Category

Financials Sector

Brief Finance: European Banks: Screening for Value January 2020 and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. European Banks: Screening for Value January 2020
  2. IndusInd Bank – NPL Formation Doubling
  3. RHB Bank – Quiet Transformation

1. European Banks: Screening for Value January 2020

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  • High liquidity in markets and improving investor risk appetite appear to be driving the rotation into equities and especially value stocks, which includes European banks and financials
  • We also believe that the past years of tightening regulation, especially banks capital, is now going into reverse, with conduct-related fines imposed on the sector having declined sharply
  • We update our value screens on European banks in this report, adding another screen for dividend cover; among the European banks, we look for value and sustainable dividend yield based on these screens
  • We believe that Banco BPM SpA (BAMI IM), Banca Popolare Dell’Emilia Rom (BPE IM) and UniCredit SpA (UCG IM) stand out among our core coverage; Banco Bilbao Vizcaya Argentari (BBVA SM) and Banco De Sabadell Sa (SAB SM) in Spain and Banco Comercial Portugues Sa (BCP PL) in Portugal screen well
  • Outside of our core coverage, we highlight Danske Bank A/S (DANSKE DC) given its value, dividend yield and relatively healthy cover; also Bank of Ireland (BKIR ID) and, despite its lack of dividend yield, Eurobank Ergasias Sa (EUROB GA) is one to watch in Greece
  • Risks to our thesis are a protracted”risk-off” period in markets, potentially driven by heightened increased trade deal frictions, low GDP growth and increased geo-political tensions that drive investors away from equities into more traditional safe haven assets

2. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

3. RHB Bank – Quiet Transformation

Image 16387586551579140765536

RHB Bank Bhd (RHBBANK MK) used to be far more focused on corporate loans and this has changed dramatically over the years, in favor of consumer loans and SME loans. The bank’s transformation is also evident in its digitalization program, which may be easier for a medium-sized, well-managed bank to affect, than for large banks or less able small banks. The result of the bank’s strategic shift is evident in many facets, including ROA and ROE. But we believe there is more to come. Better credit metrics than most is also a stand out feature, as is the RHB’s relatively low market capitalization level compared with assets.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Finance: European Banks: Screening for Value January 2020 and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. European Banks: Screening for Value January 2020
  2. IndusInd Bank – NPL Formation Doubling
  3. RHB Bank – Quiet Transformation
  4. Ping An Long/Tencent Short Pair

1. European Banks: Screening for Value January 2020

Capture2

  • High liquidity in markets and improving investor risk appetite appear to be driving the rotation into equities and especially value stocks, which includes European banks and financials
  • We also believe that the past years of tightening regulation, especially banks capital, is now going into reverse, with conduct-related fines imposed on the sector having declined sharply
  • We update our value screens on European banks in this report, adding another screen for dividend cover; among the European banks, we look for value and sustainable dividend yield based on these screens
  • We believe that Banco BPM SpA (BAMI IM), Banca Popolare Dell’Emilia Rom (BPE IM) and UniCredit SpA (UCG IM) stand out among our core coverage; Banco Bilbao Vizcaya Argentari (BBVA SM) and Banco De Sabadell Sa (SAB SM) in Spain and Banco Comercial Portugues Sa (BCP PL) in Portugal screen well
  • Outside of our core coverage, we highlight Danske Bank A/S (DANSKE DC) given its value, dividend yield and relatively healthy cover; also Bank of Ireland (BKIR ID) and, despite its lack of dividend yield, Eurobank Ergasias Sa (EUROB GA) is one to watch in Greece
  • Risks to our thesis are a protracted”risk-off” period in markets, potentially driven by heightened increased trade deal frictions, low GDP growth and increased geo-political tensions that drive investors away from equities into more traditional safe haven assets

2. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

3. RHB Bank – Quiet Transformation

Image 16387586551579140765536

RHB Bank Bhd (RHBBANK MK) used to be far more focused on corporate loans and this has changed dramatically over the years, in favor of consumer loans and SME loans. The bank’s transformation is also evident in its digitalization program, which may be easier for a medium-sized, well-managed bank to affect, than for large banks or less able small banks. The result of the bank’s strategic shift is evident in many facets, including ROA and ROE. But we believe there is more to come. Better credit metrics than most is also a stand out feature, as is the RHB’s relatively low market capitalization level compared with assets.

4. Ping An Long/Tencent Short Pair

Ping%20an%20tencent%20ration%20chart

We are long/bullish Ping An Insurance (H) (2318 HK)  from some time ago (87 region) and just sold  Tencent Holdings (700 HK)  at 387 (too early).

