• PBOC Monthly: Liquidity - Once more, with gusto

    Sandra Chow, CFA    Jason Tan, Cindy Liu, Ismael Pili, David Marshall
    06 Mar 2019

    An update on China's financing and lending landscape. (Subscription required.)
  • Indonesia property: 2019 outlook

    13 Jan 2019

    What are the key drivers that will shape the course of Indonesian property market in 2019? CreditSights provides a credit outlook for the Indonesian property market and individual company recommendations.
  • China Property Navigator 3Q18: Housing Policies

    15 Oct 2018

    Tighter restrictions on resale of housing units, expansion of home purchase restrictions and priority to first-time buyers are some of the tools China's local governments use to fine-tune their housing policies. CreditSights Q3 2018 report provides updates on China's property market. (Paid content, free trial)
  • Wow Philippines

    06 Aug 2018

    • 'Wow Philippines' was an early tourism slogan for the Philippines.  In our view, the country's macro picture warrant some eye-catching features.   
    • A robust macro story.  The Philippines is forecasted to have one of the strongest GDP growth in Asia, with the ADB expecting 6.8% in 2018 and 6.9% in 2019.  The government has stated a target of 7% to 8% growth for 2018, with an intention to maintain growth at this level in subsequent years. 
    • A resilient domestic economy.   The Philippine economy continues to be fueled by the twin engines of Overseas Filipino Workers (OFW) remittance and Business Process Outsourcing (BPO).  Despite risk to growth for both factors, remittance and BPO revenues are expected to account for roughly 10% of GDP.  
    • A second leg to its growth is investments, which had historically lagged but now offers promise.  Infrastructure spending is trending higher.  A facet of the Philippine economy worth noting includes the strong provincial growth of the country.  
    • Macro concerns doesn't derail the growth story.  Areas of macro concerns for the Philippines include its current account deficit and falling gross international reserves.  Inflation has been higher than expected, and the peso has been the weakest Asian currency against the USD this year.  Interest rates are on the rise as a result, and expected to trend higher.  Still, these factors will not derail the country's expected economic growth, which is slated to be one of the fastest in Asia.  
  • China in Brief: Some Debts Good, Some Debts Bad

    Sandra Chow, CFA    Sandra Chow, CFA, Ang Ben You, Cheong Yin Chin, CFA
    07 May 2018

