Category

Financials Sector

Brief Finance: Santander Parent for SanMex Offer Update; Wooing the Minorities? and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Santander Parent for SanMex Offer Update; Wooing the Minorities?
  2. Itaú Corpbanca – Stuck in the Middle
  3. RHB Bank Placement: Last Deal Did Well Despite Size but Discount Is Tight
  4. SPX Fade from Macro Pivot Highs

1. Santander Parent for SanMex Offer Update; Wooing the Minorities?

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  • Banco Santander Sa (SAN SM) shares have underpeformed Banco Santander Mexico-B (BSMXB MM) since the offer announcement in April, making the offer less appealing to SanMex minorities
  • In addition, SanMex delivered good results in 1Q19, and there is still some potential for results to improve at the margin
  • Santander parent management argues that SanMex minorities can benefit from risk diversification, especially in the current volatile political climate in Mexico and the uncertain outlook in the Mexico-US  trade wars
  • Yet SAN’s poor share performance reflects the challenges that its core European operations face, and the soft share price may require SAN management to sweeten its all-share offer; the offer is expected to be launched in September or October 2019

2. Itaú Corpbanca – Stuck in the Middle

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  • Itau CorpBanca (ITAUCORP CI) is starting to deliver on its turnaround
  • The challenge, in both Chile and Colombia, is that Itaú Corpbanca is in the tricky middle
  • It is neither one of the big banks, nor a specialist lender, so it needs first class execution to deliver improved returns
  • Core capital is tight, especially once Colombian bank minorities are bought out, which also limits the dividend outlook
  • Capital IQ’s consensus ROE forecasts for 2020 point to 10% plus; our more conservative estimates indicate a 2020 ROE of c8%
  • On a PBV ratio of under 1x, Itaú Corpbanca screens as good value but needs to produce much improved returns to avoid falling into the value trap

3. RHB Bank Placement: Last Deal Did Well Despite Size but Discount Is Tight

Overall%20score

Aabar Investments plans to sell US$204m worth of its RHB Bank Bhd (RHBBANK MK) or about 3.9% of the company to reduce its holding to 6.0%. 

This is the third sell-down by Aabar in less than a year, following a selldown in August 2018 and March 2019. The previous selldown in March 2019, RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, was priced at the low-end and did well in the first week. 

Guided price range is similar to its last sell down. The deal scores in the borderline for participation on our framework with a tight discount. The overhang risk remains from the 6.0% stake held by Aabar post deal. 

4. SPX Fade from Macro Pivot Highs

Spx%20new%20for%20sk

SPX is pressing into the dual top zone at 2,950 and a make or break point for the global cycle. After the break above 2,800 we view this as another important juncture for the US cycle.

RSI near that 70 resistance is the ideal fade zone with MACD resistance noted above with the trendline marking an key inflection point given we have yet to fully unwind bear divergence.

Core sectors are still underperforming as long as we stay below 2,950.

US 5 year yield is resting in key pivot support at 1.80% and will act as a bounce/break signals for the 10yr in a lead manner. We outline clear medium term resistance and support points on a pivotal yield turn.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Finance: Jinshang Bank (晋商银行) Post-IPO: Reiterate a Clear Avoid and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Jinshang Bank (晋商银行) Post-IPO: Reiterate a Clear Avoid
  2. Home Credit IPO: Whole Is Greater than the Sum of the Parts
  3. Home Credit Pre-IPO (Part II) – The Negatives – A Lot More to Dislike
  4. Rates Monitor: Zero in on US Rates
  5. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With

1. Jinshang Bank (晋商银行) Post-IPO: Reiterate a Clear Avoid

Valuation%20july%2018th

Jinshang Bank’s IPO was priced near the low end and started trading today. We have highlighted in our earlier note that the IPO is rich in valuation. In addition, we are concerned about the company’s asset quality and its exposure to cyclical business in Shanxi province. In this insight, we will summarize the allotment results and recap our views on valuation.

Our coverage on Jinshang Bank

2. Home Credit IPO: Whole Is Greater than the Sum of the Parts

M3%2b%20delinquency%20ratio

Home Credit (HC HK) is a leading emerging market consumer finance provider. In our initiation note, we noted that setting aside the ongoing industry uncertainty, we believe that Home Credit’s fundamentals are solid and recommend placing it on the IPO watchlist.

