Amareos

Ryan Shea

Thematic (Sector/Industry)

Europe’s banking sector is back in the spotlight – and, once again, it is for less than positive reasons. Unlike earlier episodes, however, the focus is not on the periphery of the region but its heartland, specifically Deutsche Bank (DB).  The catalyst for the sell-off in DB’s share price, which has slumped to multi-decade lows, was news that the US Justice Department intends to fine the bank USD 14bn for alleged misspelling of mortgage-backed securities.However, examining trends in crowd-sourced sentiment indicators it is clear that concerns about DB are hardly new and certainly pre-date the announcement of the fine. Both Stress and Fear towards DB have been in an uptrend since May 2015 and Sentiment and Optimism in negative territory since July last year (when DB’s share price was trading three times higher than its current market price).These crowd sentiment trends matter because commercial banks are different from almost any other type of private company in one very important respect. For a bank, even one the size of DB, confidence its greatest and most critical asset. And, just like trust, confidence is nebulous, fickle and asymmetric; that is to say, hard to acquire but quickly lost.As a result, banking sector crises tend to be highly non-linear. A non-linearity that stems from the fact that behaviour at such times is dominated by psychology, something the crowd-sourced sentiment indicators we track at Amareos are ideally suited to monitor.

Europe’s banking sector is back in the spotlight – and, once again, it is for less than positive reasons. Unlike earlier episodes, however, the focus is not on the periphery of the region but its heartland, specifically Deutsche Bank (DB).  The catalyst for the sell-off in DB’s share price, which has slumped to multi-decade lows, was news that the US Justice Department intends to fine the bank USD 14bn for alleged misspelling of mortgage-backed securities.However, examining trends in crowd-sourced sentiment indicators it is clear that concerns about DB are hardly new and certainly pre-date the announcement of the fine. Both Stress and Fear towards DB have been in an uptrend since May 2015 and Sentiment and Optimism in negative territory since July last year (when DB’s share price was trading three times higher than its current market price).These crowd sentiment trends matter because commercial banks are different from almost any other type of private company in one very important respect. For a bank, even one the size of DB, confidence its greatest and most critical asset. And, just like trust, confidence is nebulous, fickle and asymmetric; that is to say, hard to acquire but quickly lost.As a result, banking sector crises tend to be highly non-linear. A non-linearity that stems from the fact that behaviour at such times is dominated by psychology, something the crowd-sourced sentiment indicators we track at Amareos are ideally suited to monitor.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: The US Treasury bond market rally gave up the ghost at the longer-end of the curve while excess cash levels compressed rates at the short-end last week. The Treasury curve bull steepened for the first time in over three weeks.Market participants re-positioned into month-end and ahead of April data releases over the next two weeks. Expectations are for strong economic data. High readings could prove bearish for Treasury prices. However, since the markets are forward looking, the question is also why are rates not already higher?As markets focused on upside inflation risks, with commodity prices continuing to surge, both Sweden’s Riksbank and the Bank of Japan highlighted soft inflation pressures in their latest policy meetings. These statements may add to uncertainty over how sustainable the current rise in US inflation may prove to be.At the same time, the run-off of the US Treasury Department’s cash balances at the Fed continues to keep pressure on repo rates. This in turn is resulting in a melt-up with two year and under area yields being squeezed tighter as investors move up the curve for a return. For more on this melt-up approach, please see: <a href="https://www.smartkarma.com/compose/insight/50971/Bank%20Credit%20Strategy:%20Melt-Up%20Before%20Meltdown,%20Where%20to%20Position.%20Read%20more:%20https:/skr.ma/W1NcQ" target="_blank" rel="noopener">Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position</a>. In bank credit, with short-end interest rates compressing week-on-week and short-end credit tightening, positive total returns were easy to generate. Although credit spreads tightened more in the long- than short-end, Treasury curve steepening meant that positive total returns were not realized in longer dated notes. Most Asia-headquartered bank credits tightened by two- to three- basis points week-on-week. Tier 2 and HY Senior Unsecured notes tended to outperform on a spread basis. Most European-headquartered bank credits tightened by three- to four- basis points week-on-week. Lower risk Senior Bail-in bonds delivered higher average spread tighteningWith peak earnings season now behind us, the upcoming week will essentially complete Q1 reports for most major financial institutions. US banks signaled that they anticipate significantly higher interest rates by raising record breaking amounts in the debt capital markets following their Q1 earnings announcements. Other banks may follow. May is historically the start of a bullish period for Treasuries. However, as we start the month, the absence of evidence should not be taken as evidence of its absence. Various holidays around the world may reduce visibility over the next week. Markets in China, Japan and the UK are closed on Monday, with those in Tokyo and China shut through Wednesday. Look to the end of the week for more directionality. We explore these market themes within.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is more constrained in terms of rates than was previously expected. This should be risk asset supportive. The concern is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.

