In this briefing:
- Banking Systems Brace for COVID-19 Legacies as Asset Impairment and Weaker Profitability Loom Large
- CHAYO: When the Going Gets Tough, CHAYO Gets Going
- BCP: Offers Cheap Valuation with Earnings Upcycle Ahead in 2H20
- Gulf Energy Placement – No Big Deal
- E-Wallet Adoption Is Soaring from COVID, Catalyzing Southeast Asia Digital Economy Boom
Globally, banking systems are facing threats to their profitability due to an uncertain economic outlook and continued pressure on their net interest margins. Credible fiscal policy support could be critical to supporting the economic recovery, as well as preventing the onset of structurally lower banking profitability via over-reliance on extraordinary monetary accommodation. Some impairment to banking system assets is inevitable in the aftermath of the COVID-19 pandemic, particularly in emerging markets.
Financial conditions have improved significantly in emerging markets, but the risk of individual banking system asset impairment varies considerably on a country-by-country basis. Those countries at risk of permanent output losses due to the COVID-19 pandemic, accentuated by poor political decisions, will experience the highest incidence of falling asset quality.
Asset impairment in Asia Pacific banks will be affected by China’s impact on regional economic activity, as well as the lifting of forbearance policies, while India’s banks will probably suffer the largest losses in 2021 due to lingering bad loans. Meanwhile, the fate of Latin American banking asset quality could be the hands of governments’ ability to support economic activity via fiscal easing, particularly easing the plight of small businesses and the self-employed.
European banks’ problems vary idiosyncratically on a country-by-country basis, such as structurally low profitability in Germany and relatively low operating efficiency in France. The speed of the European economic recovery will determine the magnitude of credit losses, but banks will accept all offers of assistance from policymakers and regulators.
US banking profits were heavily assisted in Q2 by the big disconnection between financial markets and the real economy, but reimposed lockdowns could undermine the buoyancy of capital markets by delaying the economic recovery. Capital buffers are generally better at US banks and will be further enhanced by the banning of buybacks and capping of dividends, thereby ensuring adequate lending capacity for the real economy.
We initiate coverage on CHAYO with a SELL recommendation based on a target price of Bt6.90, implying a downside of 12% from the current price. We derive our target price from the PB/ROE of Thai Diversified Financials and apply a 15% small-cap discount.
- Rising level of bad loans in Thailand can boost core business
- Economic uncertainty helps to expand the customer base for debt collection
- Debt collection to further benefit from increasing mobile usage
- High growth is priced in, warrant exercise to fund growth
Risks: Increased competition in acquiring non-performing loans, loss from unsecured debt management, adverse regulatory changes, and potential litigation issues arising from debt collection service. A risk to our recommendation is that sentiment drives the share price considerably higher.
We reinitiate coverage of BCP with a BUY rating, based on a 2021E target price of Bt25, which is derived from a sum-of-the-parts (SOTP) methodology. Our valuation implies 0.8xPBV’21E, a 20% discount to the Thai energy sector.
- Full-swing earnings recovery by 2H20
- Refinery segment on recovery path
- Secured stable income from power-generation arm
- Added stability & growth from marketing business
- Unlocking value of biofuel business with BBGI spinoff
- Cheap valuation and attractive dividend yield
- Raw material price fluctuation
- Possibility of impairment losses from investment projects
Asian Development Bank (ADB) is looking to sell 176m shares in Gulf Energy Development Public Company (GULF TB), worth about US$200m. Post selldown, ADB will still have about 1.35% of stake in GULF.
In this note, we will look at deal dynamics, recent performance, and run the deal through our framework.
We have covered GULF’s IPO in:
Earlier in the year, we published an in-depth analysis explaining how Southeast Asia’s digital economy could grow much faster than expected should it successfully adopt digital payments.
With COVID catalyzing a massive surge in e-wallet adoption and governments pushing to roll out cashless payments even faster, we believe the region is currently at an inflection point that will finally see services such as e-commerce and online entertainment become mainstream staples.