Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. <a href="https://www.smartkarma.com/entities/vietnam-prosperity-jsc-bank" target="_blank" data-smartkarma-citation="entities:26914:1" rel="noopener">Vietnam Prosperity Bank (VPB VN)</a> and <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance (IIFL IN)</a>, a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the <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> complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-move-to-overweight-the-capital-inefficient-securities-from-buy" target="_blank" data-smartkarma-citation="insights:45652" rel="noopener">Move to Overweight the Capital Inefficient Securities, from Buy</a> for more details. In addition, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank Public (BBL TB)</a> continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank (TMB TB)</a> widened 2bps. 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. Finally, amongst Asia-centric banks, certain <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. Vietnam Prosperity Bank (VPB VN) and IIFL Finance (IIFL IN), a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the Bank of East Asia (BNKEA) complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see Move to Overweight the Capital Inefficient Securities, from Buy for more details. In addition, Bangkok Bank Public (BBL TB) continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while TMB Bank (TMB TB) widened 2bps. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views. Finally, amongst Asia-centric banks, certain Standard Chartered (STAN LN) bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

Even though non-bank finance companies (NBFCs) dedicated to providing loans against gold ornaments are highly profitable and enjoy significant net interest margins (NIMs), stakeholders should be concerned about the vulnerability of their branches to robberies. The spate of robberies indicates that thieves are specifically targeting branches because they follow inadequate security protocols for the substantial gold ornaments they hold in custody for their customers. Examining the robberies reported in the media indicates that each of the targeted branches held gold valued at a minimum of Rs 100 mn (equivalent to atleast 25 kgs of gold ornaments). The fact that a robbery of a single branch can yield so much, and that they have poor security protocols in place, makes them an attractive target for thieves. The average metropolitan bank branches (excluding currency chests), in contrast, have superior security protocols, while normally holding far less amounts of cash in their branches (as excess cash is immediately transferred to currency chests).While the gold ornaments held in NBFC branches are insured, robberies are a law and order issue, especially when staff and members of the public are injured or killed during such robberies. If such robberies continue because NBFCs do not want to improve the security arrangements (for cost reasons), the police will be compelled to intervene and insist NBFCs invest in the necessary security protocols (strongrooms, armed guards, CCTVs being operational 24x7, technology) failing which the police will close branches to maintain law and order.In general, in the business of loans against gold, the credit, market and liquidity risks are taken care of by the nature of the commodity gold, and management therefore are to focus on operational risk management. The spate of robberies and the poor state of security protocols indicate that managements, for cost reasons, are ignoring these critical issues as they believe insurance will cover the risk. Stakeholders in NBFCs specialising in gold lending should be cognizant of the poor operational risk management, especially the poor security arrangements in the branches, which are attracting robberies. They must insist that these companies invest in the necessary protocols before the state decides to intervene.

Even though non-bank finance companies (NBFCs) dedicated to providing loans against gold ornaments are highly profitable and enjoy significant net interest margins (NIMs), stakeholders should be concerned about the vulnerability of their branches to robberies. The spate of robberies indicates that thieves are specifically targeting branches because they follow inadequate security protocols for the substantial gold ornaments they hold in custody for their customers. Examining the robberies reported in the media indicates that each of the targeted branches held gold valued at a minimum of Rs 100 mn (equivalent to atleast 25 kgs of gold ornaments). The fact that a robbery of a single branch can yield so much, and that they have poor security protocols in place, makes them an attractive target for thieves. The average metropolitan bank branches (excluding currency chests), in contrast, have superior security protocols, while normally holding far less amounts of cash in their branches (as excess cash is immediately transferred to currency chests).While the gold ornaments held in NBFC branches are insured, robberies are a law and order issue, especially when staff and members of the public are injured or killed during such robberies. If such robberies continue because NBFCs do not want to improve the security arrangements (for cost reasons), the police will be compelled to intervene and insist NBFCs invest in the necessary security protocols (strongrooms, armed guards, CCTVs being operational 24x7, technology) failing which the police will close branches to maintain law and order.In general, in the business of loans against gold, the credit, market and liquidity risks are taken care of by the nature of the commodity gold, and management therefore are to focus on operational risk management. The spate of robberies and the poor state of security protocols indicate that managements, for cost reasons, are ignoring these critical issues as they believe insurance will cover the risk. Stakeholders in NBFCs specialising in gold lending should be cognizant of the poor operational risk management, especially the poor security arrangements in the branches, which are attracting robberies. They must insist that these companies invest in the necessary protocols before the state decides to intervene.

