Category

Financials Sector

Brief Finance: Manappuram Finance Ltd. – A “Golden” Opportunity and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Manappuram Finance Ltd. – A “Golden” Opportunity

1. Manappuram Finance Ltd. – A “Golden” Opportunity

We like the 5.9% bonds due 2023 issued by Manappuram Finance (MGFL IN) . We like the company’s primary business (making loans collateralized by gold ornaments), which is characterized by high margins and low credit losses. We do not foresee major risks (funding, asset quality, etc.), going forward.We like the pickup in yields offered by these bonds over those issued by Muthoot Finance (MUTH IN) .

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Brief Finance: BOCHK – A Very Managed, Yet Poor Set of Numbers and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. BOCHK – A Very Managed, Yet Poor Set of Numbers
  2. European Banks: Dividends in a Time of Crisis
  3. Postal Savings Bank – Slow and Steady For Now
  4. Nedbank: Castigation Towards Junk
  5. Indian Fincos – Focusing on Liquidity

1. BOCHK – A Very Managed, Yet Poor Set of Numbers

* Despite Managed Set of Results, Still A Miss: BOC Hong Kong Holdings (2388.HK) [BOCHK] reported 2H19 earnings results of HKD 15.6 bn substantially missing consensus forecasts – although HKD 645 mn or 13.1% ahead of 1H19 numbers. Given the reserve bleed on top of credit weakness which was attributed to mainland China, we calculate that the 2H19 bottom-line result was overstated by over 5%;

* Credit and NIMs to Weaken: BOCHK’s stated figures fail to tell the entire story. Net new problem loan growth amounted to HKD 2.0 bn or 74.4% linked period or 149% on annualized basis. This is alarming as we have yet to feel the impact of the corona virus on BOCHK’s results while its mainland China NPLs have already increased 157% HOH. 4Q19 net interest income actually declined 2% as the higher HIBOR rates was more than offset by USD rates while the NIM declined 6 bp to 1.66%. There is increasing pressure on asset sensitive balance sheets in response to a lagging HIBOR post the aggressive FRB moves.

2. European Banks: Dividends in a Time of Crisis

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  • The ECB is holding talks with Eurozone lenders with regards to dividends, according to Bloomberg, in order to attempt to preserve capital during the coronavirus crisis
  • Many European banks are high dividend yielding, and an important element of equity income funds; in some cases, bank dividend payouts are also very high
  • Our main screen is based on European banks’ dividend yields versus dividend cover, in which we try to identify those European banks most at risk of potential dividend cuts
  • We recognize that consensus earnings estimates are subject to change, but we see this exercise as a starting point; we intend to revisit this exercise further down the line when there will hopefully be more clarity
  • We see Intesa Sanpaolo (ISP IM) as one of the most exposed European banks to a dividend cut amongst our coverage; also among the Italians, Mediobanca SpA (MB IM) and Unione Di Banche Italiane (UBI IM) are higher risk
  • Also not out of the woods are UniCredit SpA (UCG IM) , Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) even though they seem less exposed to dividend cuts
  • Risks to our bearish view on Intesa’s dividend outlook include better than expected credit quality limiting the adverse impact on cost of risk, as well as better than expected fee generation and very stringent cost control all serving to counter earnings pressures

3. Postal Savings Bank – Slow and Steady For Now

* Decent Set of Results for Now:Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 2019 results of CNY 60.9 bn – increasing 16% YOY and in-line with its November 2019 pre-announcement. Fee revenues drove PSB’s YOY improvement, specifically the uptick in credit card and settlement/clearing fees which improved 13.3% and 25.7%, respectively; and

* Credit Quality Anticipated to Further Weaken: Credit quality was worse than expected, driven by weakness in corporate credit. More disturbing is the growth in level of net new NPLs CNY 12.9 bn which amounts to 34% over past 6 months – annualized at 68%; and

* NIM Pressures: The net interest margin declined 10 bp YOY to 2.44% due primarily to competitive pressures for deposits – especially in rural mainland China, and a 23 bp HOH decline in investment yields as PSB has a heavier securities component of assets with an LDR of 53.4%. Costlier time deposits are becoming more of longer-term funding source for PSB to grow total funding, with the consequence being a large but expensive deposit base for PSB.  

4. Nedbank: Castigation Towards Junk

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South Africa continues to face well-documented challenges and risks. In their earnings presentation earlier this month, beleaguered lender Nedbank (NED SJ) puts a “more of the same” scenario at 50% for the next few years- a grey, twilight or penumbra zone of lacklustre GDP growth, moderate inflation, high single-digit credit growth,  and elevated interest rates. In this scenario, the vexing land question remains in the background, rearing its head now and again, while initiatives to stem corruption continue and Eskom’s finances remain perilous with load-shedding at level 1 and 2. Management at Nedbank seems resigned to the Moody’s downgrade but believes that a great deal is already priced-in. Of course this could all look a lot better with a full embrace of structural reform, policy certainty, public finance improvement, enhanced business and consumer confidence, more investment and less joblessness. The bank apportions a 10% chance to a high stress scenario over the next few years, underpinned by negative news on land reform and corruption, and a 20% probability of a much more benign scenario which is conditioned by better public finances, an Eskom turnaround, and the unlikely eschewing of a downgrade.