    • Chinese banks and corporates have now released their full FY17 financial statements, following preliminary results in March.  The reports revealed how China's clampdown on leverage is starting to affect individual issuers in different ways.
    • Chinese banks' FY17 operating metrics showed the larger banks (the big six and larger joint stock banks) emerging stronger than the smaller banks from the government's deleveraging campaign, in terms of profitability and asset quality.   Because larger banks have been net interbank lenders, profitability has benefited from higher interbank rates. Asset quality also showed positive trends with special mention loan ratios falling and NPL (non-performing loan) classification actually becoming more conservative. On the other hand, the weaker joint stock and city commercial banks have seen profitability take a hit due to more expensive interbank funding costs. Their deteriorating asset quality shows them as being disproportionately affected by China's deleveraging campaign. 
    • Asset growth showed broad moderation at the banks in FY17, though growth rates were still higher at the smaller ones. The big six banks reported broadly lower asset growth rates compared to FY16. This trend can be extrapolated to the joint stock and city commercial banks, though here the picture was more mixed, with a few still seeing expansion. Slower asset growth was driven mainly by investment receivables, which fell as a % of assets at many banks. Banks' exposure to shadow loans should continue to shrink this year given the emphasis on fighting financial risks; we expect more regulations targeted at these items. 
    • Chinese real estate firms' liquidity weakened during FY17, despite robust contracted sales.  Slower mortgage approvals amid China's credit tightening delayed the companies' cash collections.  Undeterred, the developers continued heavy land acquisitions and most surpassed their FY17 land purchase budgets. All of the developers we cover aside from Greenland Hong Kong posted negative free cash flow last year. We see more bond supply risk from the China property sector as the developers plug their funding gaps with fresh onshore and offshore debt. The authorities do not seem to be clamping down heavily on developers' funding sources: onshore bond issuance among the Chinese high yield developers we track soared by 76% up to 20 April this year, compared to the same period in 2017. Offshore bond issuance has also remained steady, although rising risk aversion among $ bond investors is crimping appetite for Chinese property bonds and prompting more issuance of short-dated paper.
    • The Chinese industrial companies we track posted solid FY17 results overall, with companies ranging from car maker Geely Auto, piped gas provider China Oil & Gas and infant formula provider Health & Happiness reporting improving operations and stable or stronger credit metrics. With more prudent capex plans than the property developers, funding needs are generally lower. But regulatory approval for bond issuance seems to be on a case-by-case basis and issuers from overcapacity industries may find it harder to gain approval. Aluminium producer China Hongqiao, for instance, issued a 363-day bond in April, suggesting that investors were taking a cautious view of Hongqiao's long-term credit outlook, or that the company struggled to obtain an issuance quota from China's National Development and Reform Commission (deals of under 1 year maturity are not subject to NDRC approval). Yet the authorities are also supporting new funding channels selectively, presumably to ease the impact of credit tightening. West China Cement reported that it enjoys tax-free income from its new finance lease business, for instance.
    • We expect China will continue to tweak credit restrictions selectively, in order to rein in excessive leverage without causing a credit crunch.  Regulatory approval can be forthcoming to fund projects that are in line with government policies. For example, despite the general credit tightening, Chinese developers can obtain large quotas for China's new 'Rental Apartment Special Bonds' (长租公寓REIT), as the government tries to tackle the problem of housing affordability.  Amid the deleveraging campaign, it seems that not all debt is bad after all.
  • Webinar: China Property-The Significance of the Property Sector to China's Economy

    25 Feb 2018

    Residential home prices in China have been kept steady by an onslaught of tightening policy measures across the country since September 2016. With cities such as Lanzhou relaxing some of its restrictive measures at the start of this year, could we be on the cusp of an easing cycle?

    This on-demand 15-minute webcast explains the importance of the Chinese real estate sector and delivers a summary overview of our recent research reports. 
  • Indian Banks: 1HFY18 Review and 2018 Outlook

    10 Jan 2018

    • Indian banks reported lower annualized aggregate profitability in 1HFY18 due to weaker net interest revenues and higher provisions related to RBI's two lists of accounts which are slated for insolvency resolution.
    • The government's INR 2.1 tn recapitalization package is a game changer and has largely removed the capital uncertainty banks have been facing.
    • For banks under our coverage, our rough calculation reveals a capital requirement that is ~64% of the total amount pledged (INR 2.1 tn) by the government under our scenario analysis which we think is reasonable but not especially harsh.
    • Asset quality is already showing signs of stabilization and improvement but the recapitalization plan should also help support this picture into 2018 as banks find greater impetus to take haircuts and resolve NPAs on their books.
    • The expectation of a substantial pick up in credit growth due to the capital pledge is logical but we remain skeptical as the plan will be spread over two years and risk aversion will also likely  take some time to abate.
    • Removing capital concerns will help with bank valuations and in tandem with the recently introduced "Alternative Mechanism" (AM), should help with banking consolidation.
    • IFRS 9 implementation should also be easier to swallow with with more capital and a phased implementation of the CET 1 impact. 
  • Asian High Yield Outlook: 8 Themes for 2018

    Sandra Chow, CFA    Sandra Chow, CFA, Cheong Yin Chin, CFA, Lakshmanan R
    26 Dec 2017