Ping An shows good upside potential on the breakout of triangulation in price and MACD as well as energy above the 97/98 highs on rising volume (supportive and a measure to buy dips). Triangle breakouts are followed by high momentum moves as unfolded in Tencent’s triangle break in mid December. 

Ping An – Fresh buy support lies at 97/98 on any weakness with a near target at 101.82 and more aggressive new highs targets near 110.

Tencent’s rise is currently stretched with resistance at 420 and pullback support at 380. RSI bear divergence noted and brewing as the MACD is due for a stall cycle and tactical correction.

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Brief Finance: Hang Seng Bank – Lean on Me and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Hang Seng Bank – Lean on Me
  2. Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation
  3. Intesa SanPaolo Swoops on UBI for a Win-Win Deal
  4. HDFC AMC
  5. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

1. Hang Seng Bank – Lean on Me

  • Modest EPS Weakness Set to Continue: Hang Seng Bank (11.HK) [Hang Seng] reported 2H19 EPS results of HKD 5.79 per share – a decline of just 1% YOY – reflective of weaker overall revenues. NIMs disappointed despite the increase in HIBOR.  Additionally, credit costs and operating expenses were higher than expected.  The super normal profit cycle in Hong Kong now appears to have ended. 
  • HSBC Needs Capital:With an above average CET1 ratio at 16.9%, which increased 50 bp linked period, there is a very high likelihood that Hang Seng’s dividend will remain intact – and even continue its upward ascent. For 2019, Hang Seng’s dividend per share rose 9% against 2% profit growth as the payout rose from 60% to 64%.  

2. Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation

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  • Intesa Sanpaolo (ISP IM) has taken the initiative making an all share – allegedly not hostile, but clearly unsolicited – offer for Unione Di Banche Italiane (UBI IM), valuing UBI at 0.5x  its stated 2019YE PBV
  • Intesa has put forward a solid case for the UBI offer, and Intesa management is reassuring investors by committing to a dividend payment equivalent to a yield of 7.7% for 2020 and 2021
  • In order to allay antitrust concerns, Intesa has put in place an agreement with Banca Popolare Dell’Emilia Rom (BPE IM) to sell a pool of upto 500 going-concern branches as well as insurance operations to UnipolSai SpA (US IM), contingent on a successful offer
  • Although this offer does not directly address the consolidation of Italy’s “long tail” of small banks, Intesa CEO Carlo Messina sees it as the opportunity to create an “Italian champion” in European banking and potentially to act as a catalyst for further domestic consolidation
  • There has been an uncomfortable silence from UBI management and our sense is that CEO Victor Messiah, who had only just presented UBI Banca’s stand-alone 2020-22 Business Plan yesterday, will, we believe, need some convincing (a higher offer price?); the share price is tellingly trading at a slight premium to the implied offer price
  • In the wake of Intesa’s offer for UBI, Banco BPM SpA (BAMI IM) has one less potential high quality consolidation partner; yet we see the read-across for the rest of the Italian bank sector as positive; the need for domestic mergers with greater scale is clear, in order counter the drag of negative rates in the Eurozone
  • Risks to the deal include tougher than expected regulatory hurdles, a poor response by UBI shareholders relating to the offer as well as potential “poison pill” measures by UBI Banca management

3. Intesa SanPaolo Swoops on UBI for a Win-Win Deal

Screenshot%202020 02 18%20at%209.51.49%20pm

Intesa Sanpaolo (ISP IM) today announced one of the largest and certainly one of the boldest bank takeovers in Europe in the past ten years in an all-share deal for Unione Di Banche Italiane (UBI IM), Italy’s 5th largest lender and probably the strongest among the second tier.

The thing is, it’s hostile/unsolicited.

And it’s all shares – which is relatively unusual – executed through a Voluntary Public Exchange Offer.

Various media are reporting that the deal was launched without informing UBI’s board, on the day after UBI presented its 2022 Strategic Plan (which among other things included cutting 2000+ jobs, the closure of 175 branches in the next three years, and a plan for a 40% payout ratio). 