In November, Moody’s flagged load-shedding, a ballooning public debt and budget deficit, inequality and slow economic growth as among the risk factors that could lead to the country being downgraded. Since then, those risk factors have not got any better and are likely to be exacerbated by the economic downturn as a result of Covid-19. The yield on the 10-year South African government bonds spiked to above 12% on Monday. That means the government will have to pay billions more in interest to pay for local roads, hospitals, and services. Wider deficits and additional borrowing are a risk as elsewhere given Covid-19. A Moody’s decision could happen tomorrow. It would be one of the most telegraphed and torturous downgrades of all time.

Steven Holden at CFR shows that GEM managers have reduced positions in South African equities and are looking elsewhere broadly. Pending “junk” status means outflows as bond investors look elsewhere if they have not already made the decision. Fortunately, most of South Africa’s debt is rand-denominated. So even with the rand’s recent slump (from below R15/$ a month ago to near R17.54 currently), this will not threaten its ability to settle its debt. Many other emerging markets are not in the same position.

The collapse in the price of oil is a welcome tailwind.

South Africa has a relatively robust and well-regulated Banking System. Bank shares which “normally” trade at premium valuations, have not showed up as this cheap versus other EM peers for a very long time. First Rand is a highly prudent well-managed lender while Standard Bank always struck us as innovative but circumspect. These are Investment Grade banks trading at a junk rating now. Their relative valuations are a great deal more interesting today. But Nedbank, an inferior lender, is just too cheap to ignore as its share price has become overly detached from the others.

With such a disappointing, if not somewhat despondent, backdrop with a few positive drivers, it may seem counter-intuitive to recommend shares of a South African bank. But there is a price for everything and shares of Nedbank are at distressed levels.The pan-African franchise is struggling and is valued at zero under current valuation.

Shares trade on a Dividend Yield of 17% and an Earnings Yield of 30%. P/B and FV stand at 0.45x and 4%, respectively. Total Return ratio has reached 7.8x. A PH Score of 7.4 may reflect in great part the valuation but operational progress on Capitalisation, Efficiency, Provisioning, and Liquidity play a part too. Profitability though narrowed as credit costs  jumped forcefully on account of Asset Quality risks across the South African CIB franchise and as private equity holdings were revalued lower while risks in jurisdictions elsewhere in Africa (for example especially Zimbabwe but also Nigeria) where Nedbank has a presence rose and pose macro challenges going forward. 

Shares stand in the top quintile of our global VFM rankings.

5. Indian Fincos – Focusing on Liquidity

We look at USD denominated bonds issues by four Indian finance companies as yields on all these bonds have risen on the back of the sell off in the global markets as well as the current climate of risk aversion. Given the current lock-down in the Indian economy, we focus on these companies’ liquidity positions. We believe that these companies can comfortably weather a 3 month shutdown, even if local wholesale funding markets freeze completely. We find the bonds of Iifl Holdings (IIFL IN) particularly attractive as they are almost trading at distressed levels.

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Brief Finance: HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO

1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO

The succession fiasco at HDFC Bank (HDFCB IN) reveals how the banking regulator has allowed a founder with a minority stake to have a stranglehold on the selection of the chief executive officer (CEO) and the chairman of the bank. Strangely, the board of the bank has to date been unable to choose a successor to the present CEO, Aditya Puri.

Article 162 in HDFC Bank’s Memorandum and Articles of Association permits Housing Development Finance Corporation (HDFC IN), mortgage financier and founder of HDFC Bank, to nominate the bank’s non-executive chairman and CEO (subject to the approval of the board, shareholders and the regulator), as long as HDFC or the HDFC group holds a minimum of 20% equity stake in the bank. Such a clause in the memorandum of association granting a minority shareholder the power to nominate critical board members not only goes against basic corporate governance principles, but also defies the banking regulator’s objective of lowering founder holding in banks so as to reduce their influence in executive management. While such a clause may have been understandable in the first 5 years of a bank’s existence, the regulator needs to reconsider its decision to allow the founder to control the management in perpetuity.

In Indian banks, founders are normally minority shareholders, and it is the responsibility of the regulator to ensure that founders do not interfere in management. For the Reserve Bank of India (RBI) to permit the HDFC group to nominate the chairperson and CEO in HDFC Bank stands at stark variance with its own policy of compelling bank founders to reduce their stake to 15%.

