its bonds. <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> was left off the list of banks arranging China’s sovereign dollar debt sale for the first time since the nation returned with big annual deals in 2017, according to Bloomberg.Market Outlook Time to separate the signals from the noise for bank investors. 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. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Asia’s Additional Tier 1 bonds underperformed as investors shifted into High Yield and X-over rated Senior Unsecured notes. China Evergrande Group's (3333 HK) attempts to restore investor confidence disappointed and negatively impacted risk sentiment. China’s US$6 billion in issuance also likely absorbed excess US$ liquidity, despite the low yields on offer.   US high yield markets continued to outperform Asia’s, and the relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. Asia’s recent index widening appears to be Evergrande driven and a reduction in this company’s financial distress could have a materially positive impact on Asia’s HY index.In rate markets, US Treasury curve steepening paused as investors digested negative stimulus, vaccine, and Covid-19 news in Europe. US Treasury Secretary Mnuchin affirmed market sentiment that a stimulus package was unlikely to be agreed before the November 3 election. The reaction was limited by expectations that a stimulus agreement will be agreed at some point before the end of the winter. Nonetheless, short-term interest rate futures fell slightly as expectations of increased near-term monetary accommodation combined with limited near-term stimulus growth to lower rising rate expectations.In US equity markets, November futures on the Chicago Board of Options Exchange Volatility Index (VIX) were unchanged week-on-week as election result outcomes continued to point to a less contentious result than anticipated a few weeks ago. Meanwhile the spot VIX Index rose 2 index points on slightly higher perceived downside risks from rising Coronavirus cases in Europe as well as setbacks in stimulus and vaccine developments.Emerging market capital inflows were essentially unchanged during the week as US dollar safe-haven strength returned to the market on weaker economic expectations in Europe and as Brexit negotiations continued to disappoint. 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. More immediately, the Evergrande situation, Brexit negotiation uncertainty and Coronavirus resurgence may offset dollar weakness in safe-haven dollar flight. This may limit EM inflows.Financial institutions issued over US$16 billion in USD and Euros. Amongst Asia-headquartered banks, Bank of East Asia (BNKEA) issued an Additional Tier 1 bond while the Agricultural Bank of China (1288 HK), Bank of China Ltd (H) (3988 HK), China Minsheng Bank (1988 HK), and UnionBank of the Philippines (UBP PM) brought Senior Unsecured bonds of various maturities. Please see Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact for our pre-issuance valuation thoughts on BNKEA's new AT1 bond.  Concurrently, China saw interest of over US$27 billion for its bonds. HSBC Holdings (HSBA LN) was left off the list of banks arranging China’s sovereign dollar debt sale for the first time since the nation returned with big annual deals in 2017, according to Bloomberg.Market Outlook Time to separate the signals from the noise for bank investors. 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. Eventual reflation is bank credit and equity positive, getting to reflation is not.