In this note, we take an in-depth look at the key operating metrics on a geographical basis. Each geography on a standalone basis is unlikely to set pulses racing as they come with both opportunities and challenges. On the other hand, when put together, the combined entity makes for a more compelling investment proposition in an industry with a poor “public market” reputation.

3. Home Credit Pre-IPO (Part II) – The Negatives – A Lot More to Dislike

Pos gross loans outstanding fell yoy in 2018 2017 2018 fy16 18 cagr chartbuilder

Home Credit (HC HK) (HC) plans to raise up to US$1.5bn, as per media reports, via an IPO of new and existing shares in Hong Kong. 

HC has operations across nine countries, with China being the largest contributor in terms of assets and earnings. Its loan book has been growing at a rapid pace and earnings have managed to outpace asset growth.

Given the large quantum of data available in the 821 page application proof, I’ve split the insight into two parts. In the first part, I ran through the basics and highlighted the good stuff,  Home Credit Pre-IPO (Part I) – The Positives – Lots to Like. In this insight, I’ll talk about the not so flattering points.

4. Rates Monitor: Zero in on US Rates

We are launching our Rates Monitor to track movements in global interest rates.

  • The US Federal Reserve Bank could be entering policy accommodation at its upcoming meeting on July 31, in our view. We note that historically, episodes of policy accommodation have lasted for a considerable number of months. Furthermore, the number of rate cuts (or QE equivalent) needed have been significant.
  • If the historical trend is repeated, policy rates could eventually hit zero and it is potentially likely for the Fed to look for measures beyond rate cuts.
  • However, long-term rates today are also not significantly above the zero-lower bound. The closer they approach the zero limit; somewhat lesser the ability of unconventional policy measures to stimulate.

5. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With

Untitled

The S&P 500 continues its march higher, however the troops have been unable to keep up with the generals and with this is an ounce of concern. Sending the generals into battle often ends up with no more leaders. Our view of the markets is to deploy a barbell approach of growth and safety. While growth continues to outperform, it does so without the small-caps. Meanwhile utilities and staples continue to march just behind the growth areas of the market, and have been unable to reach new RS highs since the December decline. In this report we detail our investment thesis and outlook for U.S. equities, highlighting our favorite sectors and bottoms up ideas.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Finance: Itaú Corpbanca – Stuck in the Middle and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Itaú Corpbanca – Stuck in the Middle
  2. RHB Bank Placement: Last Deal Did Well Despite Size but Discount Is Tight
  3. SPX Fade from Macro Pivot Highs

1. Itaú Corpbanca – Stuck in the Middle

Capture22

  • Itau CorpBanca (ITAUCORP CI) is starting to deliver on its turnaround
  • The challenge, in both Chile and Colombia, is that Itaú Corpbanca is in the tricky middle
  • It is neither one of the big banks, nor a specialist lender, so it needs first class execution to deliver improved returns
  • Core capital is tight, especially once Colombian bank minorities are bought out, which also limits the dividend outlook
  • Capital IQ’s consensus ROE forecasts for 2020 point to 10% plus; our more conservative estimates indicate a 2020 ROE of c8%
  • On a PBV ratio of under 1x, Itaú Corpbanca screens as good value but needs to produce much improved returns to avoid falling into the value trap

2. RHB Bank Placement: Last Deal Did Well Despite Size but Discount Is Tight

Overall%20score

Aabar Investments plans to sell US$204m worth of its RHB Bank Bhd (RHBBANK MK) or about 3.9% of the company to reduce its holding to 6.0%. 

This is the third sell-down by Aabar in less than a year, following a selldown in August 2018 and March 2019. The previous selldown in March 2019, RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, was priced at the low-end and did well in the first week. 

Guided price range is similar to its last sell down. The deal scores in the borderline for participation on our framework with a tight discount. The overhang risk remains from the 6.0% stake held by Aabar post deal. 

3. SPX Fade from Macro Pivot Highs

Spx%20new%20for%20sk

SPX is pressing into the dual top zone at 2,950 and a make or break point for the global cycle. After the break above 2,800 we view this as another important juncture for the US cycle.

RSI near that 70 resistance is the ideal fade zone with MACD resistance noted above with the trendline marking an key inflection point given we have yet to fully unwind bear divergence.

Core sectors are still underperforming as long as we stay below 2,950.