    • Asian high yield is too expensive" lament many investors we meet. We agree. We propose a more defensive strategy next year. Current Asian high yield spreads offer little compensation for the incremental credit risk compared to investment grade, or to US high yield. We suggest a 'barbell' approach in terms of credit quality: combining a core portfolio of defensive names with a few higher-beta credits to boost returns. 
    • Credit quality is generally improving or stable among the names we cover.  But this does not justify the extent of the Asian high yield rally. Technical factors - the imbalance between demand (large inflows into emerging markets and the fabled 'Chinese onshore bid') and supply (at record levels, but still not enough to dent demand) - have been the key reason.  As supply risk increases, we are concerned that the balance will tip away from the market's favour. 
    • We highlight 8 themes that could drive the Asian high yield markets next year.  These include: 1) the effect of China's regulators and China's domestic bond markets on offshore bond supply; 2) LGFV issuance and maturity walls; 3) China's capacity cuts and their impact on commodity prices; 4) Asian high yield bond supply risk; 5) China's property market slowdown; 6) few distressed opportunities; 7) the reach for yield into frontier markets and riskier credits; 8) Fed surprise risk.  
  • China Banks 3Q17: Convertible Boost to CET1

    14 Nov 2017

    • The major Chinese banks generally delivered stronger earnings in 3Q17 with profits up YoY across all banks except for Citic where they were flat. 
    • Net interest margins ticked up QoQ across banks but the drivers are different for the big four versus BoCom and the joint stock banks. For the big four, the NIM levels are higher than the previous year as lending rates especially on interbank assets have picked up. BoCom and the joint stock banks also saw NIM tick up QoQ in 3Q - due to a run off of deposits and a run-up in loan deposit ratios - but levels are still 20-40 bp lower than the previous year. 
    • Gross NPLs and ratios have mostly stabilized, with the exception of Shanghai Pudong where loan quality worsened further in 3Q. Investment receivables, usually shadow loans, declined QoQ across the joint stock banks, though the books are still very large. Provision costs have moderated but the run rate of credit costs is still quite high and banks are rebuilding provision coverage. 
    • Loan growth has slowed slightly among the big banks, due to an easing of mortgage loan growth, while at joint stock banks the loan growth is generally faster and trends are more mixed. 
    • Liquidity remains stretched at BoCom and the joint stock banks where loan to deposit ratios, even when excluding shadow loans, have shot up to 90% or higher, from mostly below 80%, over the last two and a half years. 
    • CET1 ratios are stable and relatively strong at the big banks and Merchants, but some joint stock banks are under pressure and have used convertible bonds or private placements to raise CET1 capital.  For example, Everbright Bank lifted its CET1 ratio slightly by issuing convertible bonds (not the same as AT1 prefs) which are partly accounted for as equity, with this portion also counting as regulatory CET1 capital. Minsheng and Ping An respectively plan RMB 50 bn and RMB 26 bn of similar convertible bond issuance. Separately Shanghai Pudong also improved CET1 via private placement of new shares.  These examples reflect banks finding creative solutions to capital raising while they remain restricted from public equity capital raising as their price/book multiples are still under 1x. 
  • Japanese Banks: BOJ's Take on Financial Stability

    30 Oct 2017

    • In its latest financial stability report the BOJ highlights the unusually low profitability of Japanese banks and expresses concerns about the soundness of some lenders and risks to the efficiency of credit allocation
    • Too many lenders are fighting for a shrinking market as the population and the number of firms declines
    • Nevertheless, domestic lending has been growing at around 3%, more strongly at the regional banks than the majors, led by real estate lending to SMEs
    • Overseas funding costs have risen which has led Japanese banks to slow their growth in overseas lending and securities investment to focus more on risk and returns
    • Domestically the banks have shed yen bonds as the BOJ has bought JGBs but holdings by the major banks have picked up recently and all the banks have increased holdings of investment trusts in pursuit of higher returns  
    • As domestic loan growth has exceeded GDP growth, Japan's credit/GDP ratio has been rising, but this comes after a declining trend that has lasted more than 20 years. Before its bubble burst, Japan's ratio peaked at something close to the level that China's corporate debt/GDP is now reaching
    • The BOJ sees Japan's banking system as basically stable, but facing profitability challenges from a shrinking customer base, low lending rates, inefficiency and limited income diversification.
  • China: $ Bond - Why Issue and Where Should It Price? 