The announcement by Intesa Sanpaolo is laudatory of UBI:

Intesa Sanpaolo considers UBI Banca amongst the best Italian banks. UBI Banca has local entrenchment in the most dynamic regions of the country, enjoys outstanding results that have been achieved thanks to the excellent job of both its CEO and its management team, and has a sound Business Plan. All this can continue to be achieved and be indeed further enhanced in the combined Group. UBI Banca stands out for its similarities with Intesa Sanpaolo, specifically as regards the business model and the corporate values – many UBI Banca managers have had previous job experience at the Intesa Sanpaolo Group. In view of the shared corporate values in terms of sustainability and inclusion and social and environmental responsibility, a new unit of the combined Group’s Impact Bank will be based in Brescia and in Bergamo. The presence of the large number of Italian shareholders of UBI Banca, specifically the foundations, among the shareholders of the combined Group would reinforce the shared values, including in terms of shareholder base.

The Intesa announcement is here, and the UBI 2022 Strategic Plan is here.

Early days, and UBI is trading 5% through terms almost immediately, on what could be short-covering given the declared shorts in the name. 

More discussion below.

4. HDFC AMC

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HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 

A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.

Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.

However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

5. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

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  • Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
  • Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
  • On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
  • Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
  • We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
  • Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
  • Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

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Brief Finance: IndusInd Bank – NPL Formation Doubling and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. IndusInd Bank – NPL Formation Doubling
  2. RHB Bank – Quiet Transformation
  3. Ping An Long/Tencent Short Pair

1. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

2. RHB Bank – Quiet Transformation

Image 16387586551579140765536

RHB Bank Bhd (RHBBANK MK) used to be far more focused on corporate loans and this has changed dramatically over the years, in favor of consumer loans and SME loans. The bank’s transformation is also evident in its digitalization program, which may be easier for a medium-sized, well-managed bank to affect, than for large banks or less able small banks. The result of the bank’s strategic shift is evident in many facets, including ROA and ROE. But we believe there is more to come. Better credit metrics than most is also a stand out feature, as is the RHB’s relatively low market capitalization level compared with assets.

3. Ping An Long/Tencent Short Pair

Ping%20an%20tencent%20ration%20chart

We are long/bullish Ping An Insurance (H) (2318 HK)  from some time ago (87 region) and just sold  Tencent Holdings (700 HK)  at 387 (too early).

Ping An shows good upside potential on the breakout of triangulation in price and MACD as well as energy above the 97/98 highs on rising volume (supportive and a measure to buy dips). Triangle breakouts are followed by high momentum moves as unfolded in Tencent’s triangle break in mid December. 

Ping An – Fresh buy support lies at 97/98 on any weakness with a near target at 101.82 and more aggressive new highs targets near 110.

Tencent’s rise is currently stretched with resistance at 420 and pullback support at 380. RSI bear divergence noted and brewing as the MACD is due for a stall cycle and tactical correction.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Finance: IndusInd Bank – NPL Formation Doubling and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. IndusInd Bank – NPL Formation Doubling
  2. RHB Bank – Quiet Transformation
  3. Ping An Long/Tencent Short Pair
  4. Ashmore Group – Emerging Market Flows Remain Robust

1. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

2. RHB Bank – Quiet Transformation

Image 16387586551579140765536

RHB Bank Bhd (RHBBANK MK) used to be far more focused on corporate loans and this has changed dramatically over the years, in favor of consumer loans and SME loans. The bank’s transformation is also evident in its digitalization program, which may be easier for a medium-sized, well-managed bank to affect, than for large banks or less able small banks. The result of the bank’s strategic shift is evident in many facets, including ROA and ROE. But we believe there is more to come. Better credit metrics than most is also a stand out feature, as is the RHB’s relatively low market capitalization level compared with assets.

3. Ping An Long/Tencent Short Pair

Ping%20an%20tencent%20ration%20chart

We are long/bullish Ping An Insurance (H) (2318 HK)  from some time ago (87 region) and just sold  Tencent Holdings (700 HK)  at 387 (too early).

Ping An shows good upside potential on the breakout of triangulation in price and MACD as well as energy above the 97/98 highs on rising volume (supportive and a measure to buy dips). Triangle breakouts are followed by high momentum moves as unfolded in Tencent’s triangle break in mid December. 

Ping An – Fresh buy support lies at 97/98 on any weakness with a near target at 101.82 and more aggressive new highs targets near 110.

Tencent’s rise is currently stretched with resistance at 420 and pullback support at 380. RSI bear divergence noted and brewing as the MACD is due for a stall cycle and tactical correction.

4. Ashmore Group – Emerging Market Flows Remain Robust

  • Strong Emerging Market Performance:Ashmore Group (Ashmore) [ASHM.LN] has delivered another strong quarter of net inflows while the outlook for emerging market flows for 2020 remains quite positive. 
  • Risk to Ashmore:Market performance inevitably impacts assets under management (AUM), but also estimates of future flows which impact group revenues. The business model has  high operational gearing so the effect on profits would be exacerbated. 