US 5 year yield is resting in key pivot support at 1.80% and will act as a bounce/break signals for the 10yr in a lead manner. We outline clear medium term resistance and support points on a pivotal yield turn.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Finance: Home Credit IPO: Whole Is Greater than the Sum of the Parts and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Home Credit IPO: Whole Is Greater than the Sum of the Parts
  2. Home Credit Pre-IPO (Part II) – The Negatives – A Lot More to Dislike
  3. Rates Monitor: Zero in on US Rates
  4. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With
  5. Home Credit IPO Initiation: Credit Where Credit’s Due

1. Home Credit IPO: Whole Is Greater than the Sum of the Parts

Ssea%20take%20rates

Home Credit (HC HK) is a leading emerging market consumer finance provider. In our initiation note, we noted that setting aside the ongoing industry uncertainty, we believe that Home Credit’s fundamentals are solid and recommend placing it on the IPO watchlist.

In this note, we take an in-depth look at the key operating metrics on a geographical basis. Each geography on a standalone basis is unlikely to set pulses racing as they come with both opportunities and challenges. On the other hand, when put together, the combined entity makes for a more compelling investment proposition in an industry with a poor “public market” reputation.

2. Home Credit Pre-IPO (Part II) – The Negatives – A Lot More to Dislike

Roa china cis ssea cee total chartbuilder

Home Credit (HC HK) (HC) plans to raise up to US$1.5bn, as per media reports, via an IPO of new and existing shares in Hong Kong. 

HC has operations across nine countries, with China being the largest contributor in terms of assets and earnings. Its loan book has been growing at a rapid pace and earnings have managed to outpace asset growth.

Given the large quantum of data available in the 821 page application proof, I’ve split the insight into two parts. In the first part, I ran through the basics and highlighted the good stuff,  Home Credit Pre-IPO (Part I) – The Positives – Lots to Like. In this insight, I’ll talk about the not so flattering points.

3. Rates Monitor: Zero in on US Rates

We are launching our Rates Monitor to track movements in global interest rates.

  • The US Federal Reserve Bank could be entering policy accommodation at its upcoming meeting on July 31, in our view. We note that historically, episodes of policy accommodation have lasted for a considerable number of months. Furthermore, the number of rate cuts (or QE equivalent) needed have been significant.
  • If the historical trend is repeated, policy rates could eventually hit zero and it is potentially likely for the Fed to look for measures beyond rate cuts.
  • However, long-term rates today are also not significantly above the zero-lower bound. The closer they approach the zero limit; somewhat lesser the ability of unconventional policy measures to stimulate.

4. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With

Untitled

The S&P 500 continues its march higher, however the troops have been unable to keep up with the generals and with this is an ounce of concern. Sending the generals into battle often ends up with no more leaders. Our view of the markets is to deploy a barbell approach of growth and safety. While growth continues to outperform, it does so without the small-caps. Meanwhile utilities and staples continue to march just behind the growth areas of the market, and have been unable to reach new RS highs since the December decline. In this report we detail our investment thesis and outlook for U.S. equities, highlighting our favorite sectors and bottoms up ideas.

5. Home Credit IPO Initiation: Credit Where Credit’s Due

Operating%20income%20growth

Home Credit (HC HK) is a leading emerging market consumer finance provider. It offers point-of-sale (POS) loans, cash loans and revolving loan products to underserved borrowers in China, CIS (Russia and Kazakhstan), SSEA (India, Indonesia, Vietnam and the Philippines), and CEE (the Czech Republic and Slovakia). Home Credit intends to list in Hong Kong to raise at least $1 billion, according to press reports.

Investing in the online consumer finance market in an acquired taste, particularly as the Chinese industry has been rocked due to new regulations. Setting aside the ongoing industry uncertainty, we believe that Home Credit’s fundamentals are solid and recommend placing it on the IPO watchlist.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Finance: RHB Bank Placement: Last Deal Did Well Despite Size but Discount Is Tight and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. RHB Bank Placement: Last Deal Did Well Despite Size but Discount Is Tight
  2. SPX Fade from Macro Pivot Highs
  3. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow
  4. HUGE Nomura Holdings (8604 JP) Buyback

1. RHB Bank Placement: Last Deal Did Well Despite Size but Discount Is Tight

Overall%20score

Aabar Investments plans to sell US$204m worth of its RHB Bank Bhd (RHBBANK MK) or about 3.9% of the company to reduce its holding to 6.0%. 