In private sector banks, the nomination and remuneration committee (NRC) of each bank board recommends candidates for directorship to be approved by the board, shareholders and the regulator. Hence nominee directors of the founders can be part of the NRC, and it should be the sole responsibility of the NRC to recommend new board members and evaluate the performance of the executive directors. By allowing HDFC to nominate the chairperson and CEO in HDFC Bank reduces HDFC Bank’s NRC to a mockery.

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Brief Finance: HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO
  2. Thai Banks: KBANK & BBL (With a Permata on the Side)

1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO

The succession fiasco at HDFC Bank (HDFCB IN) reveals how the banking regulator has allowed a founder with a minority stake to have a stranglehold on the selection of the chief executive officer (CEO) and the chairman of the bank. Strangely, the board of the bank has to date been unable to choose a successor to the present CEO, Aditya Puri.

Article 162 in HDFC Bank’s Memorandum and Articles of Association permits Housing Development Finance Corporation (HDFC IN), mortgage financier and founder of HDFC Bank, to nominate the bank’s non-executive chairman and CEO (subject to the approval of the board, shareholders and the regulator), as long as HDFC or the HDFC group holds a minimum of 20% equity stake in the bank. Such a clause in the memorandum of association granting a minority shareholder the power to nominate critical board members not only goes against basic corporate governance principles, but also defies the banking regulator’s objective of lowering founder holding in banks so as to reduce their influence in executive management. While such a clause may have been understandable in the first 5 years of a bank’s existence, the regulator needs to reconsider its decision to allow the founder to control the management in perpetuity.

In Indian banks, founders are normally minority shareholders, and it is the responsibility of the regulator to ensure that founders do not interfere in management. For the Reserve Bank of India (RBI) to permit the HDFC group to nominate the chairperson and CEO in HDFC Bank stands at stark variance with its own policy of compelling bank founders to reduce their stake to 15%.

In private sector banks, the nomination and remuneration committee (NRC) of each bank board recommends candidates for directorship to be approved by the board, shareholders and the regulator. Hence nominee directors of the founders can be part of the NRC, and it should be the sole responsibility of the NRC to recommend new board members and evaluate the performance of the executive directors. By allowing HDFC to nominate the chairperson and CEO in HDFC Bank reduces HDFC Bank’s NRC to a mockery.

2. Thai Banks: KBANK & BBL (With a Permata on the Side)

Screenshot%202020 02 26%20at%2011.52.33%20pm

As Smartkarma contributor Brian Freitas has ably discussed in a couple of pieces on the Kasikornbank PCL (KBANK TB) buyback program which has been ongoing for the past two weeks, it has been a setup situation to play the pair against Bangkok Bank Public (BBL TB).

The normal way of things might be to get long the stock which was about to prospectively buy back a huge portion of its ADV after MSCI had announced a down-weight, and short the one which still had potential large overhang from a possible change in the NVDR limit 4-5 months out.

Indeed on the day of the announcement (30 Jan), KBANK shares rallied 6%. They rallied further the next day. What had been an 6-7% underperformance against BBL in the first week after the MSCI news turned into a 15% rebound against BBL to the day after the buyback announcement. 

In the next two weeks until the buyback started, KBANK gained 1.5%, but underperformed BBL by about 2%. Then the buyback started…

The first four days of the buyback KBANK averaged buybacks of 27.3% of daily volume, and KBANK gained ~2.3% vs BBL. The next day it was 15.5%, and BBL outperformed KBANK by 3.4%. And BBL has outperformed KBANK each day since that day as well. 

On Wednesday 26 Feb, the day before the last day of the buyback, KBANK was down a shocking 9.7% as the SET Index as a whole had its worst single day in 6 years at -5.05%. Surprisingly, KBANK did not execute nearly as much as they could have – a measly 1.05mm shares in the face of massive selling pressure.

That leaves up to 5,076,000 shares to buy today. It is a goodly amount, and it is possible that they left a fair bit for the last day so they could prove a point. They are certainly not in danger of breaching the limit of the upper limit (buybacks must not purchase shares at more than 115% of the average of the previous five closes (i.e. they’ll have to keep it below THB 147.55). 

But there is pushing and shoving today, there may be a setup opportunity. Today is a day to watch.

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Brief Finance: HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO
  2. Thai Banks: KBANK & BBL (With a Permata on the Side)
  3. HKEx – Management’s Art of Saying Nothing

1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO

The succession fiasco at HDFC Bank (HDFCB IN) reveals how the banking regulator has allowed a founder with a minority stake to have a stranglehold on the selection of the chief executive officer (CEO) and the chairman of the bank. Strangely, the board of the bank has to date been unable to choose a successor to the present CEO, Aditya Puri.