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Brief Finance: SBI Cards and Payment IPO: Valuation Insights and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. SBI Cards and Payment IPO: Valuation Insights
  2. Home First Finance Pre-IPO – Riding on Affordable Housing
  3. HSCEI Rejection Level
  4. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap
  5. Edelweiss Financial Services – Train Wreck

1. SBI Cards and Payment IPO: Valuation Insights

Val

SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.

In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.

2. Home First Finance Pre-IPO – Riding on Affordable Housing

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Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company is backed by True North, GIC and Bessemer who together own over 90% of the company.

HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.

However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.

3. HSCEI Rejection Level

Hscei

Hang Seng China Enterprises Index (HSCEI INDEX) has rallied back to test the underside of broken wedge support which is now labeled backswing resistance. Current resistance near 10,920 is a natural rejection level.

It is the rising wedge formation in H shares that has our attention as well as similar wedge patterns noted in the HSI, Korea and Singapore.

Wedge patterns like this show a 70% probability of breaking to the downside but when you add in the bear divergence tact, odds increase to 85%. Given the late January break of wedge support this is labeled a re test where a rejection is expected with 11,000 acting as a key pivot level just above noted resistance.

4. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap

Image

As announced in India’s 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment (FPI) limit in companies will be raised from 24% to the sectoral limits effective 1 April 2020.

The companies have an option to reduce the FPI limit to 24% or 49% or 74%, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively before 31 March 2020. Companies that reduce their FPI limit have the option to increase the FPI limit to 49% or 74% or the sectoral cap in the future. However, once the limit has been increased to a higher level, it cannot be reduced to a lower threshold.

With a month and a half to go, a few companies have sent out postal ballots to shareholders for a vote on lowering the FPI limit from the sectoral cap. We revisit our earlier Insight India – Increase in FPI Limits to Drive Passive Inflows and update the numbers.

5. Edelweiss Financial Services – Train Wreck

  • Weak Edelweiss Result:Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported earnings of INR 170 mn for FY 3Q20, a 67% and 92% linked quarter and YOY decline. Loan loss provisions were substantially higher, the agency business exhibited lower profits, and larger insurance and BMU losses all contributed to this disastrous result.

  • FY 4Q20 Should Be Special As Well: Edelweiss intends to complete a detailed review of its corporate loan book in FY 4Q20 and will update its Expected Credit Loss (ECL) model. If the organization is honest with itself, we’d anticipate a far greater level of NPLs next quarter. 

You are currently reading Executive Summaries of Smartkarma Insights.

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Brief Finance: Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation
  2. Intesa SanPaolo Swoops on UBI for a Win-Win Deal
  3. HDFC AMC
  4. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?
  5. HSBC – Move Along, There’s Nothing To See Here

1. Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation

Capture7

  • Intesa Sanpaolo (ISP IM) has taken the initiative making an all share – allegedly not hostile, but clearly unsolicited – offer for Unione Di Banche Italiane (UBI IM), valuing UBI at 0.5x  its stated 2019YE PBV
  • Intesa has put forward a solid case for the UBI offer, and Intesa management is reassuring investors by committing to a dividend payment equivalent to a yield of 7.7% for 2020 and 2021
  • In order to allay antitrust concerns, Intesa has put in place an agreement with Banca Popolare Dell’Emilia Rom (BPE IM) to sell a pool of upto 500 going-concern branches as well as insurance operations to UnipolSai SpA (US IM), contingent on a successful offer
  • Although this offer does not directly address the consolidation of Italy’s “long tail” of small banks, Intesa CEO Carlo Messina sees it as the opportunity to create an “Italian champion” in European banking and potentially to act as a catalyst for further domestic consolidation
  • There has been an uncomfortable silence from UBI management and our sense is that CEO Victor Messiah, who had only just presented UBI Banca’s stand-alone 2020-22 Business Plan yesterday, will, we believe, need some convincing (a higher offer price?); the share price is tellingly trading at a slight premium to the implied offer price
  • In the wake of Intesa’s offer for UBI, Banco BPM SpA (BAMI IM) has one less potential high quality consolidation partner; yet we see the read-across for the rest of the Italian bank sector as positive; the need for domestic mergers with greater scale is clear, in order counter the drag of negative rates in the Eurozone
  • Risks to the deal include tougher than expected regulatory hurdles, a poor response by UBI shareholders relating to the offer as well as potential “poison pill” measures by UBI Banca management

2. Intesa SanPaolo Swoops on UBI for a Win-Win Deal

Screenshot%202020 02 18%20at%208.55.44%20pm

Intesa Sanpaolo (ISP IM) today announced one of the largest and certainly one of the boldest bank takeovers in Europe in the past ten years in an all-share deal for Unione Di Banche Italiane (UBI IM), Italy’s 5th largest lender and probably the strongest among the second tier.