This is the third sell-down by Aabar in less than a year, following a selldown in August 2018 and March 2019. The previous selldown in March 2019, RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, was priced at the low-end and did well in the first week. 

Guided price range is similar to its last sell down. The deal scores in the borderline for participation on our framework with a tight discount. The overhang risk remains from the 6.0% stake held by Aabar post deal. 

2. SPX Fade from Macro Pivot Highs

Spx%20new%20for%20sk

SPX is pressing into the dual top zone at 2,950 and a make or break point for the global cycle. After the break above 2,800 we view this as another important juncture for the US cycle.

RSI near that 70 resistance is the ideal fade zone with MACD resistance noted above with the trendline marking an key inflection point given we have yet to fully unwind bear divergence.

Core sectors are still underperforming as long as we stay below 2,950.

US 5 year yield is resting in key pivot support at 1.80% and will act as a bounce/break signals for the 10yr in a lead manner. We outline clear medium term resistance and support points on a pivotal yield turn.

3. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow

Nav%2018%20jun

This week in StubWorld …

Preceding my comments on Wheelock and Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

4. HUGE Nomura Holdings (8604 JP) Buyback

Screenshot%202019 06 19%20at%203.04.24%20am

Yesterday after the close, Nomura Holdings (8604 JP) announced its Board of Directors had approved a buyback program to buy up to ¥150bn and up to 300 million shares.

The period eligible for execution of the buyback will run from 19 June 2019 through 31 March 2020, though the trust agreement enabling the execution has not been signed as of the board announcement. I would not expect it to take long. Nomura has been buying back shares most every year for many years. 

300 million shares is 8.6% of shares outstanding and 9.06% of shares out ex-Treasury shares.

This is larger than previous buybacks and is done for obvious reasons. The broker’s shares are trading a few percent off a 6+ year low, and at 0.43x tangible book. The shares are in the doldrums as full-service brokers worldwide suffer from the ongoing move to passive, ongoing difficult trading conditions in bonds and credit, and the ever-increasing competition for deals. This past year the broker suffered its first annual pre-tax loss since the massive write-downs and markdowns suffered in the year to March 2009. This came as asset management and retail brokerage business saw pre-tax income drop in half from ¥169bn to ¥84bn, but the institutional securities business saw pre-tax income drop from +¥100bn to – ¥111bn, and other expenses hit (including a ¥19.8bn settlement with the DOJ and ¥12bn of associated legal costs, an ¥11bn loss on Mebuki Financial Group (7167 JP) and a little more here and there on cross-holding impairments).

Nomura Holdings may be in the dumps, but the situation is worth a cursory look at least. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Finance: Home Credit Pre-IPO (Part II) – The Negatives – A Lot More to Dislike and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Home Credit Pre-IPO (Part II) – The Negatives – A Lot More to Dislike
  2. Rates Monitor: Zero in on US Rates
  3. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With
  4. Home Credit IPO Initiation: Credit Where Credit’s Due
  5. Is Poor Internal Audit a Lacuna in HDFC Bank’s Processes, Or Part of Its Business Model?

1. Home Credit Pre-IPO (Part II) – The Negatives – A Lot More to Dislike

Loan%20 %20pos%20loan%20purpose

Home Credit (HC HK) (HC) plans to raise up to US$1.5bn, as per media reports, via an IPO of new and existing shares in Hong Kong. 

HC has operations across nine countries, with China being the largest contributor in terms of assets and earnings. Its loan book has been growing at a rapid pace and earnings have managed to outpace asset growth.

Given the large quantum of data available in the 821 page application proof, I’ve split the insight into two parts. In the first part, I ran through the basics and highlighted the good stuff,  Home Credit Pre-IPO (Part I) – The Positives – Lots to Like. In this insight, I’ll talk about the not so flattering points.

2. Rates Monitor: Zero in on US Rates

We are launching our Rates Monitor to track movements in global interest rates.

  • The US Federal Reserve Bank could be entering policy accommodation at its upcoming meeting on July 31, in our view. We note that historically, episodes of policy accommodation have lasted for a considerable number of months. Furthermore, the number of rate cuts (or QE equivalent) needed have been significant.
  • If the historical trend is repeated, policy rates could eventually hit zero and it is potentially likely for the Fed to look for measures beyond rate cuts.
  • However, long-term rates today are also not significantly above the zero-lower bound. The closer they approach the zero limit; somewhat lesser the ability of unconventional policy measures to stimulate.

3. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With

Untitled

The S&P 500 continues its march higher, however the troops have been unable to keep up with the generals and with this is an ounce of concern. Sending the generals into battle often ends up with no more leaders. Our view of the markets is to deploy a barbell approach of growth and safety. While growth continues to outperform, it does so without the small-caps. Meanwhile utilities and staples continue to march just behind the growth areas of the market, and have been unable to reach new RS highs since the December decline. In this report we detail our investment thesis and outlook for U.S. equities, highlighting our favorite sectors and bottoms up ideas.

4. Home Credit IPO Initiation: Credit Where Credit’s Due

Fee%20and%20commission

Home Credit (HC HK) is a leading emerging market consumer finance provider. It offers point-of-sale (POS) loans, cash loans and revolving loan products to underserved borrowers in China, CIS (Russia and Kazakhstan), SSEA (India, Indonesia, Vietnam and the Philippines), and CEE (the Czech Republic and Slovakia). Home Credit intends to list in Hong Kong to raise at least $1 billion, according to press reports.

Investing in the online consumer finance market in an acquired taste, particularly as the Chinese industry has been rocked due to new regulations. Setting aside the ongoing industry uncertainty, we believe that Home Credit’s fundamentals are solid and recommend placing it on the IPO watchlist.

5. Is Poor Internal Audit a Lacuna in HDFC Bank’s Processes, Or Part of Its Business Model?

Hdbk%20audit%20&%20compliance%20committee

Recently, the Reserve Bank of India (RBI) was forced to disclose its confidential inspection reports, called Risk Assessment Reports (RARs), of the State Bank of India (SBI), HDFC Bank, ICICI Bank and Axis Bank for the years FY2013 to FY2015. Shockingly, among the four banks, HDFC Bank was assessed not only with poor scores on internal audit, operational (non-IT) risk, risk governance, senior management and board risk, but with the worst scores on internal audit in all 3 years, and in non-IT operational risk in 2 of the 3 years. This stands in contrast to HDFC Bank’s reputation for good governance. Although, on the aggregate risk, there was no cause for concern, the fact that RBI scored HDFC Bank as high-risk on these select segments, and that from FY2013 to FY2015 these segment risk scores kept getting worse, should be of concern to shareholders. It is worth recalling that in July 2011, Cobrapost had exposed the staff of banks brazenly marketing money laundering; HDFC Bank figured prominently among these, and was subsequently fined by the RBI. Apparently, the bank and its board took the regulator’s penalty lightly, as its subsequent RBI risk scores evidenced a casual approach towards internal audit and compliance.

The accountability for such poor risk scores on internal audit and non-IT operational risk rests squarely with the bank’s audit and compliance committee, which in the concerned years was chaired by the chairperson of the board, namely C.M. Vasudev (FY2013 and FY2014) and Shyamala Gopinath (FY2015), and had as its members Pandit  Palande, Partho Datta and Bobby Parikh. That a committee chaired by the chairperson of the board, with eminent independent directors as its members, was ranked so poorly by the banking supervisor, and that its rating kept getting worse, is a sad reflection on the oversight exercised by HDFC Bank’s board of directors. This was all the more surprising as Shyamala Gopinath was a former career central banker and retired as deputy governor, RBI, and should have realised the importance of compliance and internal audit in banks.

What should also be of concern is that HDFC Bank has never indicated that these risk scores were so poor in their management commentary, which portrayed a rosy picture. It is also extremely unfortunate, but largely expected, that sell-side analysts have not displayed any interest in further probing these concerns regarding India’s largest bank by market capitalisation, though they are in the public domain.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Finance: SPX Fade from Macro Pivot Highs and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. SPX Fade from Macro Pivot Highs
  2. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow
  3. HUGE Nomura Holdings (8604 JP) Buyback

1. SPX Fade from Macro Pivot Highs

Spx%20new%20for%20sk

SPX is pressing into the dual top zone at 2,950 and a make or break point for the global cycle. After the break above 2,800 we view this as another important juncture for the US cycle.

RSI near that 70 resistance is the ideal fade zone with MACD resistance noted above with the trendline marking an key inflection point given we have yet to fully unwind bear divergence.