Article 162 in HDFC Bank’s Memorandum and Articles of Association permits Housing Development Finance Corporation (HDFC IN), mortgage financier and founder of HDFC Bank, to nominate the bank’s non-executive chairman and CEO (subject to the approval of the board, shareholders and the regulator), as long as HDFC or the HDFC group holds a minimum of 20% equity stake in the bank. Such a clause in the memorandum of association granting a minority shareholder the power to nominate critical board members not only goes against basic corporate governance principles, but also defies the banking regulator’s objective of lowering founder holding in banks so as to reduce their influence in executive management. While such a clause may have been understandable in the first 5 years of a bank’s existence, the regulator needs to reconsider its decision to allow the founder to control the management in perpetuity.

In Indian banks, founders are normally minority shareholders, and it is the responsibility of the regulator to ensure that founders do not interfere in management. For the Reserve Bank of India (RBI) to permit the HDFC group to nominate the chairperson and CEO in HDFC Bank stands at stark variance with its own policy of compelling bank founders to reduce their stake to 15%.

In private sector banks, the nomination and remuneration committee (NRC) of each bank board recommends candidates for directorship to be approved by the board, shareholders and the regulator. Hence nominee directors of the founders can be part of the NRC, and it should be the sole responsibility of the NRC to recommend new board members and evaluate the performance of the executive directors. By allowing HDFC to nominate the chairperson and CEO in HDFC Bank reduces HDFC Bank’s NRC to a mockery.

2. Thai Banks: KBANK & BBL (With a Permata on the Side)

Screenshot%202020 02 26%20at%2011.52.33%20pm

As Smartkarma contributor Brian Freitas has ably discussed in a couple of pieces on the Kasikornbank PCL (KBANK TB) buyback program which has been ongoing for the past two weeks, it has been a setup situation to play the pair against Bangkok Bank Public (BBL TB).

The normal way of things might be to get long the stock which was about to prospectively buy back a huge portion of its ADV after MSCI had announced a down-weight, and short the one which still had potential large overhang from a possible change in the NVDR limit 4-5 months out.

Indeed on the day of the announcement (30 Jan), KBANK shares rallied 6%. They rallied further the next day. What had been an 6-7% underperformance against BBL in the first week after the MSCI news turned into a 15% rebound against BBL to the day after the buyback announcement. 

In the next two weeks until the buyback started, KBANK gained 1.5%, but underperformed BBL by about 2%. Then the buyback started…

The first four days of the buyback KBANK averaged buybacks of 27.3% of daily volume, and KBANK gained ~2.3% vs BBL. The next day it was 15.5%, and BBL outperformed KBANK by 3.4%. And BBL has outperformed KBANK each day since that day as well. 

On Wednesday 26 Feb, the day before the last day of the buyback, KBANK was down a shocking 9.7% as the SET Index as a whole had its worst single day in 6 years at -5.05%. Surprisingly, KBANK did not execute nearly as much as they could have – a measly 1.05mm shares in the face of massive selling pressure.

That leaves up to 5,076,000 shares to buy today. It is a goodly amount, and it is possible that they left a fair bit for the last day so they could prove a point. They are certainly not in danger of breaching the limit of the upper limit (buybacks must not purchase shares at more than 115% of the average of the previous five closes (i.e. they’ll have to keep it below THB 147.55). 

But there is pushing and shoving today, there may be a setup opportunity. Today is a day to watch.

3. HKEx – Management’s Art of Saying Nothing

  • Weak Quarter:Hong Kong Exchanges and Clearing (388.HK) [HKEx] reported EPS results of HKD 1.57  – down 11% linked quarter.  The weak results are primarily be attributed to reduced investment income on the back of the lower interest rate environment, and higher operating expenses related to both staff and non-staff costs.  
  •  No Real Discussion of 2020:  Velocity and ADTV no doubt will decline, as tech IPOs get delayed and many large travel-related companies are more likely to file for bankruptcy. Mainland China’s debt-laden developers were already facing a cash-crunch prior to the corona virus pandemic and problems are now exacerbated. Most builders only have a cash buffer of just three months. The mainland Chinese government’s lockdown and travel restrictions are in month two – intimating that developer defaults will accelerate in March 2020. It’s probably fair to say that the 105% Northbound growth in 2019 was no more than a head fake.  
  • Focus, Focus, Focus: This is a management tea, who all too often, gets distracted and fails to meet both near and long-term targets. That outrageous London Stock Exchange bid of USD 39 bn alone should have cost Charles Li his CEO title. Nevertheless, we are hopeful that HKEx has learned that this failure/distraction has caused an enormous loss of market confidence. 