The thing is, it’s hostile/unsolicited.

And it’s all shares – which is relatively unusual – executed through a Voluntary Public Exchange Offer.

Various media are reporting that the deal was launched without informing UBI’s board, on the day after UBI presented its 2022 Strategic Plan (which among other things included cutting 2000+ jobs, the closure of 175 branches in the next three years, and a plan for a 40% payout ratio). 

The announcement by Intesa Sanpaolo is laudatory of UBI:

Intesa Sanpaolo considers UBI Banca amongst the best Italian banks. UBI Banca has local entrenchment in the most dynamic regions of the country, enjoys outstanding results that have been achieved thanks to the excellent job of both its CEO and its management team, and has a sound Business Plan. All this can continue to be achieved and be indeed further enhanced in the combined Group. UBI Banca stands out for its similarities with Intesa Sanpaolo, specifically as regards the business model and the corporate values – many UBI Banca managers have had previous job experience at the Intesa Sanpaolo Group. In view of the shared corporate values in terms of sustainability and inclusion and social and environmental responsibility, a new unit of the combined Group’s Impact Bank will be based in Brescia and in Bergamo. The presence of the large number of Italian shareholders of UBI Banca, specifically the foundations, among the shareholders of the combined Group would reinforce the shared values, including in terms of shareholder base.

The Intesa announcement is here, and the UBI 2022 Strategic Plan is here.

Early days, and UBI is trading 5% through terms almost immediately, on what could be short-covering given the declared shorts in the name. 

More discussion below.

3. HDFC AMC

Image 958797691111582006215660

HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 

A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.

Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.

However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

4. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

Capture2

  • Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
  • Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
  • On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
  • Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
  • We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
  • Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
  • Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

5. HSBC – Move Along, There’s Nothing To See Here

Image 3569098531582006533646

It was 20 years ago that HSBC Holdings (5 HK) bought CCF in France. The conservative Scottish lender paid USD10.6bn for the French bank that had shareholders’ equity of USD3.2bn in 1999. Perhaps this was another poor purchase, at an inflated price? We all know the more fabled story of Household International, which become HSBC Finance, and forever changed the face of HSBC Holdings. The results just out once again show how past poor decisions are not always historical events. HSBC recorded a USD7.3bn goodwill impairment charge for Europe, causing a loss during 4Q19.

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Brief Finance: Intesa Swoops on UBI for a Win-Win Deal and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Intesa Swoops on UBI for a Win-Win Deal
  2. HDFC AMC
  3. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?
  4. HSBC – Move Along, There’s Nothing To See Here
  5. SBI Cards and Payment IPO: Valuation Insights

1. Intesa Swoops on UBI for a Win-Win Deal

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Intesa Sanpaolo (ISP IM) today announced one of the largest and certainly one of the boldest bank takeovers in Europe in the past ten years in an all-share deal for Unione Di Banche Italiane (UBI IM), Italy’s 5th largest lender and probably the strongest among the second tier.

The thing is, it’s hostile/unsolicited.

And it’s all shares – which is relatively unusual – executed through a Voluntary Public Exchange Offer.

Various media are reporting that the deal was launched without informing UBI’s board, on the day after UBI presented its 2022 Strategic Plan (which among other things included cutting 2000+ jobs, the closure of 175 branches in the next three years, and a plan for a 40% payout ratio). 

The announcement by Intesa Sanpaolo is laudatory of UBI:

Intesa Sanpaolo considers UBI Banca amongst the best Italian banks. UBI Banca has local entrenchment in the most dynamic regions of the country, enjoys outstanding results that have been achieved thanks to the excellent job of both its CEO and its management team, and has a sound Business Plan. All this can continue to be achieved and be indeed further enhanced in the combined Group. UBI Banca stands out for its similarities with Intesa Sanpaolo, specifically as regards the business model and the corporate values – many UBI Banca managers have had previous job experience at the Intesa Sanpaolo Group. In view of the shared corporate values in terms of sustainability and inclusion and social and environmental responsibility, a new unit of the combined Group’s Impact Bank will be based in Brescia and in Bergamo. The presence of the large number of Italian shareholders of UBI Banca, specifically the foundations, among the shareholders of the combined Group would reinforce the shared values, including in terms of shareholder base.

