Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The timing of <a href="https://www.smartkarma.com/entities/societe-generale-sa" target="_blank" data-smartkarma-citation="entities:21478:1" rel="noopener">Société Générale's (SocGen)</a> decision to rationalize its retail banking legal complexity is interesting. Coming just months after posting its biggest loss since the Kerviel affair 12 years ago, the retail network consolidation may make the firm more readily resolvable should it reach the point of non-viability. This is not good news for AT1 investors.Impediments to resolution lower the likelihood of asset stripping. Although reducing these impediments does not increase the probability of resolution, it does nothing to improve the resilience of the firm, which is also needed.With long-duration AT1 notes now favored by investors, SocGen’s recently issued 5 3/8% coupon 2030 first call US$-bond trades tight. SocGen + duration ≠ a good idea.  The longer duration US dollar bonds appear overpriced. We see better value elsewhere along SocGen’s AT1 curve, including the Australian dollar and Singapore dollar notes.

The timing of Société Générale's (SocGen) decision to rationalize its retail banking legal complexity is interesting. Coming just months after posting its biggest loss since the Kerviel affair 12 years ago, the retail network consolidation may make the firm more readily resolvable should it reach the point of non-viability. This is not good news for AT1 investors.Impediments to resolution lower the likelihood of asset stripping. Although reducing these impediments does not increase the probability of resolution, it does nothing to improve the resilience of the firm, which is also needed.With long-duration AT1 notes now favored by investors, SocGen’s recently issued 5 3/8% coupon 2030 first call US$-bond trades tight. SocGen + duration ≠ a good idea.  The longer duration US dollar bonds appear overpriced. We see better value elsewhere along SocGen’s AT1 curve, including the Australian dollar and Singapore dollar notes.

Société Générale AT1: Resolution or Resilience in the Retail Restructuring? Take Shorter Duration

Risk markets rallied on expectations that a meaningful economic restart will be brought forward following news of <a href="https://www.smartkarma.com/entities/pfizer-inc" target="_blank" data-smartkarma-citation="entities:1131:1" rel="noopener">Pfizer's (PFE US)</a> preliminary success rate of 90% in its Coronavirus vaccine trials. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, Caa rated corporates continued to tighten by more than the Asia High Yield (HY) index and other components of the US HY complex.Following two days of initial euphoria, markets consolidated on news of increased Coronavirus contagion. The growing footprint of Coronavirus related, pre-Christmas, restrictions across Europe and the US may be a headwind for economic growth over the near term.In the rate markets, a sharp jump in US yields early in the week retraced as the week progressed and attracted end-user buying, particularly in Asia. Japanese investors were reported to have been strong buyers of 7- to 10-year Treasuries. One of the developing risks at this point is that the reflation trade does not resurface while federal stimulus is constrained, and near-term economic prospects reduce. A tepid increase in yields could limit the effectiveness of any fresh Fed action. Against this background, almost all Asia-headquartered bonds tightened relative to their benchmark spreads as vaccine progress and US Treasury curve steepening increased prospects for higher net interest margins. Amongst Additional Tier 1 bonds, Thai-headquartered banks led advances as the Bank of Thailand lifted a dividend ban and stated that the financial institutions have sufficient capital and loan-loss provisions to withstand the impact of COVID-19. This sounds like cheer-leading and we are tempted to fade this rally. Concurrently, Turkish HY Senior Unsecured bank bonds materially outperformed their global peers in anticipation of more orthodox monetary and economic policies. Given the starting point for a potential Turkish bank bond rally, we may see higher returns from Turkish- as opposed to Thai-bank bonds.In the debt capital markets, over US$30 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. When we noted last week that issuers were likely to bring 2021 issuance needs forward, we did not anticipate a flood like this. In what may have been the busiest bank bond issuance week of the year, the amount issued was almost one-half the amount brought in the prior eight weeks.Market Outlook: Over the near term, 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. Over the medium term, a less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including EM fixed income securities over time.

Risk markets rallied on expectations that a meaningful economic restart will be brought forward following news of Pfizer's (PFE US) preliminary success rate of 90% in its Coronavirus vaccine trials. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, Caa rated corporates continued to tighten by more than the Asia High Yield (HY) index and other components of the US HY complex.Following two days of initial euphoria, markets consolidated on news of increased Coronavirus contagion. The growing footprint of Coronavirus related, pre-Christmas, restrictions across Europe and the US may be a headwind for economic growth over the near term.In the rate markets, a sharp jump in US yields early in the week retraced as the week progressed and attracted end-user buying, particularly in Asia. Japanese investors were reported to have been strong buyers of 7- to 10-year Treasuries. One of the developing risks at this point is that the reflation trade does not resurface while federal stimulus is constrained, and near-term economic prospects reduce. A tepid increase in yields could limit the effectiveness of any fresh Fed action. Against this background, almost all Asia-headquartered bonds tightened relative to their benchmark spreads as vaccine progress and US Treasury curve steepening increased prospects for higher net interest margins. Amongst Additional Tier 1 bonds, Thai-headquartered banks led advances as the Bank of Thailand lifted a dividend ban and stated that the financial institutions have sufficient capital and loan-loss provisions to withstand the impact of COVID-19. This sounds like cheer-leading and we are tempted to fade this rally. Concurrently, Turkish HY Senior Unsecured bank bonds materially outperformed their global peers in anticipation of more orthodox monetary and economic policies. Given the starting point for a potential Turkish bank bond rally, we may see higher returns from Turkish- as opposed to Thai-bank bonds.In the debt capital markets, over US$30 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. When we noted last week that issuers were likely to bring 2021 issuance needs forward, we did not anticipate a flood like this. In what may have been the busiest bank bond issuance week of the year, the amount issued was almost one-half the amount brought in the prior eight weeks.Market Outlook: Over the near term, 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. Over the medium term, a less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including EM fixed income securities over time.

