Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Three macro events this week should drive near term returns. The outcomes may appear fiendish to over-extended investors, much in the same way that Krampus, the mythical counterparty to St. Nicholas, taunts naughty children.The events include the outcome of the Fed’s Federal Open Market Committee meeting, the final week for the US Congress to agree addition US federal stimulus bill this year and the almost final week towards a Brexit deal. Resulting US dollar strength could snuff out the recent rally in Asia and broader EM US$-denominated credit.Expectations that the Fed could alter its bond purchase program at its upcoming meeting has limited bearish sentiment in the long end of the Treasury market. Look for a decision to extend the weighted average maturity of its bond purchases. The failure of the Fed to deliver could embolden the market to break a psychological 1% barrier on the 10-year Treasury bond. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. However, this would raise the real effective rate and could be dollar negative. Asia and EM securities could react.Even if the Fed delivers what one-half of the market expects by altering its bond buying program, there are other extenuating circumstances that could result in a flight to quality, such as renewed lockdowns, the lack of a federal fiscal package and / or Brexit agreement. In a reversal of the recent trend of bad news = buy, the lack of federal stimulus would lower risk sentiment. We remain unconvinced that an actual agreement is the underlying goal of these negotiations. Control of the US Senate is at stake and the political posturing plays right into that race. Failure to reach an agreement would move all eyes to the Senate run-off races in January. Please see out last weekly, <a href="https://www.smartkarma.com/insights/bank-credit-weekly-new-equation-is-bad-news-buy" target="_blank" data-smartkarma-citation="insights:46058" rel="noopener">The New Equation is Bad News = Buy</a>, for more details. The continuing saga of Brexit negotiations may also change investor risk preferences. As we approach a no deal deadline, signaling to prepare for a ‘hard Brexit’ or ‘Australian-option’ trade agreement, depending on your Brexit stance, is already impacting rates. The lack of an agreement could revive flight to quality trades as we cross into the new year.Against this backdrop, Asia High Yield securities continued to outperform US HY, as in the last few weeks. Caa-rated US credits softened slightly, although by less than Ba and B rated securities. Risk remains over-bid and the consensus trade on rates, the dollar and trade is disconcerting. Regarding over-bid risk, please see <a href="https://www.smartkarma.com/insights/yes-bank-par-is-plenty-move-to-underweight" target="_blank" data-smartkarma-citation="insights:46120" rel="noopener">YES Bank: Par is Plenty- Move to Underweight</a>. As regards a trade to counter the over-consensus market, please see <a href="https://www.smartkarma.com/insights/societe-generale-at1-resolution-or-resilience-in-the-retail-restructuring-take-shorter-duration" target="_blank" data-smartkarma-citation="insights:46244" rel="noopener">Société Générale AT1: Resolution or Resilience in the Retail Restructuring? Take Shorter Duration</a>.Market Outlook: A strong start in Asia on the back of the US FDA approval of Pfizer’s vaccine may begin the week. However, the cognitive dissonance trade which ignores distribution and time extension risk may be overcome by a buy the rumor, sell the fact tactical trade since positive sentiment from vaccine news is already priced in. Event risk should take hold as the week progresses. With economic recovery increasingly priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction.