Executive Summary: The US Treasury bond market rally gave up the ghost at the longer-end of the curve while excess cash levels compressed rates at the short-end last week. The Treasury curve bull steepened for the first time in over three weeks.Market participants re-positioned into month-end and ahead of April data releases over the next two weeks. Expectations are for strong economic data. High readings could prove bearish for Treasury prices. However, since the markets are forward looking, the question is also why are rates not already higher?As markets focused on upside inflation risks, with commodity prices continuing to surge, both Sweden’s Riksbank and the Bank of Japan highlighted soft inflation pressures in their latest policy meetings. These statements may add to uncertainty over how sustainable the current rise in US inflation may prove to be.At the same time, the run-off of the US Treasury Department’s cash balances at the Fed continues to keep pressure on repo rates. This in turn is resulting in a melt-up with two year and under area yields being squeezed tighter as investors move up the curve for a return. For more on this melt-up approach, please see: Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position. In bank credit, with short-end interest rates compressing week-on-week and short-end credit tightening, positive total returns were easy to generate. Although credit spreads tightened more in the long- than short-end, Treasury curve steepening meant that positive total returns were not realized in longer dated notes. Most Asia-headquartered bank credits tightened by two- to three- basis points week-on-week. Tier 2 and HY Senior Unsecured notes tended to outperform on a spread basis. Most European-headquartered bank credits tightened by three- to four- basis points week-on-week. Lower risk Senior Bail-in bonds delivered higher average spread tighteningWith peak earnings season now behind us, the upcoming week will essentially complete Q1 reports for most major financial institutions. US banks signaled that they anticipate significantly higher interest rates by raising record breaking amounts in the debt capital markets following their Q1 earnings announcements. Other banks may follow. May is historically the start of a bullish period for Treasuries. However, as we start the month, the absence of evidence should not be taken as evidence of its absence. Various holidays around the world may reduce visibility over the next week. Markets in China, Japan and the UK are closed on Monday, with those in Tokyo and China shut through Wednesday. Look to the end of the week for more directionality. We explore these market themes within.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is more constrained in terms of rates than was previously expected. This should be risk asset supportive. The concern is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.  

Bank Credit Weekly: Bull Steepening, but Is It Sustainable?

We have been here before. As the Fed places achieving full employment above its goal of stable and low inflation, risks to financial stability should rise. Stability may be threatened by asset bubbles which are already likely to be forming in asset markets.At the same time, the fear of missing out (FOMO) is pushing investors to be invested while herd mentality provides job protection for asset managers that remain invested. The risk of an equity correction grows in the background. The issue is the lack of a catalyst for now. However, when it does arrive, the question is whether it is accompanied by a flight to quality in the bond market or if rising inflation expectations keep pushing market interest rates higher. Correlations may be reset in the latter outcome and some asset managers could implode in that scenario.We have been here before, as well. Counterparty failures and concerns regarding central clearing house stability may be the hot topics by the end of the year. As such, credit analysts should re-assess their exposures to the former, the prime brokers. Concurrently, now would be an opportune time to buy protection via credit indexes or credit default swaps. Most asset managers will not, as they are protected by the herd, but fortune favors the brave.In the near term, the market is gaining a newfound appreciation for the obscure mechanisms that influence short-term interest rates. We do our best to explain these tools inside and for more background on these pressures, please see our most recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" data-smartkarma-citation="insights:47886" rel="noopener">Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus</a>. More importantly, this concern is new and something new creates an opportunity. This is where the price of protection could be earned.Only the patina of time will tell if we are right in our correlation and counterparty concerns. But why risk it? Now is the time to think outside the box. Credit investors are not just playing for carry. Price appreciation may be gone, but credit investors need to play for highly efficient carry. Emerging Market and other High Yield assets will likely be impacted by the dislocation in short-term interest rates as investors bid-up higher yielding, short duration assets. A melt-up should occur before we get to the eventual meltdown. This is where to position.As such we identify our top 10 bank securities to position within to ride the melt-up. Downside risks are limited to potential opportunity costs from not investing further out the curve. However, we suspect that many investors are already full of long duration positions. The upside is that, if we are correct, these securities could also outperform in a meltdown. Therefore, our top melt-up picks may dovetail with attempts to reduce duration as the year proceeds.