Core sectors are still underperforming as long as we stay below 2,950.

US 5 year yield is resting in key pivot support at 1.80% and will act as a bounce/break signals for the 10yr in a lead manner. We outline clear medium term resistance and support points on a pivotal yield turn.

2. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow

Nav%2018%20jun

This week in StubWorld …

Preceding my comments on Wheelock and Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

3. HUGE Nomura Holdings (8604 JP) Buyback

Screenshot%202019 06 19%20at%203.04.24%20am

Yesterday after the close, Nomura Holdings (8604 JP) announced its Board of Directors had approved a buyback program to buy up to ¥150bn and up to 300 million shares.

The period eligible for execution of the buyback will run from 19 June 2019 through 31 March 2020, though the trust agreement enabling the execution has not been signed as of the board announcement. I would not expect it to take long. Nomura has been buying back shares most every year for many years. 

300 million shares is 8.6% of shares outstanding and 9.06% of shares out ex-Treasury shares.

This is larger than previous buybacks and is done for obvious reasons. The broker’s shares are trading a few percent off a 6+ year low, and at 0.43x tangible book. The shares are in the doldrums as full-service brokers worldwide suffer from the ongoing move to passive, ongoing difficult trading conditions in bonds and credit, and the ever-increasing competition for deals. This past year the broker suffered its first annual pre-tax loss since the massive write-downs and markdowns suffered in the year to March 2009. This came as asset management and retail brokerage business saw pre-tax income drop in half from ¥169bn to ¥84bn, but the institutional securities business saw pre-tax income drop from +¥100bn to – ¥111bn, and other expenses hit (including a ¥19.8bn settlement with the DOJ and ¥12bn of associated legal costs, an ¥11bn loss on Mebuki Financial Group (7167 JP) and a little more here and there on cross-holding impairments).

Nomura Holdings may be in the dumps, but the situation is worth a cursory look at least. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Finance: SPX Fade from Macro Pivot Highs and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. SPX Fade from Macro Pivot Highs
  2. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow
  3. HUGE Nomura Holdings (8604 JP) Buyback
  4. KTC – Marginal Yields to Double?

1. SPX Fade from Macro Pivot Highs

Spx%20new%20for%20sk

SPX is pressing into the dual top zone at 2,950 and a make or break point for the global cycle. After the break above 2,800 we view this as another important juncture for the US cycle.

RSI near that 70 resistance is the ideal fade zone with MACD resistance noted above with the trendline marking an key inflection point given we have yet to fully unwind bear divergence.

Core sectors are still underperforming as long as we stay below 2,950.

US 5 year yield is resting in key pivot support at 1.80% and will act as a bounce/break signals for the 10yr in a lead manner. We outline clear medium term resistance and support points on a pivotal yield turn.

2. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow

Nav%2018%20jun

This week in StubWorld …

Preceding my comments on Wheelock and Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

3. HUGE Nomura Holdings (8604 JP) Buyback

Screenshot%202019 06 19%20at%203.04.24%20am

Yesterday after the close, Nomura Holdings (8604 JP) announced its Board of Directors had approved a buyback program to buy up to ¥150bn and up to 300 million shares.

The period eligible for execution of the buyback will run from 19 June 2019 through 31 March 2020, though the trust agreement enabling the execution has not been signed as of the board announcement. I would not expect it to take long. Nomura has been buying back shares most every year for many years. 

300 million shares is 8.6% of shares outstanding and 9.06% of shares out ex-Treasury shares.

This is larger than previous buybacks and is done for obvious reasons. The broker’s shares are trading a few percent off a 6+ year low, and at 0.43x tangible book. The shares are in the doldrums as full-service brokers worldwide suffer from the ongoing move to passive, ongoing difficult trading conditions in bonds and credit, and the ever-increasing competition for deals. This past year the broker suffered its first annual pre-tax loss since the massive write-downs and markdowns suffered in the year to March 2009. This came as asset management and retail brokerage business saw pre-tax income drop in half from ¥169bn to ¥84bn, but the institutional securities business saw pre-tax income drop from +¥100bn to – ¥111bn, and other expenses hit (including a ¥19.8bn settlement with the DOJ and ¥12bn of associated legal costs, an ¥11bn loss on Mebuki Financial Group (7167 JP) and a little more here and there on cross-holding impairments).

