Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: The narrative has changed and there is little to stand in the way of further Treasury market strength near term. This should lead to US dollar weakness and may be Emerging Market risk asset supportive. Nonetheless, we suspect that Asia will remain driven by concerns that China is tightening which could constrain investor sentiment in this market.Trading volume-, Treasury issuance- and economic data-risks were no match for short-position unwinding, data reappraisal, and Japanese investor re-entry into the Treasury bond market over the last week. Treasury yields continued their retracement, posting their biggest weekly rally since August. Furthermore, after the worst quarter since 1980, Treasuries have gained around 1% this month, paring 2021 losses to about 3.3%. We may have seen a sell-the-rumor, buy-the-fact market event occur with respect to Treasuries and the better-than-expected March economic data set.The narrative has changed to one that is Treasury bond supportive. Fixed income markets are discounting lower economic growth and price expectations. Scenarios with a declining growth rate may be increasingly discounted in the Treasury markets. With GDP growth anticipated to tail-off over the next few quarters, sustainable wage growth may not materialize. Meanwhile, supply chain bottlenecks and rising producer prices may negatively impact corporate margins rather than consumer wallets. We elaborate on each of these themes within.Against this backdrop, there are limited economic announcements which could impact the Treasury market over the next few weeks. Meanwhile, Japanese investors may find buying US$ denominated bonds attractive after hedging the currency risk. This may be risk asset supportive going forward.  We review this inside.In the bank credit markets, March’s carry trade outperformance continued to unwind as shorter-duration bonds outperformed during the week. All recent higher coupon outperformers experienced large spread declines. Even the Turkish bank credit curve behaved in a manner consistent with other bonds globally, rather than trade at a discount. We identify the winners and losers.In China, while the immediate threat of Credit Armageddon may be lower, the ultimate game plan for China Huarong Asset Management is yet to be known. As such, the market may remain skittish while trading opportunities remain amongst the other asset management companies. Please see: <a href="https://www.smartkarma.com/compose/insight/50463/China%20Huarong:%20Contagion%20Creates%20Opportunity.%20Read%20more:%20https:/skr.ma/SmFJQ" target="_blank" rel="noopener">China Huarong: Contagion Creates Opportunity</a> for more details.US banks set a high bar for performance by announcing stellar investment banking and progressively improving core banking results last week. Then they signaled that they anticipate significantly higher interest rates later this year by hitting the market for record breaking amounts. Middle East- and Asia-headquartered banks may lead the headlines next week. Amongst major European names, only Credit Suisse is scheduled to provide final Q1 results on Tuesday, 20 April. For our thoughts, please see: <a href="https://www.smartkarma.com/compose/insight/50463/Credit%20Suisse:%20Skating%20on%20a%20Thin%20Layer%20of%20Capital.%20Read%20more:%20https:/skr.ma/rGLd5" target="_blank" rel="noopener">Credit Suisse: Skating on a Thin Layer of Capital</a>.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is repricing for lower growth and lower rates over a longer time-period. This should be risk asset supportive as the US dollar finally weakens. The risk is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.