Three macro events this week should drive near term returns. The outcomes may appear fiendish to over-extended investors, much in the same way that Krampus, the mythical counterparty to St. Nicholas, taunts naughty children.The events include the outcome of the Fed’s Federal Open Market Committee meeting, the final week for the US Congress to agree addition US federal stimulus bill this year and the almost final week towards a Brexit deal. Resulting US dollar strength could snuff out the recent rally in Asia and broader EM US$-denominated credit.Expectations that the Fed could alter its bond purchase program at its upcoming meeting has limited bearish sentiment in the long end of the Treasury market. Look for a decision to extend the weighted average maturity of its bond purchases. The failure of the Fed to deliver could embolden the market to break a psychological 1% barrier on the 10-year Treasury bond. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. However, this would raise the real effective rate and could be dollar negative. Asia and EM securities could react.Even if the Fed delivers what one-half of the market expects by altering its bond buying program, there are other extenuating circumstances that could result in a flight to quality, such as renewed lockdowns, the lack of a federal fiscal package and / or Brexit agreement. In a reversal of the recent trend of bad news = buy, the lack of federal stimulus would lower risk sentiment. We remain unconvinced that an actual agreement is the underlying goal of these negotiations. Control of the US Senate is at stake and the political posturing plays right into that race. Failure to reach an agreement would move all eyes to the Senate run-off races in January. Please see out last weekly, The New Equation is Bad News = Buy, for more details. The continuing saga of Brexit negotiations may also change investor risk preferences. As we approach a no deal deadline, signaling to prepare for a ‘hard Brexit’ or ‘Australian-option’ trade agreement, depending on your Brexit stance, is already impacting rates. The lack of an agreement could revive flight to quality trades as we cross into the new year.Against this backdrop, Asia High Yield securities continued to outperform US HY, as in the last few weeks. Caa-rated US credits softened slightly, although by less than Ba and B rated securities. Risk remains over-bid and the consensus trade on rates, the dollar and trade is disconcerting. Regarding over-bid risk, please see YES Bank: Par is Plenty- Move to Underweight. As regards a trade to counter the over-consensus market, please see Société Générale AT1: Resolution or Resilience in the Retail Restructuring? Take Shorter Duration.Market Outlook: A strong start in Asia on the back of the US FDA approval of Pfizer’s vaccine may begin the week. However, the cognitive dissonance trade which ignores distribution and time extension risk may be overcome by a buy the rumor, sell the fact tactical trade since positive sentiment from vaccine news is already priced in. Event risk should take hold as the week progresses. With economic recovery increasingly priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction.

Bank Credit Weekly: Krampus Is Coming to Town: Fed, Stimulus & Brexit to Taunt Over-Eager Investors

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Indian mutual fund industry has assets of almost INR 5 trillion across Multi cap, Large Cap, Large and Mid Cap, Mid Cap and Small Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.In the upcoming recategorization in January 2021, we see 6 stocks moved from the mid cap segment to the large cap segment with an equal number of stocks moving the other way, and 12 stocks are expected to move from the small cap segment to the mid cap segment with the same number moving the other way. There are quite a few IPOs that will join the small cap list, with just 1 joining the large cap list and 1 joining the mid cap list.Historically, the stocks migrating upward to a higher market cap segment have outperformed stocks that migrate to a lower market cap segment over the 1 month and 2 month period post the publishing of the AMFI list. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

The Indian mutual fund industry has assets of almost INR 5 trillion across Multi cap, Large Cap, Large and Mid Cap, Mid Cap and Small Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.In the upcoming recategorization in January 2021, we see 6 stocks moved from the mid cap segment to the large cap segment with an equal number of stocks moving the other way, and 12 stocks are expected to move from the small cap segment to the mid cap segment with the same number moving the other way. There are quite a few IPOs that will join the small cap list, with just 1 joining the large cap list and 1 joining the mid cap list.Historically, the stocks migrating upward to a higher market cap segment have outperformed stocks that migrate to a lower market cap segment over the 1 month and 2 month period post the publishing of the AMFI list. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

India: AMFI Stock Categorization Changes to Drive Active Portfolio Churn

Risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan) during the month of November. In fact, only 4 securities widened in G-Spread terms out of the 100 bonds that we track in the region. Meanwhile, the largest widening was only 15 basis points (bps) month-on-month.India-headquartered bank bonds led in terms of spread tightening over November and dominate our top 10 list. Amongst the India-headquartered banks, several non-bank finance companies (NBFCs) led advances. Relative to year-end spread levels, there is limited upside remaining amongst the top 10 performers of November.In a positive sign, from a momentum perspective, the positive spread movement amongst India’s NBFCs was continuous throughout November. Coronavirus vaccine news, a Goldilocks US election outcome, and the Janet Yellen effect propelled riskier asset prices higher in most markets and India was no exception.   While the trend is your friend, ordinarily thin trading markets could meet concerns that economic recovery is fully priced, and profit-taking may ensue during December. In addition, there is the risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. Post-COVID-19, India’s operating environment starts from an already high level of non-performing assets and each bank’s loan loss predictive ability has significant room for improvement. The same could be said for the other outperforming bank bonds in our top 10 list.

Risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan) during the month of November. In fact, only 4 securities widened in G-Spread terms out of the 100 bonds that we track in the region. Meanwhile, the largest widening was only 15 basis points (bps) month-on-month.India-headquartered bank bonds led in terms of spread tightening over November and dominate our top 10 list. Amongst the India-headquartered banks, several non-bank finance companies (NBFCs) led advances. Relative to year-end spread levels, there is limited upside remaining amongst the top 10 performers of November.In a positive sign, from a momentum perspective, the positive spread movement amongst India’s NBFCs was continuous throughout November. Coronavirus vaccine news, a Goldilocks US election outcome, and the Janet Yellen effect propelled riskier asset prices higher in most markets and India was no exception.   While the trend is your friend, ordinarily thin trading markets could meet concerns that economic recovery is fully priced, and profit-taking may ensue during December. In addition, there is the risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. Post-COVID-19, India’s operating environment starts from an already high level of non-performing assets and each bank’s loan loss predictive ability has significant room for improvement. The same could be said for the other outperforming bank bonds in our top 10 list.

Bank Credit Compass: Asia’s November Performance and December Expectations

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

Thematic (Sector/Industry)

*Adding To The Confusion Again: Just when we thought Indian banking couldn’t get any muddier, the Reserve Bank of India (RBI) released its Report of the Internal Working Group (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks which convened on June 12, 2020; and*Proposed Changes: The IWG has proposed: a) a higher promoter stake cap of 26% (from 15% currently); b) harmonization of corporate structures to non-operative financial holding companies (NOFHC); c) large corporates can be given a banking license subject to conditions and checks; and d) large non-bank financial companies (NBFCs) with assets greater than INR 500 bn can be considered for a banking license.

*Adding To The Confusion Again: Just when we thought Indian banking couldn’t get any muddier, the Reserve Bank of India (RBI) released its Report of the Internal Working Group (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks which convened on June 12, 2020; and*Proposed Changes: The IWG has proposed: a) a higher promoter stake cap of 26% (from 15% currently); b) harmonization of corporate structures to non-operative financial holding companies (NOFHC); c) large corporates can be given a banking license subject to conditions and checks; and d) large non-bank financial companies (NBFCs) with assets greater than INR 500 bn can be considered for a banking license.

Reserve Bank of India – How Simple Becomes Really Complicated

* 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

India

Sammaan Capital Limited is a mortgage-focused non-banking financial company. The Company offers housing loans to salaried and self-employed individuals for construction, purchase, renovation, and reconstruction of houses, as well as business loans to MSMEs, self-employed individuals, and proprietorships for working capital or business expansion. Sammaan Capital operates in India.

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Sammaan Capital (SAMMAANC IN)

Bank Credit Weekly: Krampus Is Coming to Town: Fed, Stimulus & Brexit to Taunt Over-Eager Investors

3-macro event outcomes this week may taunt over-eager investors. US-$ strength could halt the recent rally in Asia and broader EM US$-denominated...

Hank Calenti, CFA

India: AMFI Stock Categorization Changes to Drive Active Portfolio Churn

The reclassification of stocks to large, mid and small cap will set off a churn in mutual fund portfolios where historically stocks migrating...

Brian Freitas

Bank Credit Compass: Asia’s November Performance and December Expectations

India-headquartered bank bonds led spread tightening over November. Ordinarily thin markets could meet concerns that economic recovery is fully...

Hank Calenti, CFA

Reserve Bank of India – How Simple Becomes Really Complicated

RESERVE BANK OF INDIA: New Just when we thought Indian banking couldn’t get any muddier, the Reserve Bank of India (RBI) released its Report of the...

Thomas J. Monaco

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

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