Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Equity Bottom-Up

There are positives signs of real transformation at <a href="https://www.smartkarma.com/entities/security-bank-corp" target="_blank" data-smartkarma-citation="entities:3929:1" rel="noopener">Security Bank (SECB PM)</a> that can lead to far higher profit in coming quarters. At present the bank’s improvements in several areas are concealed by high credit costs, which will likely follow the pattern of most banks globally: a radical decline after being grossly inflated. Given the valuation gap for SECB and Philippine peer banks, we believe its transformation is still not fully appreciated.

There are positives signs of real transformation at Security Bank (SECB PM) that can lead to far higher profit in coming quarters. At present the bank’s improvements in several areas are concealed by high credit costs, which will likely follow the pattern of most banks globally: a radical decline after being grossly inflated. Given the valuation gap for SECB and Philippine peer banks, we believe its transformation is still not fully appreciated.

Security Bank – Positive Transformation

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/industrial-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:19515:1" rel="noopener">Industrial Bank Co Ltd A (601166 CH)</a> and Kookmin Bank (<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">KB Financial Group (105560 KS))</a> were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see <a href="https://www.smartkarma.com/insights/kotak-indusind-happy-indusind-bondholders-move-to-overweight" target="_blank" data-smartkarma-citation="insights:44542" rel="noopener">Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight</a> for more details. On Friday, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the Industrial Bank Co Ltd A (601166 CH) and Kookmin Bank (KB Financial Group (105560 KS)) were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that Kotak Mahindra Bank (KMB IN) is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight for more details. On Friday, Indusind Bank (IIB IN) reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

<a href="https://www.smartkarma.com/entities/bank-rakyat-indonesia-persero" target="_blank" data-smartkarma-citation="entities:484:1" rel="noopener">Bank Rakyat Indonesia Persero (BBRI IJ)</a> could price a potential five-year senior unsecured US$-bond at 200 basis points over similar maturity US Treasuries (T+200), based on current spread levels at which peer banks trade and relative to where Republic of Indonesia US$-bonds trade.  In early August, Indonesia’s Deputy Minister for State-Owned Enterprise stated that Bank Rakyat could issue up to US$1 billion in a global bond offering during the third quarter, according to a Bloomberg report. The Deputy Minister suggested that the company secure dollar liquidity now as pricing seems reasonable. We could not agree more.Despite considerable margin compression in recent results from Covid-19 impacts and a restructuring portfolio at over 21% of total loans, Bank Rakyat’s US$ bonds continue to be well bid in the market. Furthermore, in May, <a href="https://www.smartkarma.com/entities/bank-mandiri-persero-tbk-pt" target="_blank" data-smartkarma-citation="entities:441:1" rel="noopener">Bank Mandiri Persero (BMRI IJ)</a> issued a five year note at T+455bps. Bank Mandiri’s bond now trades at T+215bps. Investors have enjoyed 10 price points of performance in the Mandiri bond over the last 3+ months. We are not optimistic on obtaining the same level of performance from a Bank Rakyat bond in the current market. As such, with slightly more than one month to the end of Q3, we ponder the potential pricing on Rakyat’s promised new issue and consider if there could be any upside left for investors. The final price may prove attractive considering that the bank is 58% owned by the Republic of Indonesia. Even if the bond is priced at T+200bps, there may be as much as 50bps of upside overtime. We detail our fair value expectations within

Bank Rakyat Indonesia Persero (BBRI IJ) could price a potential five-year senior unsecured US$-bond at 200 basis points over similar maturity US Treasuries (T+200), based on current spread levels at which peer banks trade and relative to where Republic of Indonesia US$-bonds trade.  In early August, Indonesia’s Deputy Minister for State-Owned Enterprise stated that Bank Rakyat could issue up to US$1 billion in a global bond offering during the third quarter, according to a Bloomberg report. The Deputy Minister suggested that the company secure dollar liquidity now as pricing seems reasonable. We could not agree more.Despite considerable margin compression in recent results from Covid-19 impacts and a restructuring portfolio at over 21% of total loans, Bank Rakyat’s US$ bonds continue to be well bid in the market. Furthermore, in May, Bank Mandiri Persero (BMRI IJ) issued a five year note at T+455bps. Bank Mandiri’s bond now trades at T+215bps. Investors have enjoyed 10 price points of performance in the Mandiri bond over the last 3+ months. We are not optimistic on obtaining the same level of performance from a Bank Rakyat bond in the current market. As such, with slightly more than one month to the end of Q3, we ponder the potential pricing on Rakyat’s promised new issue and consider if there could be any upside left for investors. The final price may prove attractive considering that the bank is 58% owned by the Republic of Indonesia. Even if the bond is priced at T+200bps, there may be as much as 50bps of upside overtime. We detail our fair value expectations within