Bank Credit Weekly: Risk Pause as China Evergrande Impacts Asia Sentiment

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

JP Morgan & Co. – Good Credit Omen For US and Global Banks

Dollar strengthening, continued equity market weakness and the panoply of Fed speakers crying for more fiscal stimulus did not help Asian or US HY credit sentiment. Against this backdrop, Asia’s HY index gapped wider on Friday while the US HY index steadily weakened throughout the week. Investors may see more attractive valuations following this secondary market selloff.In rate markets, the US Treasury curve flattened on supply technicals and risk-off momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may try to pass another stimulus bill was met incredulity that this could be accomplished while a Supreme Court nominee is vetted.The Bloomberg index of emerging market capital inflows finished the materially lower as the US dollar strengthened in a flight to safety trade. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.   Despite the softer tone in global risk sentiment, Asia bank credit was unchanged to slightly tighter in spread terms. Additional Tier 1 bonds outperformed other asset classes. This result is at odds with sentiment in other markets and we are not convinced that it is sustainable. Concurrently, despite a poor start to the week in bank debt capital markets, over US$8billion was issued by banks in USD and Euros in the form of Senior Unsecured and Tier II bonds. This follows from over US$54 billion in bank bonds issued over the prior four weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis.Amongst Asia-centric banks, <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:714:1" rel="noopener">China Merchants Bank A (600036 CH)</a>, CDB Leasing and <a href="https://www.smartkarma.com/entities/china-huarong-asset-management" target="_blank" data-smartkarma-citation="entities:968:1" rel="noopener">China Huarong Asset Management (2799 HK)</a> brought US$ bonds during the week. Meanwhile three banks and two countries announced mandates for new debt issuance in the near term. Over upcoming week, the pace of supply likely to slow in Asia because of China’s Golden Week holiday starting Oct. 1. At the same time, spreads in Asia are unlikely to move with conviction until this festival is over. Notably, <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> issued a new note at a similar structure and risk layer as was issued 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> last week; however, BNP’s bond was issued 10 basis points (bps) tighter while HSBC’s bond widened 27bps during the week.  Market Outlook Aggregate demand remains structurally weak. This realization is offsetting the unrealistically high optimism which followed from the Fed’s change in inflation policy stance. We may now have a period of Fed optimism unwinding combined with heightened concerns on the economic outlook post-US election. 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. This weeks’ confluence of risk-off indicators is a reminder that investors flee to the US dollar in times of heightened uncertainty, to the detriment of EM assets.  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.

Dollar strengthening, continued equity market weakness and the panoply of Fed speakers crying for more fiscal stimulus did not help Asian or US HY credit sentiment. Against this backdrop, Asia’s HY index gapped wider on Friday while the US HY index steadily weakened throughout the week. Investors may see more attractive valuations following this secondary market selloff.In rate markets, the US Treasury curve flattened on supply technicals and risk-off momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may try to pass another stimulus bill was met incredulity that this could be accomplished while a Supreme Court nominee is vetted.The Bloomberg index of emerging market capital inflows finished the materially lower as the US dollar strengthened in a flight to safety trade. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.   Despite the softer tone in global risk sentiment, Asia bank credit was unchanged to slightly tighter in spread terms. Additional Tier 1 bonds outperformed other asset classes. This result is at odds with sentiment in other markets and we are not convinced that it is sustainable. Concurrently, despite a poor start to the week in bank debt capital markets, over US$8billion was issued by banks in USD and Euros in the form of Senior Unsecured and Tier II bonds. This follows from over US$54 billion in bank bonds issued over the prior four weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis.Amongst Asia-centric banks, China Merchants Bank A (600036 CH), CDB Leasing and China Huarong Asset Management (2799 HK) brought US$ bonds during the week. Meanwhile three banks and two countries announced mandates for new debt issuance in the near term. Over upcoming week, the pace of supply likely to slow in Asia because of China’s Golden Week holiday starting Oct. 1. At the same time, spreads in Asia are unlikely to move with conviction until this festival is over. Notably, BNP Paribas' (BNP FP) issued a new note at a similar structure and risk layer as was issued by HSBC Holdings (HSBA LN) last week; however, BNP’s bond was issued 10 basis points (bps) tighter while HSBC’s bond widened 27bps during the week.  Market Outlook Aggregate demand remains structurally weak. This realization is offsetting the unrealistically high optimism which followed from the Fed’s change in inflation policy stance. We may now have a period of Fed optimism unwinding combined with heightened concerns on the economic outlook post-US election. 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. This weeks’ confluence of risk-off indicators is a reminder that investors flee to the US dollar in times of heightened uncertainty, to the detriment of EM assets.  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: Return of Risk-Off, Save for Asia Bank Credit

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)

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Bank Credit Weekly: Return of Risk-Off, Save for Asia Bank Credit

Dollar strengthening, continued equity market weakness and the panoply of Fed speakers crying for more fiscal stimulus did not help Asian or US HY...

Hank Calenti, CFA

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