Nomura Holdings may be in the dumps, but the situation is worth a cursory look at least. 

4. KTC – Marginal Yields to Double?

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Thailand’s credit card and personal lender, Krungthai Card (KTC TB), will enter the Pico and Nano loan market in July.  These loans are capped at a rate of 36% compared with 28% for personal loans and 18% for credit card loans.  We must expect therefore that at least during 2020, that marginal loans will be done a rate that is essentially double the rate on core credit card loans. Even where KTC is able to end next year with only 5% of its loans in this segment, the impact to profit can be substantial.

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Brief Finance: Rates Monitor: Zero in on US Rates and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Rates Monitor: Zero in on US Rates
  2. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With
  3. Home Credit IPO Initiation: Credit Where Credit’s Due
  4. Is Poor Internal Audit a Lacuna in HDFC Bank’s Processes, Or Part of Its Business Model?
  5. Home Credit Pre-IPO (Part I) – The Positives – Lots to Like

1. Rates Monitor: Zero in on US Rates

We are launching our Rates Monitor to track movements in global interest rates.

  • The US Federal Reserve Bank could be entering policy accommodation at its upcoming meeting on July 31, in our view. We note that historically, episodes of policy accommodation have lasted for a considerable number of months. Furthermore, the number of rate cuts (or QE equivalent) needed have been significant.
  • If the historical trend is repeated, policy rates could eventually hit zero and it is potentially likely for the Fed to look for measures beyond rate cuts.
  • However, long-term rates today are also not significantly above the zero-lower bound. The closer they approach the zero limit; somewhat lesser the ability of unconventional policy measures to stimulate.

2. U.S. Equity Strategy: Growth And Safety Are The Plays To Stay With

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The S&P 500 continues its march higher, however the troops have been unable to keep up with the generals and with this is an ounce of concern. Sending the generals into battle often ends up with no more leaders. Our view of the markets is to deploy a barbell approach of growth and safety. While growth continues to outperform, it does so without the small-caps. Meanwhile utilities and staples continue to march just behind the growth areas of the market, and have been unable to reach new RS highs since the December decline. In this report we detail our investment thesis and outlook for U.S. equities, highlighting our favorite sectors and bottoms up ideas.

3. Home Credit IPO Initiation: Credit Where Credit’s Due

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Home Credit (HC HK) is a leading emerging market consumer finance provider. It offers point-of-sale (POS) loans, cash loans and revolving loan products to underserved borrowers in China, CIS (Russia and Kazakhstan), SSEA (India, Indonesia, Vietnam and the Philippines), and CEE (the Czech Republic and Slovakia). Home Credit intends to list in Hong Kong to raise at least $1 billion, according to press reports.

Investing in the online consumer finance market in an acquired taste, particularly as the Chinese industry has been rocked due to new regulations. Setting aside the ongoing industry uncertainty, we believe that Home Credit’s fundamentals are solid and recommend placing it on the IPO watchlist.

4. Is Poor Internal Audit a Lacuna in HDFC Bank’s Processes, Or Part of Its Business Model?

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Recently, the Reserve Bank of India (RBI) was forced to disclose its confidential inspection reports, called Risk Assessment Reports (RARs), of the State Bank of India (SBI), HDFC Bank, ICICI Bank and Axis Bank for the years FY2013 to FY2015. Shockingly, among the four banks, HDFC Bank was assessed not only with poor scores on internal audit, operational (non-IT) risk, risk governance, senior management and board risk, but with the worst scores on internal audit in all 3 years, and in non-IT operational risk in 2 of the 3 years. This stands in contrast to HDFC Bank’s reputation for good governance. Although, on the aggregate risk, there was no cause for concern, the fact that RBI scored HDFC Bank as high-risk on these select segments, and that from FY2013 to FY2015 these segment risk scores kept getting worse, should be of concern to shareholders. It is worth recalling that in July 2011, Cobrapost had exposed the staff of banks brazenly marketing money laundering; HDFC Bank figured prominently among these, and was subsequently fined by the RBI. Apparently, the bank and its board took the regulator’s penalty lightly, as its subsequent RBI risk scores evidenced a casual approach towards internal audit and compliance.