Bank Rakyat Indonesia: Pondering Pricing on a Promised New Issue

Debt Capital Markets

Rizal Commercial Banking / Debt Capital Markets

Caveat emptor. That is, let the buyer beware.  <a href="https://www.smartkarma.com/entities/rizal-commercial-banking-corp" target="_blank" data-smartkarma-citation="entities:23143:1" rel="noopener">Rizal Commercial Bank's (RCB PM)</a> Additional Tier 1 (AT1) bond should be un-investable for many. This is unfortunate as this issuance represents the Philippine’s inaugural AT1 bond, both in local and hard currency.We are extremely disappointed by the quantity and quality of disclosure by the firm in advance of its inaugural AT1 bond. It may have been poorly advised. The known unknowns remain unanswered while the second quarter financial report brings more questions than answers. For more on this, please see <a href="https://www.smartkarma.com/insights/rizal-commercial-bank-the-known-unknowns-in-advance-of-its-at1-issuance" target="_blank" data-smartkarma-citation="insights:41425" rel="noopener">Rizal Commercial Bank: The Known Unknowns in Advance of Its AT1 Issuance</a>.Reliance on the Ba3 Moody’s rating requires a large leap of faith. There is no publicly available presentation regarding Q2 results, nor can we find a prospectus for the inaugural AT1 bond on the firm’s website. However, a list of cars and properties for sale is readily available. Material financial information is either mistakenly missing or purposefully not provided. For more on this shortfall, please see <a href="https://www.smartkarma.com/insights/philippine-bank-asset-quality-reported-versus-reality-and-relative-value" target="_blank" data-smartkarma-citation="insights:41710" rel="noopener">Philippine Bank Asset Quality: Reported Versus Reality and Relative Value</a> and also <a href="https://www.smartkarma.com/insights/philippine-banks-a-related-party" target="_blank" data-smartkarma-citation="insights:41194" rel="noopener">Philippine Banks: A Related Party</a>. There may be no Regulation FD (fair disclosure) in the Philippines, but investors should be treated better. The AT1 security may be listed on the Singapore Stock Exchange. We are hopeful that this leads to an improved disclosure regime at Rizal.Priced with a 6.5% coupon, which equates to T+623.6 basis points, the bond is priced tight relative to institutions that produce more valuable financial information. It is also tight given a potentially low Common Equity Tier 1 capital buffer to a coupon suspension. In addition, from what we can piece together from half-year and year-end financials, there is little to no forward earnings momentum and capital appears inadequate for the institution’s risk profile. Taken together, we expect Rizal’s Senior Unsecured bonds to perform due to the AT1 bond issuance, rather than the AT1 note itself.Since it is not possible to fully assess the performance of this institution, from a credit perspective, on a quarterly or semi-annual basis, we believe that if you own this AT1 bond either you have access to privileged information or you do not know what you own. Caveat emptor.

Caveat emptor. That is, let the buyer beware.  Rizal Commercial Bank's (RCB PM) Additional Tier 1 (AT1) bond should be un-investable for many. This is unfortunate as this issuance represents the Philippine’s inaugural AT1 bond, both in local and hard currency.We are extremely disappointed by the quantity and quality of disclosure by the firm in advance of its inaugural AT1 bond. It may have been poorly advised. The known unknowns remain unanswered while the second quarter financial report brings more questions than answers. For more on this, please see Rizal Commercial Bank: The Known Unknowns in Advance of Its AT1 Issuance.Reliance on the Ba3 Moody’s rating requires a large leap of faith. There is no publicly available presentation regarding Q2 results, nor can we find a prospectus for the inaugural AT1 bond on the firm’s website. However, a list of cars and properties for sale is readily available. Material financial information is either mistakenly missing or purposefully not provided. For more on this shortfall, please see Philippine Bank Asset Quality: Reported Versus Reality and Relative Value and also Philippine Banks: A Related Party. There may be no Regulation FD (fair disclosure) in the Philippines, but investors should be treated better. The AT1 security may be listed on the Singapore Stock Exchange. We are hopeful that this leads to an improved disclosure regime at Rizal.Priced with a 6.5% coupon, which equates to T+623.6 basis points, the bond is priced tight relative to institutions that produce more valuable financial information. It is also tight given a potentially low Common Equity Tier 1 capital buffer to a coupon suspension. In addition, from what we can piece together from half-year and year-end financials, there is little to no forward earnings momentum and capital appears inadequate for the institution’s risk profile. Taken together, we expect Rizal’s Senior Unsecured bonds to perform due to the AT1 bond issuance, rather than the AT1 note itself.Since it is not possible to fully assess the performance of this institution, from a credit perspective, on a quarterly or semi-annual basis, we believe that if you own this AT1 bond either you have access to privileged information or you do not know what you own. Caveat emptor.