Bank Credit Weekly: Vaccine Rally, Then Consolidation, Drives Outperformance & Turkey Vs Thai Banks

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<ul class="">
<li>The new CaixaBank has established the composition of its Board of directors, which will be the largest domestic bank in Spain.</li>
<li> The independent expert (BDO) has endorsed the exchange ratio,
<ul>
<li>
0.6845 new CaixaBank shares for each Bankia share.</li>
</ul>
</li>
<li>The FROB believes that the operation will have a positive effect on the recovery of the aid.</li>
</ul>
I recommend keeping an eye on the spread.
<ul>
<li>It closed on 27 October at 1.66% (gross), not far from the maximum reached on 20 October of 1.73%, and in any case an interesting level for a deal that will certainly close (est. March 2021).
</li>
</ul>
Further catalysts post-merger are (increased) dividend payouts and the exit in the short to medium term of the Kingdom of Spain from the capital of the merged entity.
M&amp;A consolidation seems as a reasonable way to reduce costs and protect profits. These can be among domestic banks or, much to the liking of the ECB, between banks domiciled in different EU countries that share common markets, and would create European champions (see list of banks that appear in many rumours at the end of the note).


The new CaixaBank has established the composition of its Board of directors, which will be the largest domestic bank in Spain.
 The independent expert (BDO) has endorsed the exchange ratio,


0.6845 new CaixaBank shares for each Bankia share.


The FROB believes that the operation will have a positive effect on the recovery of the aid.

I recommend keeping an eye on the spread.

It closed on 27 October at 1.66% (gross), not far from the maximum reached on 20 October of 1.73%, and in any case an interesting level for a deal that will certainly close (est. March 2021).


Further catalysts post-merger are (increased) dividend payouts and the exit in the short to medium term of the Kingdom of Spain from the capital of the merged entity.
M&amp;A consolidation seems as a reasonable way to reduce costs and protect profits. These can be among domestic banks or, much to the liking of the ECB, between banks domiciled in different EU countries that share common markets, and would create European champions (see list of banks that appear in many rumours at the end of the note).

Bankia - CaixaBank: Merger in Progress, Spread Attractive

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.

Thematic (Sector/Industry)

There is another EUR100bn package announced in France. This is the same pattern we are seeing in most places, with governments and central banks increasing support, not limiting support. Where the main three banks in France took sizable credit costs during 1H20, with this new package there is greater likelihood of easing credit costs. We wonder if <a href="https://www.smartkarma.com/entities/societe-generale-sa" target="_blank" data-smartkarma-citation="entities:21478:1" rel="noopener">Societe Generale Sa (GLE FP)</a> has the most to gain, considering that it lost the most during 1H20?

There is another EUR100bn package announced in France. This is the same pattern we are seeing in most places, with governments and central banks increasing support, not limiting support. Where the main three banks in France took sizable credit costs during 1H20, with this new package there is greater likelihood of easing credit costs. We wonder if Societe Generale Sa (GLE FP) has the most to gain, considering that it lost the most during 1H20?

There are continued positive signs of recovery in Europe. It’s not just limited to the US. In all likelihood we are past the dire days of the crisis, or the ‘great interruption.’ Germany just reopened its borders to European travel and the region shows several positive signs from reopening economies. The impact to banks can be significant, which are highly leveraged to economic improvements. We wonder if this is well expected, considering the market capitalization of many EU banks?

There are continued positive signs of recovery in Europe. It’s not just limited to the US. In all likelihood we are past the dire days of the crisis, or the ‘great interruption.’ Germany just reopened its borders to European travel and the region shows several positive signs from reopening economies. The impact to banks can be significant, which are highly leveraged to economic improvements. We wonder if this is well expected, considering the market capitalization of many EU banks?

France

Societe Generale SA attracts deposits and offers commercial, retail, investment, and private banking services.  The Bank offers consumer credit, vehicle lease financing, information technology equipment leasing, life and non-life insurance, custodian services, trade and project financing, currency exchange, treasury services, and financial and commodities futures brokerage services.

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

Societe Generale Sa (GLE FP)

Société Générale AT1: Resolution or Resilience in the Retail Restructuring? Take Shorter Duration

SocGen’s decision to rationalize its complexity may make the firm more readily resolvable. SocGen + duration ≠ a good idea. We see value elsewhere...

Hank Calenti, CFA

Bank Credit Weekly: Vaccine Rally, Then Consolidation, Drives Outperformance & Turkey Vs Thai Banks

Positive vaccine news and the US election result lowers the likelihood of excessive US stimulus. This should cap pressure on Treasury yields and...

Hank Calenti, CFA

Bankia - CaixaBank: Merger in Progress, Spread Attractive

I recommend keeping an eye on the spread. It closed today (27 October) at a gross 1.66%, an interesting level for a deal that will certainly close...

Jesus Rodriguez Aguilar

France Banks – Reboot Package

There is another EUR100bn package announced in France. This is the same pattern we are seeing in most places, with governments and central banks...

Daniel Tabbush

EU Banks – Leveraged To Sharp Recovery

There are continued positive signs of recovery in Europe. It’s not just limited to the US. In all likelihood we are past the dire days of the...

Daniel Tabbush

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)