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Brief Finance: HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO
  2. Thai Banks: KBANK & BBL (With a Permata on the Side)
  3. HKEx – Management’s Art of Saying Nothing
  4. Sawada Withholds Opinion on TOB – Mongolia Deal Risk May Exist

1. HDFC Bank: NRC & Search Committee Merely a Formality – HDFC Will Choose the CEO

The succession fiasco at HDFC Bank (HDFCB IN) reveals how the banking regulator has allowed a founder with a minority stake to have a stranglehold on the selection of the chief executive officer (CEO) and the chairman of the bank. Strangely, the board of the bank has to date been unable to choose a successor to the present CEO, Aditya Puri.

Article 162 in HDFC Bank’s Memorandum and Articles of Association permits Housing Development Finance Corporation (HDFC IN), mortgage financier and founder of HDFC Bank, to nominate the bank’s non-executive chairman and CEO (subject to the approval of the board, shareholders and the regulator), as long as HDFC or the HDFC group holds a minimum of 20% equity stake in the bank. Such a clause in the memorandum of association granting a minority shareholder the power to nominate critical board members not only goes against basic corporate governance principles, but also defies the banking regulator’s objective of lowering founder holding in banks so as to reduce their influence in executive management. While such a clause may have been understandable in the first 5 years of a bank’s existence, the regulator needs to reconsider its decision to allow the founder to control the management in perpetuity.

In Indian banks, founders are normally minority shareholders, and it is the responsibility of the regulator to ensure that founders do not interfere in management. For the Reserve Bank of India (RBI) to permit the HDFC group to nominate the chairperson and CEO in HDFC Bank stands at stark variance with its own policy of compelling bank founders to reduce their stake to 15%.

In private sector banks, the nomination and remuneration committee (NRC) of each bank board recommends candidates for directorship to be approved by the board, shareholders and the regulator. Hence nominee directors of the founders can be part of the NRC, and it should be the sole responsibility of the NRC to recommend new board members and evaluate the performance of the executive directors. By allowing HDFC to nominate the chairperson and CEO in HDFC Bank reduces HDFC Bank’s NRC to a mockery.

2. Thai Banks: KBANK & BBL (With a Permata on the Side)

Screenshot%202020 02 26%20at%2011.52.33%20pm

As Smartkarma contributor Brian Freitas has ably discussed in a couple of pieces on the Kasikornbank PCL (KBANK TB) buyback program which has been ongoing for the past two weeks, it has been a setup situation to play the pair against Bangkok Bank Public (BBL TB).

The normal way of things might be to get long the stock which was about to prospectively buy back a huge portion of its ADV after MSCI had announced a down-weight, and short the one which still had potential large overhang from a possible change in the NVDR limit 4-5 months out.

Indeed on the day of the announcement (30 Jan), KBANK shares rallied 6%. They rallied further the next day. What had been an 6-7% underperformance against BBL in the first week after the MSCI news turned into a 15% rebound against BBL to the day after the buyback announcement. 

In the next two weeks until the buyback started, KBANK gained 1.5%, but underperformed BBL by about 2%. Then the buyback started…

The first four days of the buyback KBANK averaged buybacks of 27.3% of daily volume, and KBANK gained ~2.3% vs BBL. The next day it was 15.5%, and BBL outperformed KBANK by 3.4%. And BBL has outperformed KBANK each day since that day as well. 

On Wednesday 26 Feb, the day before the last day of the buyback, KBANK was down a shocking 9.7% as the SET Index as a whole had its worst single day in 6 years at -5.05%. Surprisingly, KBANK did not execute nearly as much as they could have – a measly 1.05mm shares in the face of massive selling pressure.

That leaves up to 5,076,000 shares to buy today. It is a goodly amount, and it is possible that they left a fair bit for the last day so they could prove a point. They are certainly not in danger of breaching the limit of the upper limit (buybacks must not purchase shares at more than 115% of the average of the previous five closes (i.e. they’ll have to keep it below THB 147.55). 

But there is pushing and shoving today, there may be a setup opportunity. Today is a day to watch.

3. HKEx – Management’s Art of Saying Nothing

  • Weak Quarter:Hong Kong Exchanges and Clearing (388.HK) [HKEx] reported EPS results of HKD 1.57  – down 11% linked quarter.  The weak results are primarily be attributed to reduced investment income on the back of the lower interest rate environment, and higher operating expenses related to both staff and non-staff costs.  
  •  No Real Discussion of 2020:  Velocity and ADTV no doubt will decline, as tech IPOs get delayed and many large travel-related companies are more likely to file for bankruptcy. Mainland China’s debt-laden developers were already facing a cash-crunch prior to the corona virus pandemic and problems are now exacerbated. Most builders only have a cash buffer of just three months. The mainland Chinese government’s lockdown and travel restrictions are in month two – intimating that developer defaults will accelerate in March 2020. It’s probably fair to say that the 105% Northbound growth in 2019 was no more than a head fake.  
  • Focus, Focus, Focus: This is a management tea, who all too often, gets distracted and fails to meet both near and long-term targets. That outrageous London Stock Exchange bid of USD 39 bn alone should have cost Charles Li his CEO title. Nevertheless, we are hopeful that HKEx has learned that this failure/distraction has caused an enormous loss of market confidence. 

