In this briefing:
- BOCHK – A Very Managed, Yet Poor Set of Numbers
- European Banks: Dividends in a Time of Crisis
- Postal Savings Bank – Slow and Steady For Now
- Nedbank: Castigation Towards Junk
- Indian Fincos – Focusing on Liquidity
* 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.
- 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
* 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.
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.
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.