Executive Summary: The narrative has changed and there is little to stand in the way of further Treasury market strength near term. This should lead to US dollar weakness and may be Emerging Market risk asset supportive. Nonetheless, we suspect that Asia will remain driven by concerns that China is tightening which could constrain investor sentiment in this market.Trading volume-, Treasury issuance- and economic data-risks were no match for short-position unwinding, data reappraisal, and Japanese investor re-entry into the Treasury bond market over the last week. Treasury yields continued their retracement, posting their biggest weekly rally since August. Furthermore, after the worst quarter since 1980, Treasuries have gained around 1% this month, paring 2021 losses to about 3.3%. We may have seen a sell-the-rumor, buy-the-fact market event occur with respect to Treasuries and the better-than-expected March economic data set.The narrative has changed to one that is Treasury bond supportive. Fixed income markets are discounting lower economic growth and price expectations. Scenarios with a declining growth rate may be increasingly discounted in the Treasury markets. With GDP growth anticipated to tail-off over the next few quarters, sustainable wage growth may not materialize. Meanwhile, supply chain bottlenecks and rising producer prices may negatively impact corporate margins rather than consumer wallets. We elaborate on each of these themes within.Against this backdrop, there are limited economic announcements which could impact the Treasury market over the next few weeks. Meanwhile, Japanese investors may find buying US$ denominated bonds attractive after hedging the currency risk. This may be risk asset supportive going forward.  We review this inside.In the bank credit markets, March’s carry trade outperformance continued to unwind as shorter-duration bonds outperformed during the week. All recent higher coupon outperformers experienced large spread declines. Even the Turkish bank credit curve behaved in a manner consistent with other bonds globally, rather than trade at a discount. We identify the winners and losers.In China, while the immediate threat of Credit Armageddon may be lower, the ultimate game plan for China Huarong Asset Management is yet to be known. As such, the market may remain skittish while trading opportunities remain amongst the other asset management companies. Please see: China Huarong: Contagion Creates Opportunity for more details.US banks set a high bar for performance by announcing stellar investment banking and progressively improving core banking results last week. Then they signaled that they anticipate significantly higher interest rates later this year by hitting the market for record breaking amounts. Middle East- and Asia-headquartered banks may lead the headlines next week. Amongst major European names, only Credit Suisse is scheduled to provide final Q1 results on Tuesday, 20 April. For our thoughts, please see: Credit Suisse: Skating on a Thin Layer of Capital.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is repricing for lower growth and lower rates over a longer time-period. This should be risk asset supportive as the US dollar finally weakens. The risk is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.  

Bank Credit Weekly: Narrative Change Pushes Carry-Trade Unwind as Treasuries Rally

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

<div>
Linklogis, a technology solution provider for supply chain finance in China raised around US$1bn in its Hong Kong IPO. Its early investors include Tencent, GIC and Standard Chartered Bank.
</div>
<div>
We have covered various aspects of the deal in our earlier notes,
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-positives-fast-growing-blockchain-driven-supply-chain-financier" target="_blank" rel="noopener">Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier,</a> </li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-negatives-inconsistent-growth-and-margins-well-funded-competitors" target="_blank" rel="noopener">Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors, and</a></li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-earnings-forecast-peer-comparison-and-first-stab-at-valuation" target="_blank" rel="noopener">Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation</a></li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-phip-updates-nothing-to-complain-about" target="_blank" rel="noopener">Linklogis Pre-IPO - PHIP Updates - Nothing to Complain About</a></li>
<li><a href="https://www.smartkarma.com/insights/linklogis-ipo-pricey-for-a-reason" target="_blank" rel="noopener">Linklogis IPO - Pricey for a Reason</a></li>
</ul>
</div>
<div>
In this note, we will talk about deal dynamics and updates since our last note.
</div>


Linklogis, a technology solution provider for supply chain finance in China raised around US$1bn in its Hong Kong IPO. Its early investors include Tencent, GIC and Standard Chartered Bank.


We have covered various aspects of the deal in our earlier notes,




Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier, 
Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors, and
Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation
Linklogis Pre-IPO - PHIP Updates - Nothing to Complain About
Linklogis IPO - Pricey for a Reason



In this note, we will talk about deal dynamics and updates since our last note.


Linklogis IPO Trading - Decent but Not Hot Demand

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)

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on April 2, 2021 released finalized new capital standards for the country’s domestic systemically important banks (D-SIBs), and indicated that the need for banking  crisis liquidation plans; and* Aggressive Capital Raises Expected: In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value.

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on April 2, 2021 released finalized new capital standards for the country’s domestic systemically important banks (D-SIBs), and indicated that the need for banking  crisis liquidation plans; and* Aggressive Capital Raises Expected: In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value. 

