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Daily Archives: 12th November 2018

12th November 2018

🏦 Compare and Contrast | Bank Capital

Two EM focused banks but seen differently

Standard Chartered (STANLN) and Banco Santander (SANTAN) have similar business models in retail/commercial banking especially in emerging markets – but underneath they display very different characteristics. To some extent, both have diversified geographical exposures with a strong domestic franchise. The key difference seems to the region of focus.

STANLN is predominantly focused on fast-growing markets in Asia, Middle East and Africa which expose the bank to the cyclical fortunes of the two major Asian economies – China and India.  SANTAN is focused more in Western Europe especially in Spain, UK & Portugal and in the US & Brazil, which expose the bank to the tail risks in Europe and LATAM. So whilst STANLN is a thoroughbred in EM land, SANTAN is probably the PAN European champion retail bank that others are aspiring to be.

Just going through the numbers it is clear that SANTAN is a much bigger bank than STANLN in almost every conceivable way – total assets, total loans, revenues, net income, shareholder equity and ultimately market capitalisation (SANTAN’s market cap is EUR 69 billion versus STANLN’s GBP 20 billion).  SANTAN also delivers a higher ROTE than STANLN for the time being and is able to use its global reach to much better effect and by keeping both operating costs and credit costs low.

Equity investors seem to prefer SANTAN over STANLN

It seems that SANTAN’s better earnings track record is preferred by equity investors as seen in the year-to-date share price performance, which has been slightly better than STANLN.  And on one metric SANTAN comfortably beats STANLN and that is on Price/TNAV. SANTAN is one of the few European banks whose P/TNAV is close to 1.0 times. STANLN’s P/TNAV trades around 0.45 times, reflecting investor pessimism over growth and business restructuring.   SANTAN with its acquisition history is able to project its future growth prospects much better than STANLN.

The question for equity investors then boils down to two things:

  1. Assessing periphery-related risks versus a potential sharp economic slowdown in Asia
  2. Acquisition risks (SANTAN is a serial acquirer) versus a potential takeover target

Credit investors seem to think the opposite

But in credit land what I see is the exact opposite as STANLN debt instruments trade much better than SANTAN in terms of spreads and more importantly in terms of perception of credit risks.

Historically, both in AT1 and LT2, it seems that STANLN trades tighter in spread than SANTAN and this may be due to:

  • STANLN has much higher equity cushion within the capital structure to absorb unexpected losses
  • STANLN reports both higher CET1 and leverage ratio than SANTAN
  • STANLN is not a frequent issuer of sub debt and this helps in issuance as a rare issuer
  • STANLN is seen as a takeover prospect and potentially acquired by a larger institution
  • SANTAN’s perceived levered balance sheet and its track record of serial acquisitions

Whilst the above factors may be valid, in my opinion, I see a convergence in credit spreads between the two names as the market factors in a higher credit risk premium for EM risk especially if there is a significant slowdown in China. It remains to be seen how long that would take though to materialise.

12th November 2018

Volkswagen piles ’em high, sells ’em cheap

iTraxx Main

71.8bp, +2.1bp

iTraxx X-Over

294.3bp, +7.3bp

🇩🇪 10 Yr Bund

0.39%, -2bp

iBoxx Corp IG

B+144.3bp, +2.3bp

iBoxx Corp HY

B+430bp, +6bp

🇺🇸 10 Yr US T-Bond

3.19%, unchanged

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Size opens eyes…

Not usually a price taker, or a price giver, Volkswagen surprised with a 6-part deal, had the market to itself and we would have to concede that they timed it to perfection. And the deals were spread across the ‘Brexit’ divide – with deals in euros and sterling.

Given the size and multitude of deals, the borrower was by necessity a price taker. VW is a relatively quality borrower, blue chip, the most frequent borrower in the market and the biggest – It has a well-populated, liquid curve and so it is relatively easy for them to get some serious amount of funding in. And that’s what they did.

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