4. Sawada Withholds Opinion on TOB – Mongolia Deal Risk May Exist

This Tender Offer is still an odd duck.

Today, Sawada Holdings (8699 JP) announced that after deliberations, the company’s Board of Directors had decided to continue to Withhold its Opinion on the Tender Offer being conducted by META Capital and Upsilon Investment Partners to take control of the company. 

One problem is Mongolia Risk. In the first insight Sawada Holdings Partial Tender – An Odd Duck I noted a lack of documentation. This document appears to show that the whole thing was put together in what is in Japan a relatively short amount of time. It appears some background documentation may be insufficient. 

It is kind of a mess, and that does not bode well, for which I am calling myself “bearish.”

However, there is a caveat to this caveat, and that means I would not short.

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Brief Finance: Nagoya Bank’s Biggish Buyback and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Nagoya Bank’s Biggish Buyback

1. Nagoya Bank’s Biggish Buyback

Screenshot%202020 02 26%20at%205.24.19%20pm

Bank Of Nagoya (8522 JP), regionally and colloquially known as “Meigin”, is a regional bank with a low ROE (3.3%) and a low PBR (0.3x) and a JPY 60bn market cap, which puts it squarely in the “too-small-to-be-a-big-regional-but-not-actually-really-small” category.

Like other regional banks, revenues, recurring profits, and net profits will be down this year. The recent Q3 report on 5 February provided for no change to full year forecasts. 

Today, the company announced (Japanese) that it would move to a corporate system of Board and Audit & Supervisory Committee. The Audit and Supervisory Committee will have a majority of outside directors. This is aimed at improving governance, and speeding up business decision-making at the board level. To make the change (which would generally be seen as a positive in governance terms) will require a change to the bank’s Articles of Incorporation. That will require approval at the AGM in June, after which the change would become effective. 

The OTHER NEW News

Today the bank also announced (Japanese) that it would buy back up to 700,000 shares for up to JPY 2.5bn. That is 3.72% of shares outstanding (less treasury shares). The period of the buyback is from 27 February to 27 March and it expects to buy back on-market, including through ToSTNeT-3 transactions. To be able to buy back all 700,000 shares would require that the purchase price be less than ¥3571/share (vs last traded price of ¥3285). 

The accompanying information is that the bank will cancel 1.5mm shares (Meigin already has 946,687 shares as treasury shares). 

Both bits – the buyback and the cancellation – tell you something.

This is worth a look for short-term traders.

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Brief Finance: Nagoya Bank’s Biggish Buyback and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Nagoya Bank’s Biggish Buyback
  2. Healius: Jangho’s Preferential Option

1. Nagoya Bank’s Biggish Buyback

Screenshot%202020 02 26%20at%205.24.19%20pm

Bank Of Nagoya (8522 JP), regionally and colloquially known as “Meigin”, is a regional bank with a low ROE (3.3%) and a low PBR (0.3x) and a JPY 60bn market cap, which puts it squarely in the “too-small-to-be-a-big-regional-but-not-actually-really-small” category.

Like other regional banks, revenues, recurring profits, and net profits will be down this year. The recent Q3 report on 5 February provided for no change to full year forecasts. 

Today, the company announced (Japanese) that it would move to a corporate system of Board and Audit & Supervisory Committee. The Audit and Supervisory Committee will have a majority of outside directors. This is aimed at improving governance, and speeding up business decision-making at the board level. To make the change (which would generally be seen as a positive in governance terms) will require a change to the bank’s Articles of Incorporation. That will require approval at the AGM in June, after which the change would become effective. 

The OTHER NEW News

Today the bank also announced (Japanese) that it would buy back up to 700,000 shares for up to JPY 2.5bn. That is 3.72% of shares outstanding (less treasury shares). The period of the buyback is from 27 February to 27 March and it expects to buy back on-market, including through ToSTNeT-3 transactions. To be able to buy back all 700,000 shares would require that the purchase price be less than ¥3571/share (vs last traded price of ¥3285). 

The accompanying information is that the bank will cancel 1.5mm shares (Meigin already has 946,687 shares as treasury shares). 

Both bits – the buyback and the cancellation – tell you something.

This is worth a look for short-term traders.