We have been here before. As the Fed places achieving full employment above its goal of stable and low inflation, risks to financial stability should rise. Stability may be threatened by asset bubbles which are already likely to be forming in asset markets.At the same time, the fear of missing out (FOMO) is pushing investors to be invested while herd mentality provides job protection for asset managers that remain invested. The risk of an equity correction grows in the background. The issue is the lack of a catalyst for now. However, when it does arrive, the question is whether it is accompanied by a flight to quality in the bond market or if rising inflation expectations keep pushing market interest rates higher. Correlations may be reset in the latter outcome and some asset managers could implode in that scenario.We have been here before, as well. Counterparty failures and concerns regarding central clearing house stability may be the hot topics by the end of the year. As such, credit analysts should re-assess their exposures to the former, the prime brokers. Concurrently, now would be an opportune time to buy protection via credit indexes or credit default swaps. Most asset managers will not, as they are protected by the herd, but fortune favors the brave.In the near term, the market is gaining a newfound appreciation for the obscure mechanisms that influence short-term interest rates. We do our best to explain these tools inside and for more background on these pressures, please see our most recent Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus. More importantly, this concern is new and something new creates an opportunity. This is where the price of protection could be earned.Only the patina of time will tell if we are right in our correlation and counterparty concerns. But why risk it? Now is the time to think outside the box. Credit investors are not just playing for carry. Price appreciation may be gone, but credit investors need to play for highly efficient carry. Emerging Market and other High Yield assets will likely be impacted by the dislocation in short-term interest rates as investors bid-up higher yielding, short duration assets. A melt-up should occur before we get to the eventual meltdown. This is where to position.As such we identify our top 10 bank securities to position within to ride the melt-up. Downside risks are limited to potential opportunity costs from not investing further out the curve. However, we suspect that many investors are already full of long duration positions. The upside is that, if we are correct, these securities could also outperform in a meltdown. Therefore, our top melt-up picks may dovetail with attempts to reduce duration as the year proceeds. 

Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Svenska Handelsbanken AB / Equity Bottom-Up

<h2>Strategy</h2>Scandinavian banks look set for (another) period of share price underperformance despite optically high earnings and dividend yields plus best-in-class (by European standards) average CET1 ratios.Many banks delivered subpar fundamental progression at Q118 as judged by our PH Score™. <a href="https://www.smartkarma.com/entities/22475" target="_blank" data-smartkarma-citation="entities:22475:1">Skandinaviska Enskilda Banken (SEBA SS)</a> and <a href="https://www.smartkarma.com/entities/22480" target="_blank" data-smartkarma-citation="entities:22480:1">Svenska Handelsbanken AB (SHBA SS)</a> scored 2.6 while <a href="https://www.smartkarma.com/entities/22438" target="_blank" data-smartkarma-citation="entities:22438:1">Nordea Bank AB (NDA SS)</a> achieved 3.7 (quintile 5). <a href="https://www.smartkarma.com/entities/22336" target="_blank" data-smartkarma-citation="entities:22336:1">Danske Bank A/S (DANSKE DC)</a> at 4.9 was a bit better but…

StrategyScandinavian banks look set for (another) period of share price underperformance despite optically high earnings and dividend yields plus best-in-class (by European standards) average CET1 ratios.Many banks delivered subpar fundamental progression at Q118 as judged by our PH Score™. Skandinaviska Enskilda Banken (SEBA SS) and Svenska Handelsbanken AB (SHBA SS) scored 2.6 while Nordea Bank AB (NDA SS) achieved 3.7 (quintile 5). Danske Bank A/S (DANSKE DC) at 4.9 was a bit better but…

Nordic Banks: Underperformance or Something More Serious?

Sweden

Skandinaviska Enskilda Banken AB (SEB) is a North European financial banking group.  The Bank offers corporate, institutional, and private banking services including savings account, investment banking, securities brokerage services, loans, pensions, and insurance products.  SEB has branches throughout Sweden, in Germany and the Baltic States, and is represented in many countries worldwide.

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Skandinaviska Enskilda Banken (SEBA SS)

The Confidence "Interval"

Europe’s banking sector is back in the spotlight – and, once again, it is for less than positive reasons. Unlike earlier episodes, however, the...

Amareos

Bank Credit Weekly: Bull Steepening, but Is It Sustainable?

Treasury yields bull steepened while the melt-up led credit total returns. Yield conviction may build as April economic data is published; however,...

Hank Calenti, CFA

Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position

We could see a melt-up in asset prices from short-term interest rate pressures before the eventual meltdown. We explain the melt-up potential and...

Hank Calenti, CFA

Nordic Banks: Underperformance or Something More Serious?

StrategyScandinavian banks look set for (another) period of share price underperformance despite optically high earnings and dividend yields plus...

Paul Hollingworth

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)