The accountability for such poor risk scores on internal audit and non-IT operational risk rests squarely with the bank’s audit and compliance committee, which in the concerned years was chaired by the chairperson of the board, namely C.M. Vasudev (FY2013 and FY2014) and Shyamala Gopinath (FY2015), and had as its members Pandit  Palande, Partho Datta and Bobby Parikh. That a committee chaired by the chairperson of the board, with eminent independent directors as its members, was ranked so poorly by the banking supervisor, and that its rating kept getting worse, is a sad reflection on the oversight exercised by HDFC Bank’s board of directors. This was all the more surprising as Shyamala Gopinath was a former career central banker and retired as deputy governor, RBI, and should have realised the importance of compliance and internal audit in banks.

What should also be of concern is that HDFC Bank has never indicated that these risk scores were so poor in their management commentary, which portrayed a rosy picture. It is also extremely unfortunate, but largely expected, that sell-side analysts have not displayed any interest in further probing these concerns regarding India’s largest bank by market capitalisation, though they are in the public domain.

5. Home Credit Pre-IPO (Part I) – The Positives – Lots to Like

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Home Credit (HC HK) (HC) plans to raise up to US$1.5bn, as per media reports, via an IPO of new and existing shares in Hong Kong. 

HC has operations across nine countries, with China being the largest contributor in terms of assets and earnings. Its loan book has been growing at a rapid pace and earnings have managed to outpace asset growth.

Given the large quantum of data available in the 821 page application proof, I’ve split the insight into two parts. In this insight, I’ll run through the basics and highlight the good stuff. I’ll reserve the more interesting and not so flattering points for the next insight. 

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Brief Finance: StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow
  2. HUGE Nomura Holdings (8604 JP) Buyback
  3. KTC – Marginal Yields to Double?
  4. Alibaba (BABA US): Early Thoughts on the Hong Kong Listing

1. StubWorld: Wheelock’s NAV (Unjustly) Narrows; A Case For Naspers’ NAV To (Further) Narrow

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This week in StubWorld …

Preceding my comments on Wheelock and Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

2. HUGE Nomura Holdings (8604 JP) Buyback

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Yesterday after the close, Nomura Holdings (8604 JP) announced its Board of Directors had approved a buyback program to buy up to ¥150bn and up to 300 million shares.

The period eligible for execution of the buyback will run from 19 June 2019 through 31 March 2020, though the trust agreement enabling the execution has not been signed as of the board announcement. I would not expect it to take long. Nomura has been buying back shares most every year for many years. 

300 million shares is 8.6% of shares outstanding and 9.06% of shares out ex-Treasury shares.

This is larger than previous buybacks and is done for obvious reasons. The broker’s shares are trading a few percent off a 6+ year low, and at 0.43x tangible book. The shares are in the doldrums as full-service brokers worldwide suffer from the ongoing move to passive, ongoing difficult trading conditions in bonds and credit, and the ever-increasing competition for deals. This past year the broker suffered its first annual pre-tax loss since the massive write-downs and markdowns suffered in the year to March 2009. This came as asset management and retail brokerage business saw pre-tax income drop in half from ¥169bn to ¥84bn, but the institutional securities business saw pre-tax income drop from +¥100bn to – ¥111bn, and other expenses hit (including a ¥19.8bn settlement with the DOJ and ¥12bn of associated legal costs, an ¥11bn loss on Mebuki Financial Group (7167 JP) and a little more here and there on cross-holding impairments).

Nomura Holdings may be in the dumps, but the situation is worth a cursory look at least. 

3. KTC – Marginal Yields to Double?

1

Thailand’s credit card and personal lender, Krungthai Card (KTC TB), will enter the Pico and Nano loan market in July.  These loans are capped at a rate of 36% compared with 28% for personal loans and 18% for credit card loans.  We must expect therefore that at least during 2020, that marginal loans will be done a rate that is essentially double the rate on core credit card loans. Even where KTC is able to end next year with only 5% of its loans in this segment, the impact to profit can be substantial.

4. Alibaba (BABA US): Early Thoughts on the Hong Kong Listing

Alibaba Group Holding (BABA US) seems to be going ahead with its rumoured secondary listing in Hong Kong. According to some media reports, Alibaba has confidentially filed for a secondary listing in the Hong Kong Stock Exchange (HKEX) last week to raise $20bn – although there has been no official announcement yet from Alibaba.

While Alibaba’s secondary listing in Hong Kong could be politically motivated amidst rising tensions between the US and China, we believe such a move won’t be necessarily bad for anyone, including its US shareholders.

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