Why Have Gold Loan NBFCs Become Low Hanging Fruit for Robbers?

Credit risk markets remained decoupled between the US and Asia as spreads on US Caa-rated entities continued to defy gravity. The risk-on wave continued to swell through US risk asses on additional positive vaccine news. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, spreads on the US Caa-rated complex tightened to inside Asia’s HY index for the first time since 2014. Is it time to sell the Caa bull market?  Treasury Secretary Mnuchin’s decision to cancel several underutilized emergency Fed programs at the end of the year may raise expectations for the Fed to expand its asset purchase program or target its purchases more directly along the Treasury curve at its December meeting. We are set-up for disappointment.  Against this background, Asia’s HY Additional Tier 1 underperformed Subordinated and Senior Unsecured securities as near-term global growth concerns outweighed vaccine progress. Most of the underperforming bond were issued over the last three months. This suggests these may have been issued at the top of the market, in spread terms. Amongst Additional Tier 1 bonds, Hong Kong-headquartered banks led advances. <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's (23 HK)</a> announcement that it would call its 5.5% coupon December-callable AT1 bond aided sentiment. We first recommended that investors overweight this security in mid-February within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-overweight-short-call-at1-on-refinancing-ability" target="_blank" data-smartkarma-citation="insights:36787" rel="noopener">Bank of East Asia: Overweight Short-Call AT1 on Refinancing Ability</a> and recently re-iterated this call within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Bank of East Asia: Buy the Inefficient Capital Securities</a>. Victory lap over.Concurrently, Turkish HY Senior Unsecured bank bonds again materially outperformed their global peers following delivery of a more orthodox monetary policy regime. Nonetheless, Turkish bank bonds continue to trade wide of similarly rated entities in other emerging markets.  Given the starting point for a potential Turkish bank bond rally, we anticipate a virus versus vaccine market immunity in Turkish-bank bonds returns over the near term.   Over US$13 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. Amongst higher-yield issued securities, the UK Co-operative Bank’s Caa1 rated bond makes India’s <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance's (IIFL IN)</a> US$-bond look cheap in comparison. However, unlike India where every bank rescue requires a liability moratorium, the Co-operative Bank resolution three years ago was not damaging to the financial system. India’s rescue of <a href="https://www.smartkarma.com/entities/lakshmi-vilas-bank-ltd" target="_blank" data-smartkarma-citation="entities:17552:1" rel="noopener">Lakshmi Vilas Bank (LVB IN)</a> this week is no exception. For our views on this please see: <a href="https://www.smartkarma.com/insights/lakshmi-vilas-bank-dbs-rescue-is-a-wasted-option" target="_blank" data-smartkarma-citation="insights:45471" rel="noopener">Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option</a>.US$-debt issuance should be slowed by the upcoming US holiday on Thursday. We could see a short-lived resurgence in early December and then drift sideways until heavy issuance re-emerges in January.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets.

