Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

A pack of small, but smart, investors in a free and open market caught hedge funds off guard this week. The hunter was hunted, and the resulting equity market volatility drove financial concerns more than financial conditions. The GameStop situation is noise and not a signal for risk assets. For a nasty global risk asset unwind, there needs to be a catalyst in the form of either an economic downturn or a material tightening in Fed policy. Neither is in play. Weakness in Asia High Yield this week may create opportunities.More importantly, for credit investors, short-term Libor levels hit record lows on Friday. This matters as investors that focus on high-quality short-term securities may be pushed into commercial paper or other very short-duration paper. The rate curve should bull steepening from the excess amount of cash in the market. The flood of cash could drive credit yields even lower.In this environment, U.S. CCC-rated and Asia High Yield index spreads widened.  More and more brokerage houses are recommending Asia High Yield as the place to be in 2021, despite property developer concerns in China. Our take is that fundamentals have yet to catch-up with spreads in the US CCC-rated area although we suspect that they may. However, US High Yield has a higher effective duration now, versus pre-Covid, and versus Asia High Yield. As such US High Yield credits have more limited upside in the reflation scenario. A delay in the reflation scenario should benefit Asia-headquartered risk assets.At the same time, ivory-tower syndrome has taken over the Fed. Chairman Powell’s comments this week that what is really driving asset prices is not monetary policy, suggests that the disconcerting disconnect between financial and economic conditions is not understood by senior policymakers. If the Chairman’s comments were true, then there would be no need to signal a tapering of asset purchases well in advance. Whether you call it price fixing or price guidance by the Fed and ECB policymakers, it does not matter as you cannot fight it. The Fear of Missing Out (FOMO) is real in the credit markets.Despite these challenges, Asia’s bank spreads continued to tighten during the week. Officials in India anticipate 11% GDP growth in ’21-’22 from April, following vaccination, in-line with the 11.5% and 8.1% projected for India and China, respectively, by the IMF. The near-term future is in South Asian, but this may not apply to all India-headquartered banks. We also note that significant bank recapitalized in needed for these forecasts to materialize. Please see <a href="https://www.smartkarma.com/insights/yes-bank-solvency-simulation-with-covid-19-coverage-scenarios" target="_blank" data-smartkarma-citation="insights:47523" rel="noopener">YES Bank Solvency Simulation with Covid-19 Coverage Scenarios</a> for an example of the difficulties facing India-headquartered banks.Market Outlook: GameStop is noise and not a signal. Although weakening in some markets, economic growth and continued monetary accommodation remain the main drivers for credit markets. Credit fundamentals should catch-up with repressed credit spreads. Therefore, credit has limited upside in a fast reflation scenario. Reconciliation or negotiation may deliver the same stimulus result over the near term.  As such, a slower, more contained, reflation environment could be Emerging Market credit supportive.

A pack of small, but smart, investors in a free and open market caught hedge funds off guard this week. The hunter was hunted, and the resulting equity market volatility drove financial concerns more than financial conditions. The GameStop situation is noise and not a signal for risk assets. For a nasty global risk asset unwind, there needs to be a catalyst in the form of either an economic downturn or a material tightening in Fed policy. Neither is in play. Weakness in Asia High Yield this week may create opportunities.More importantly, for credit investors, short-term Libor levels hit record lows on Friday. This matters as investors that focus on high-quality short-term securities may be pushed into commercial paper or other very short-duration paper. The rate curve should bull steepening from the excess amount of cash in the market. The flood of cash could drive credit yields even lower.In this environment, U.S. CCC-rated and Asia High Yield index spreads widened.  More and more brokerage houses are recommending Asia High Yield as the place to be in 2021, despite property developer concerns in China. Our take is that fundamentals have yet to catch-up with spreads in the US CCC-rated area although we suspect that they may. However, US High Yield has a higher effective duration now, versus pre-Covid, and versus Asia High Yield. As such US High Yield credits have more limited upside in the reflation scenario. A delay in the reflation scenario should benefit Asia-headquartered risk assets.At the same time, ivory-tower syndrome has taken over the Fed. Chairman Powell’s comments this week that what is really driving asset prices is not monetary policy, suggests that the disconcerting disconnect between financial and economic conditions is not understood by senior policymakers. If the Chairman’s comments were true, then there would be no need to signal a tapering of asset purchases well in advance. Whether you call it price fixing or price guidance by the Fed and ECB policymakers, it does not matter as you cannot fight it. The Fear of Missing Out (FOMO) is real in the credit markets.Despite these challenges, Asia’s bank spreads continued to tighten during the week. Officials in India anticipate 11% GDP growth in ’21-’22 from April, following vaccination, in-line with the 11.5% and 8.1% projected for India and China, respectively, by the IMF. The near-term future is in South Asian, but this may not apply to all India-headquartered banks. We also note that significant bank recapitalized in needed for these forecasts to materialize. Please see YES Bank Solvency Simulation with Covid-19 Coverage Scenarios for an example of the difficulties facing India-headquartered banks.Market Outlook: GameStop is noise and not a signal. Although weakening in some markets, economic growth and continued monetary accommodation remain the main drivers for credit markets. Credit fundamentals should catch-up with repressed credit spreads. Therefore, credit has limited upside in a fast reflation scenario. Reconciliation or negotiation may deliver the same stimulus result over the near term.  As such, a slower, more contained, reflation environment could be Emerging Market credit supportive.