China Banks – Big Capital Raises Coming

Executive Summary: <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group's (CSGN VX)</a> press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in <a href="https://www.smartkarma.com/compose/insight/49970/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a>, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Executive Summary: Credit Suisse Group's (CSGN VX) press release of this morning is no reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than CHF2bn (US$2.1bn) could result in the suspension of coupons on CS’ Contingent Capital securities. This is one-half the charges related to the Archegos Capital Management affair. This leaves little room for maneuver.A warm wind blowing from a hot US economy could crack the ice. Low interest rates, which are pushing investors to take more risk, are generating asset bubbles. CS, like other banks, intermediates in this asset-inflated environment. Unlike other banks, something as simple as an unexpected spike in interest rates could be the catalyst which leads to a fissure in the firm’s capital layer. Another family or hedge fund disaster like Archegos and CS’ CoCo coupons could be at risk.Bank capital analysis is arcane and further complicated by selective disclosure. CoCo investors may not be aware of how slim CS’ capital buffer truly is. And yet, this is at the core of whether the security is under- or over- priced. We deconstruct the press release to determine this level within.As we noted in Credit Suisse: Where There’s Smoke, There’s a Capital Raise, we were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now trading around $95.We continue to believe that Credit Suisse needs to enhance its capital base. Assuming no additional cracks in the ice – a large assumption - it may take CS two quarters to achieve current UBS-type capital buffer levels. However, CS has a materially higher risk tolerance and is clearly impaired from a risk management perspective. At least, one full year of earnings retention may be needed to address these deficiencies. Furthermore, there are weak spots yet to traverse including legacy RMBS costs, CS Supply Chain Fund shortfalls and a debt scandal in Mozambique to say nothing of increased regulatory capital charges following recent events. Together, these may see to it that share buybacks are suspended for some time to come. This would be beneficial for CS’ debt capital over time. In the interim CS’ CoCos may recover somewhat; however, we continue to believe that these securities will lag the market until the layer of capital is strengthened. As such, we remain Underweight.

Credit Suisse: Skating on a Thin Layer of Capital

Equity Bottom-Up

*AGM Leads To More Questions Than Answers: At its recent annual general meeting (AGM), DBS Group Holdings (DBS.SP) [DBS] highlighted several back to the future mainland China strategies and tried to justify its truly dumb acquisition in India. The management team didn’t do itself any favors; and *Another Fine Mess You’ve Gotten Us Into: CEO Gupta was completely put back on his heals and left defending its acquisition of Lakshmi Vilas Bank (LVB). Shareholders raised fundamental concerns over financial losses and LVB’s impact on DBS' bottom-line. In our view, without some form of ring-fencing of LVB’s challenged assets it is unclear how this transaction would NOT have a negative material impact on DBS’ earnings and capital ratios over the near-term.

*AGM Leads To More Questions Than Answers: At its recent annual general meeting (AGM), DBS Group Holdings (DBS.SP) [DBS] highlighted several back to the future mainland China strategies and tried to justify its truly dumb acquisition in India. The management team didn’t do itself any favors; and *Another Fine Mess You’ve Gotten Us Into: CEO Gupta was completely put back on his heals and left defending its acquisition of Lakshmi Vilas Bank (LVB). Shareholders raised fundamental concerns over financial losses and LVB’s impact on DBS' bottom-line. In our view, without some form of ring-fencing of LVB’s challenged assets it is unclear how this transaction would NOT have a negative material impact on DBS’ earnings and capital ratios over the near-term. 

DBS Group Holdings – Quickly Losing Credibility

Hong Kong

Standard Chartered plc is an international banking group operating principally in Asia, Africa, and the Middle East.  The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

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

Standard Chartered (2888 HK)

Bank Credit Weekly: Narrative Change Pushes Carry-Trade Unwind as Treasuries Rally

The narrative has changed. There is little to stand in the way of further Treasury market strength near term. This should lead to US$ weakness and...

Hank Calenti, CFA

Linklogis IPO Trading - Decent but Not Hot Demand

Linklogis, a technology solution provider for supply chain finance in China raised around US$1bn in its Hong Kong IPO. Its early investors include...

Sumeet Singh

China Banks – Big Capital Raises Coming

CHINA BANKS: The PBOC and CBIRC released finalized new capital standards for the country’s D-SIBs. Equity raises require P/BV over 1.0x and many of...

Thomas J. Monaco

Credit Suisse: Skating on a Thin Layer of Capital

CS is skating on thin ice from a capital perspective while its risk management blade is dulled. Asset bubbles could crack the ice. A loss of less...

Hank Calenti, CFA

DBS Group Holdings – Quickly Losing Credibility

DBS GROUP HOLDINGS: At its recent AGM, DBS highlighted several back to the future mainland China strategies and tried to justify its acquisition in...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)