Rizal Commercial Bank’s Inaugural AT1 Bond: Caveat Emptor

<a href="https://www.smartkarma.com/entities/rizal-commercial-banking-corp" target="_blank" data-smartkarma-citation="entities:23143:1" rel="noopener">Rizal Commercial Banking (RCBPM)</a> and <a href="https://www.smartkarma.com/entities/unionbank-of-the-philippines" target="_blank" data-smartkarma-citation="entities:23192:1" rel="noopener">Union Bank of the Philippines (UBPPM)</a> present their respective non-performing loan (NPL) ratios net of allowance for losses. Although permitted by Philippine Central Bank regulations, this greatly reduces the resulting ratio and makes comparisons with other global banks misleading. Unfortunately, the ratio is then republished, net of allowances, by some data providers.From our perspective, the higher the level of NPLs relative to Common Equity Tier1 capital and loan loss reserves as an economic contraction begins, the greater the greater the reliance on future earnings for loss absorption. All things equal, the higher the reliance of future earnings capacity, the lower the likelihood of de-risking in the near term as the firm attempts to grow-out of its problem. As such, we undertook a thorough analysis of reported loan impairment amounts to get a more complete picture of Philippine bank asset quality and assess if reality is priced in the bond market.As presented by the bank, Rizal appears to have one of the lowest NPL ratios amongst Philippine banks. Adjusted and compared relative to our loss absorption metric, Rizal has the lowest asset quality. Union Bank of the Philippines and <a href="https://www.smartkarma.com/entities/philippine-national-bank" target="_blank" data-smartkarma-citation="entities:233:1" rel="noopener">Philippine National Bank (PNBPM)</a> are not far behind.  <a href="https://www.smartkarma.com/entities/security-bank-corp" target="_blank" data-smartkarma-citation="entities:3929:1" rel="noopener">Security Bank (SECBPM)</a> reports the best asset quality relative to its loss absorption ability.Nonetheless, Rizal Bank’s senior unsecured spreads appear to price-in its asset quality relative to peers; however, Union Bank’s and Security Bank’s spreads do not.

Rizal Commercial Banking (RCBPM) and Union Bank of the Philippines (UBPPM) present their respective non-performing loan (NPL) ratios net of allowance for losses. Although permitted by Philippine Central Bank regulations, this greatly reduces the resulting ratio and makes comparisons with other global banks misleading. Unfortunately, the ratio is then republished, net of allowances, by some data providers.From our perspective, the higher the level of NPLs relative to Common Equity Tier1 capital and loan loss reserves as an economic contraction begins, the greater the greater the reliance on future earnings for loss absorption. All things equal, the higher the reliance of future earnings capacity, the lower the likelihood of de-risking in the near term as the firm attempts to grow-out of its problem. As such, we undertook a thorough analysis of reported loan impairment amounts to get a more complete picture of Philippine bank asset quality and assess if reality is priced in the bond market.As presented by the bank, Rizal appears to have one of the lowest NPL ratios amongst Philippine banks. Adjusted and compared relative to our loss absorption metric, Rizal has the lowest asset quality. Union Bank of the Philippines and Philippine National Bank (PNBPM) are not far behind.  Security Bank (SECBPM) reports the best asset quality relative to its loss absorption ability.Nonetheless, Rizal Bank’s senior unsecured spreads appear to price-in its asset quality relative to peers; however, Union Bank’s and Security Bank’s spreads do not.

Philippine Bank Asset Quality: Reported Versus Reality and Relative Value

Philippines

Security Bank Corporation is one of the Philippines' leading universal banks, offering a comprehensive suite of financial products and services through its core businesses: Retail Banking, Business (MSME) Banking, Wholesale (Corporate, Commercial, and Investment) Banking, and Financial Markets. Its offerings include deposits, lending, transaction banking, treasury, investment banking, wealth management, and foreign exchange. The company is headquartered in Makati, Philippines, and was established on June 18, 1951.

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

Security Bank (SECB PM)

Security Bank – Positive Transformation

There are positives signs of real transformation at Security Bank (SECB PM) that can lead to far higher profit in coming quarters.

Daniel Tabbush

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market...

Hank Calenti, CFA

Bank Rakyat Indonesia: Pondering Pricing on a Promised New Issue

Bank Rakyat Indonesia Persero (BBRI IJ) could price a potential five-year senior unsecured US$-bond at 200 basis points over similar maturity US...

Hank Calenti, CFA

Rizal Commercial Bank’s Inaugural AT1 Bond: Caveat Emptor

Caveat emptor. That is, let the buyer beware. Rizal Commercial Bank's (RCB PM) Additional Tier 1 (AT1) bond should be un-investable for many. This...

Hank Calenti, CFA

Philippine Bank Asset Quality: Reported Versus Reality and Relative Value

Rizal Commercial Banking (RCBPM) and Union Bank of the Philippines (UBPPM) present their respective non-performing loan (NPL) ratios net of...

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)