2. Healius: Jangho’s Preferential Option

Image 56335789421582698442176

Yesterday, PE outfit Partners Group announced it had acquired, via an option deed with Jangho, a relevant interest in 15.88% of the shares in Healius (HLS AU). This was followed by an announcement of a non-binding indicative proposal from Partners at $3.40/share, a 23% premium to last close, by way of a Scheme. 

This morning, Healius announced its 1H19 results. Revenue, EBIT and NPAT were up 7%, 4%, and 8% compared to the six-month period ending 31 Dec 2018.  A dividend of A$0.26/share (fully franked, 38% payout) was declared with an ex-date on the 26 March.

Healius also announced the sale process of part or all of the medical center business to “focus on a range of growth initiated in the diagnostic division and, in time, the day hospital businesses.” 

There are questions marks over the merits of offloading “part” of the medical centres. There is also possible pushback on the fairness of Partners’ indicative proposal.

But ASIC taking a closer look at the Partners/Jangho call option deed may frustrate the deal.

As always, more below the fold.

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Brief Finance: European Banks: Dividends in a Time of Crisis and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. European Banks: Dividends in a Time of Crisis
  2. Postal Savings Bank – Slow and Steady For Now
  3. Nedbank: Castigation Towards Junk
  4. Indian Fincos – Focusing on Liquidity
  5. New China Life – VONB Is a True Challenge

1. European Banks: Dividends in a Time of Crisis

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  • The ECB is holding talks with Eurozone lenders with regards to dividends, according to Bloomberg, in order to attempt to preserve capital during the coronavirus crisis
  • Many European banks are high dividend yielding, and an important element of equity income funds; in some cases, bank dividend payouts are also very high
  • Our main screen is based on European banks’ dividend yields versus dividend cover, in which we try to identify those European banks most at risk of potential dividend cuts
  • We recognize that consensus earnings estimates are subject to change, but we see this exercise as a starting point; we intend to revisit this exercise further down the line when there will hopefully be more clarity
  • We see Intesa Sanpaolo (ISP IM) as one of the most exposed European banks to a dividend cut amongst our coverage; also among the Italians, Mediobanca SpA (MB IM) and Unione Di Banche Italiane (UBI IM) are higher risk
  • Also not out of the woods are UniCredit SpA (UCG IM) , Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) even though they seem less exposed to dividend cuts
  • Risks to our bearish view on Intesa’s dividend outlook include better than expected credit quality limiting the adverse impact on cost of risk, as well as better than expected fee generation and very stringent cost control all serving to counter earnings pressures

2. Postal Savings Bank – Slow and Steady For Now

* Decent Set of Results for Now:Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 2019 results of CNY 60.9 bn – increasing 16% YOY and in-line with its November 2019 pre-announcement. Fee revenues drove PSB’s YOY improvement, specifically the uptick in credit card and settlement/clearing fees which improved 13.3% and 25.7%, respectively; and

* Credit Quality Anticipated to Further Weaken: Credit quality was worse than expected, driven by weakness in corporate credit. More disturbing is the growth in level of net new NPLs CNY 12.9 bn which amounts to 34% over past 6 months – annualized at 68%; and

* NIM Pressures: The net interest margin declined 10 bp YOY to 2.44% due primarily to competitive pressures for deposits – especially in rural mainland China, and a 23 bp HOH decline in investment yields as PSB has a heavier securities component of assets with an LDR of 53.4%. Costlier time deposits are becoming more of longer-term funding source for PSB to grow total funding, with the consequence being a large but expensive deposit base for PSB.  

3. Nedbank: Castigation Towards Junk

Nedbank%20group%202019%20annual%20results%20presentation page 21

South Africa continues to face well-documented challenges and risks. In their earnings presentation earlier this month, beleaguered lender Nedbank (NED SJ) puts a “more of the same” scenario at 50% for the next few years- a grey, twilight or penumbra zone of lacklustre GDP growth, moderate inflation, high single-digit credit growth,  and elevated interest rates. In this scenario, the vexing land question remains in the background, rearing its head now and again, while initiatives to stem corruption continue and Eskom’s finances remain perilous with load-shedding at level 1 and 2. Management at Nedbank seems resigned to the Moody’s downgrade but believes that a great deal is already priced-in. Of course this could all look a lot better with a full embrace of structural reform, policy certainty, public finance improvement, enhanced business and consumer confidence, more investment and less joblessness. The bank apportions a 10% chance to a high stress scenario over the next few years, underpinned by negative news on land reform and corruption, and a 20% probability of a much more benign scenario which is conditioned by better public finances, an Eskom turnaround, and the unlikely eschewing of a downgrade.