The Intesa announcement is here, and the UBI 2022 Strategic Plan is here.

Early days, and UBI is trading 5% through terms almost immediately, on what could be short-covering given the declared shorts in the name. 

More discussion below.

2. HDFC AMC

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HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 

A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.

Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.

However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

3. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

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  • Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
  • Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
  • On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
  • Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
  • We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
  • Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
  • Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

4. HSBC – Move Along, There’s Nothing To See Here

Image 83167007521582006533645

It was 20 years ago that HSBC Holdings (5 HK) bought CCF in France. The conservative Scottish lender paid USD10.6bn for the French bank that had shareholders’ equity of USD3.2bn in 1999. Perhaps this was another poor purchase, at an inflated price? We all know the more fabled story of Household International, which become HSBC Finance, and forever changed the face of HSBC Holdings. The results just out once again show how past poor decisions are not always historical events. HSBC recorded a USD7.3bn goodwill impairment charge for Europe, causing a loss during 4Q19.

5. SBI Cards and Payment IPO: Valuation Insights

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SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.

In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.

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Brief Finance: HDFC AMC and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. HDFC AMC
  2. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?
  3. HSBC – Move Along, There’s Nothing To See Here
  4. SBI Cards and Payment IPO: Valuation Insights
  5. Home First Finance Pre-IPO – Riding on Affordable Housing

1. HDFC AMC

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HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 

A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.

Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.

However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

2. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

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  • Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
  • Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
  • On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
  • Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
  • We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
  • Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
  • Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

3. HSBC – Move Along, There’s Nothing To See Here

Image 48781676641582006533646

It was 20 years ago that HSBC Holdings (5 HK) bought CCF in France. The conservative Scottish lender paid USD10.6bn for the French bank that had shareholders’ equity of USD3.2bn in 1999. Perhaps this was another poor purchase, at an inflated price? We all know the more fabled story of Household International, which become HSBC Finance, and forever changed the face of HSBC Holdings. The results just out once again show how past poor decisions are not always historical events. HSBC recorded a USD7.3bn goodwill impairment charge for Europe, causing a loss during 4Q19.

4. SBI Cards and Payment IPO: Valuation Insights

Val

SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.

In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.

5. Home First Finance Pre-IPO – Riding on Affordable Housing

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Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company is backed by True North, GIC and Bessemer who together own over 90% of the company.

HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.

However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Finance: Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There? and more

By | Daily Briefs, Financials Sector

In this briefing:

  1. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?
  2. HSBC – Move Along, There’s Nothing To See Here
  3. SBI Cards and Payment IPO: Valuation Insights
  4. Home First Finance Pre-IPO – Riding on Affordable Housing
  5. HSCEI Rejection Level

1. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

Capture5

  • Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
  • Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
  • On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
  • Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
  • We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
  • Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
  • Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

2. HSBC – Move Along, There’s Nothing To See Here

Image 79759114251582011733080

It was 20 years ago that HSBC Holdings (5 HK) bought CCF in France. The conservative Scottish lender paid USD10.6bn for the French bank that had shareholders’ equity of USD3.2bn in 1999. Perhaps this was another poor purchase, at an inflated price? We all know the more fabled story of Household International, which become HSBC Finance, and forever changed the face of HSBC Holdings. The results just out once again show how past poor decisions are not always historical events. HSBC recorded a USD7.3bn goodwill impairment charge for Europe, causing a loss during 4Q19.

3. SBI Cards and Payment IPO: Valuation Insights

Val

SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.

In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.

4. Home First Finance Pre-IPO – Riding on Affordable Housing

Image?1581998114

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company is backed by True North, GIC and Bessemer who together own over 90% of the company.

HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.

However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.

5. HSCEI Rejection Level

Hscei

Hang Seng China Enterprises Index (HSCEI INDEX) has rallied back to test the underside of broken wedge support which is now labeled backswing resistance. Current resistance near 10,920 is a natural rejection level.

It is the rising wedge formation in H shares that has our attention as well as similar wedge patterns noted in the HSI, Korea and Singapore.

Wedge patterns like this show a 70% probability of breaking to the downside but when you add in the bear divergence tact, odds increase to 85%. Given the late January break of wedge support this is labeled a re test where a rejection is expected with 11,000 acting as a key pivot level just above noted resistance.

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