Credit risk markets remained decoupled between the US and Asia as spreads on US Caa-rated entities continued to defy gravity. The risk-on wave continued to swell through US risk asses on additional positive vaccine news. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, spreads on the US Caa-rated complex tightened to inside Asia’s HY index for the first time since 2014. Is it time to sell the Caa bull market?  Treasury Secretary Mnuchin’s decision to cancel several underutilized emergency Fed programs at the end of the year may raise expectations for the Fed to expand its asset purchase program or target its purchases more directly along the Treasury curve at its December meeting. We are set-up for disappointment.  Against this background, Asia’s HY Additional Tier 1 underperformed Subordinated and Senior Unsecured securities as near-term global growth concerns outweighed vaccine progress. Most of the underperforming bond were issued over the last three months. This suggests these may have been issued at the top of the market, in spread terms. Amongst Additional Tier 1 bonds, Hong Kong-headquartered banks led advances. Bank of East Asia's (23 HK) announcement that it would call its 5.5% coupon December-callable AT1 bond aided sentiment. We first recommended that investors overweight this security in mid-February within Bank of East Asia: Overweight Short-Call AT1 on Refinancing Ability and recently re-iterated this call within Bank of East Asia: Buy the Inefficient Capital Securities. Victory lap over.Concurrently, Turkish HY Senior Unsecured bank bonds again materially outperformed their global peers following delivery of a more orthodox monetary policy regime. Nonetheless, Turkish bank bonds continue to trade wide of similarly rated entities in other emerging markets.  Given the starting point for a potential Turkish bank bond rally, we anticipate a virus versus vaccine market immunity in Turkish-bank bonds returns over the near term.   Over US$13 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. Amongst higher-yield issued securities, the UK Co-operative Bank’s Caa1 rated bond makes India’s IIFL Finance's (IIFL IN) US$-bond look cheap in comparison. However, unlike India where every bank rescue requires a liability moratorium, the Co-operative Bank resolution three years ago was not damaging to the financial system. India’s rescue of Lakshmi Vilas Bank (LVB IN) this week is no exception. For our views on this please see: Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option.US$-debt issuance should be slowed by the upcoming US holiday on Thursday. We could see a short-lived resurgence in early December and then drift sideways until heavy issuance re-emerges in January.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets.

Bank Credit Weekly: Virus Vs. Vaccine: Time to Sell the Caa-Bull?

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

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme.

* RBI Failure To Think Through Moratorium Leads To Continued Uncertainty for India: On September 3, 2020, the Supreme Court of India held a hearing on interest rate waivers for loans under moratorium granted by the Reserve Bank of India (RBI). On September 10th, the Supreme Court clarified: a) the matter under discussion is related to interest on interest payments and not on the interest payments themselves; and b) that banks should not classify loans as NPL for another two month period, if they were not classified NPLs on August 31st.; and   *Dissatisfied Borrowers: The Supreme Court has now disposed of the 'interest on interest waiver' related petitions where borrowers were satisfied with the interest on interest waiver measures implemented by the RBI and the financial sector. However, there remain other borrowers (ie. power companies) who aren’t satisfied and have proposed further modifications to the RBI’s restructuring scheme. 

Reserve Bank of India – The Fun Never Stops

Lakshmi Iyer, CFA

We reiterate our buy recommendation on bonds issued by <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Holdings (IIFL IN)</a> (USD bonds due '23). While spreads have tightened following the release of 2Q FY'21 results, we feel there is potential for further tightening. The upcoming sale of part of the real estate portfolio could also prove supportive.<div class="content-highlight">Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.</div>

We reiterate our buy recommendation on bonds issued by IIFL Holdings (IIFL IN) (USD bonds due '23). While spreads have tightened following the release of 2Q FY'21 results, we feel there is potential for further tightening. The upcoming sale of part of the real estate portfolio could also prove supportive.Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

India

IIFL Holdings Limited is a financial services company and is engaged, through its subsidiaries, in the businesses of  non-banking finance, housing finance, wealth management, asset management, institutional & retail brokerage and investment banking. The Company is also a distributor of insurance and other financial products.

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IIFL Holdings (IIFL IN)

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

The risk-wave caught a bid in Asia HY while positive momentum in US Caa-rated credits slowed. We are set-up for buy-the-rumor, sell-the-fact profit...

Hank Calenti, CFA

Why Have Gold Loan NBFCs Become Low Hanging Fruit for Robbers?

The spate of robberies indicates that thieves are specifically targeting branches because they follow inadequate security protocols for the gold...

Hemindra Hazari

Bank Credit Weekly: Virus Vs. Vaccine: Time to Sell the Caa-Bull?

Is it time to sell the Caa-bull market? Some AT1 bonds seem to be at a market top. We are set-up for disappointment. Nonetheless, we anticipate...

Hank Calenti, CFA

Reserve Bank of India – The Fun Never Stops

RESERVE BANK OF INDIA: Certain Borrowers Are Dis-Satisfied With "Interest On Interest Waiver" And Proposed Additional Modifications To RBI...

Thomas J. Monaco

IIFL Finance Ltd. - Reiterate Buy

IIFL bonds rose after it reported reported decent numbers for 2Q FY21. We foresee further spread tightening. The upcoming sale of the real estate...

Lakshmi Iyer, CFA

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