In November, Moody’s flagged load-shedding, a ballooning public debt and budget deficit, inequality and slow economic growth as among the risk factors that could lead to the country being downgraded. Since then, those risk factors have not got any better and are likely to be exacerbated by the economic downturn as a result of Covid-19. The yield on the 10-year South African government bonds spiked to above 12% on Monday. That means the government will have to pay billions more in interest to pay for local roads, hospitals, and services. Wider deficits and additional borrowing are a risk as elsewhere given Covid-19. A Moody’s decision could happen tomorrow. It would be one of the most telegraphed and torturous downgrades of all time.

Steven Holden at CFR shows that GEM managers have reduced positions in South African equities and are looking elsewhere broadly. Pending “junk” status means outflows as bond investors look elsewhere if they have not already made the decision. Fortunately, most of South Africa’s debt is rand-denominated. So even with the rand’s recent slump (from below R15/$ a month ago to near R17.54 currently), this will not threaten its ability to settle its debt. Many other emerging markets are not in the same position.

The collapse in the price of oil is a welcome tailwind.

South Africa has a relatively robust and well-regulated Banking System. Bank shares which “normally” trade at premium valuations, have not showed up as this cheap versus other EM peers for a very long time. First Rand is a highly prudent well-managed lender while Standard Bank always struck us as innovative but circumspect. These are Investment Grade banks trading at a junk rating now. Their relative valuations are a great deal more interesting today. But Nedbank, an inferior lender, is just too cheap to ignore as its share price has become overly detached from the others.

With such a disappointing, if not somewhat despondent, backdrop with a few positive drivers, it may seem counter-intuitive to recommend shares of a South African bank. But there is a price for everything and shares of Nedbank are at distressed levels.The pan-African franchise is struggling and is valued at zero under current valuation.

Shares trade on a Dividend Yield of 17% and an Earnings Yield of 30%. P/B and FV stand at 0.45x and 4%, respectively. Total Return ratio has reached 7.8x. A PH Score of 7.4 may reflect in great part the valuation but operational progress on Capitalisation, Efficiency, Provisioning, and Liquidity play a part too. Profitability though narrowed as credit costs  jumped forcefully on account of Asset Quality risks across the South African CIB franchise and as private equity holdings were revalued lower while risks in jurisdictions elsewhere in Africa (for example especially Zimbabwe but also Nigeria) where Nedbank has a presence rose and pose macro challenges going forward. 

Shares stand in the top quintile of our global VFM rankings.

4. Indian Fincos – Focusing on Liquidity

We look at USD denominated bonds issues by four Indian finance companies as yields on all these bonds have risen on the back of the sell off in the global markets as well as the current climate of risk aversion. Given the current lock-down in the Indian economy, we focus on these companies’ liquidity positions. We believe that these companies can comfortably weather a 3 month shutdown, even if local wholesale funding markets freeze completely. We find the bonds of Iifl Holdings (IIFL IN) particularly attractive as they are almost trading at distressed levels.

5. New China Life – VONB Is a True Challenge

  • VONB Weakness Suggest Long-term Vulnerability: New China Life (1336.HK) [NCL] posted net profit of CNY 14.6 bn – increasing 84% YOY and in line with pre-announcement – reflecting a combination of in-force business expansion, a one-time tax refund of CNY 2 bn, and a six-fold YOY increase in trading gains to CNY 2.7 bn;   
  • Value Challenges Ahead: With value challenges ahead in NCL’s illiquid securities portfolio (Challenged Tier 2/3 bank negotiable CDs and alternatives) and the CBIRC’s enabling of insurers to increase their concentration in equities during the January/February market sell-offs, we not only question solvency margins but the viability of China Life’s full-year dividend per share – not to mention the impact of lower gross yields; and
  • Conference Call:New China Life will have its conference call on 3/26. Expect discussion on a more balanced product and channel mix, VONB margins in this declining rate environment, and agent retention.

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Brief Finance: Healius: Jangho’s Preferential Option and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Healius: Jangho’s Preferential Option

1. Healius: Jangho’s Preferential Option

Image 56335789421582698442176

Yesterday, PE outfit Partners Group announced it had acquired, via an option deed with Jangho, a relevant interest in 15.88% of the shares in Healius (HLS AU). This was followed by an announcement of a non-binding indicative proposal from Partners at $3.40/share, a 23% premium to last close, by way of a Scheme. 

This morning, Healius announced its 1H19 results. Revenue, EBIT and NPAT were up 7%, 4%, and 8% compared to the six-month period ending 31 Dec 2018.  A dividend of A$0.26/share (fully franked, 38% payout) was declared with an ex-date on the 26 March.

Healius also announced the sale process of part or all of the medical center business to “focus on a range of growth initiated in the diagnostic division and, in time, the day hospital businesses.” 

There are questions marks over the merits of offloading “part” of the medical centres. There is also possible pushback on the fairness of Partners’ indicative proposal.

But ASIC taking a closer look at the Partners/Jangho call option deed may frustrate the deal.

As always, more below the fold.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.