Bank Credit Weekly: GameStop Is Noise, Not a Signal, for Risk Assets

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

Equity Bottom-Up

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, and still has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.9%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund the restructuring - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, and still has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.9%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund the restructuring - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.  

Bank of East Asia – How Much Longer Can Caixa Hold On?

*Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.

 *Bottom-line Worse Than It Looks: Axis Bank (AXSB.IN) [Axis] reported FY 3Q21 results of INR 11.2 bn, declining INR 5.7 bn (33.8%) on a linked quarter basis. Given the hefty increase in net new NPLs, results would appear to be incredibly overstated. The largest delta during the quarter was an INR 8.2 bn (19.3%) increase in operating expenses, led by a compensation increase of 18.9% and an other opex increase of 19.6%; and *Poor Provisions: Without accounting for the linked quarter increase in restructured loans, we find that Axis’ net new NPL growth is extremely elevated at 84.5% - which is troubling even for an Indian bank. We would like to see Axis add INR 321 bn or 146% to loss reserves. Instead of overstating profit figures, Axis needs to begin taking the requisite losses in order to buttress reserves. Axis reserve shortfall, in our view, represents over five years of PBT and 25% plus of stated equity.  

We screen for value in <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered' s  (StanLn)</a> Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit versus a Sovereign CDS Portfolio</a> as well as <a href="https://www.smartkarma.com/insights/standard-chartered-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:47266" rel="noopener">Capital, Forbearance and CDS</a> for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

We screen for value in Standard Chartered' s  (StanLn) Additional Tier 1 (AT1) curve within a post-Covid-19 economic operating environment. This is the final installment of a series of linked insights on Standard Chartered. Please see: Standard Chartered Credit versus a Sovereign CDS Portfolio as well as Capital, Forbearance and CDS for background on StanLn.First we assess whether StanLn has the capacity to absorb losses from its Covid-19 relief lending. Then we screen for potential extension risk and determine where the market may be mispricing StanLn’s credit risk while considering the liquidity of its AT1 instruments and other factors that may influence credit spreads.Standard Chartered ’s recently issued 4.75% coupon 2031 first call AT1 bond should be trading tighter given a higher Common Equity Tier 1 capital buffer than other banks which recently issued 10-year AT1 notes. However, the question is whether investors should reach for duration at this point in the Covid-19 economic cycle. Concurrently, Standard Chartered’ s Legacy Tier 1 bonds may be of interest to event-driven investors. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Our top pick is the 7.75% coupon 2023 AT1 bond due to superior credit-adjusted returns, moderate duration as well as low extension risk and decent liquidity.  The main risk to this top pick is the tension between assuring sufficient shareholder returns in the near-term versus StanLn’s long-term provisioning needs. The bank is expected to announce full-year results towards the end of February.

Standard Chartered: Screening for AT1 Value, Post-Covid-19

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered' s (StanLn)</a> capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit Versus a Sovereign CDS Portfolio</a> for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a>.

Standard Chartered' s (StanLn) capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see Standard Chartered Credit Versus a Sovereign CDS Portfolio for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than HSBC Holdings' (HSBA LN).

Standard Chartered: Capital, Forbearance and CDS

United Kingdom

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.

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Standard Chartered (STAN LN)

Bank Credit Weekly: GameStop Is Noise, Not a Signal, for Risk Assets

GME is noise, not a signal. Economic growth and monetary policy remain the drivers for credit markets. Reconciliation or negotiation equal the same...

Hank Calenti, CFA

Bank of East Asia – How Much Longer Can Caixa Hold On?

BANK OF EAST ASIA: CaixaBank is a 17.3% holder of BEA, and still has significant capital concerns. CaixaBank needs to find additional ways to...

Thomas J. Monaco

Axis Bank – Evil Result

AXIS BANK: Axis reported a 33.8% decline in linked quarter FY 3Q21 results. Given the hefty increase in net new NPLs, results make little sense....

Thomas J. Monaco

Standard Chartered: Screening for AT1 Value, Post-Covid-19

We screen for value in StanLn’s AT1 curve, including the S$ bond, within a post-Covid-19 economic environment, and we determine StanLn’s capacity...

Hank Calenti, CFA

Standard Chartered: Capital, Forbearance and CDS

Standard Chartered’s capital ratios remain above regulatory minimums even after adjusting for Covid-19 forbearance. Limited aid to SMEs and...

Hank Calenti, CFA

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