    10 Sep 2017

    • China is reported to be readying a dollar sovereign issue. We expect it to price at the tightest end of the EM external sovereign index, inside highly rated sovereigns including Korea, Hong Kong and Israel. This is thanks to what we expect will be a strong technical bid from Chinese banks.
    • China doesn't have to issue external debt which raises questions about why the sovereign is issuing at this stage. 
    • Credit growth has slowed but remains well above nominal GDP, and there are long term questions about the viability of the investments toward which credit is going. That has left the Chinese economy very imbalanced, but those imbalances are largely domestic. Foreign currency debt remains low, both at a sovereign and whole economy level.
    • China's still extremely high reserves amount to close to double the stock of external debt, both public and private and close to 19 months of imports of goods and services. Reserve drain has also been halted as outflows have been curbed sharply in 2017.
  • EM Weekly: Beta Sell-Off, Asia Least Hard Hit

    13 Aug 2017

    • Risk assets took a bump last week largely due to global, rather than EM, factors. DM underperformed EM in excess return terms. In IG, EM corporates generated excess returns of minus 0.38% versus minus 0.54% on DM. In HY corporates a similar story was true with excess returns of minus 0.44% versus minus 1.12% on DM.  
    • One of the drivers of the risk off tone last week was the war of words between US President Donald Trump and North Korea's leader Kim Jong-un. That hit the Korean won hardest, it fell 1.64% versus the dollar over the week. Asian currencies were generally weaker last week, with the exception of the Chinese renminbi which strengthened by 0.98%. But in hard currency, the opposite was true with Korean names and sovereign debt generally outperforming IG counterparts.  
    • In fact the hardest hit last week in the hard currency corporate and sovereign indices were the LatAm and sub-Saharan African credits which are usually caught up in any beta sell off regardless of the driver. Asian names, which tend to be tighter, higher rated and more defensive were the strongest performing last week in that risk-off environment, including Korea.
    • Notable outliers to those broad moves last week included Teva which continued to sell off for a second week with very high trade volumes persisting after weaker 2Q17 results in the week before last. Teva was down by 1.62% in excess return terms. Venezuela and PDVSA were also among the bottom of the high yield indices' constituents for performance last week and continued to be very volatile, falling on average by 3.32% and 3.69% respectively in price terms last week. Kenya was at the stronger end of the sovereign index last week with excess returns of 0.71%, after relief that last week's elections didn't turn to violence, albeit with the result still being disputed and strikes planned on Monday.
    • Issuance slowed to a trickle last week with $2.5 bn priced, of which $1.7 bn was rated high yield. The only sovereign new issue was Gabon (B3/B+) which priced a $200 mn tap of its 6.95% 2025 notes. There are several other sovereign new issues being rumoured as coming in the second half of August or early Autumn including Bahrain (euros), $2 bn from Oman and $3 bn from Nigeria.
  • China Property Trip Notes May 2017: Tug-of-War

    10 Jul 2017

    • We visited 4 'hot' cities last month, namely, Wuhan, Hefei, Nanjing and Shanghai. These cities are classified as 'hot' property markets by the Chinese government. Why? The average price of a newly constructed homes jumped ~31.4%, ~48.1%, ~51.4% and ~56.0% from January 2015 to April 2017 in Wuhan, Hefei, Nanjing and Shanghai, respectively. The respective local governments tried to rein the runaway home prices by implementing tighter housing measures. However, our recent trip indicates that these restrictive measures have not been very effective. The sales volume did decline after the introduction of tighter measures, but the average home prices remained relatively resilient.
    • Most of the projects in Shanghai (Tier-1 city) and Nanjing (upper Tier-2 city) were able to achieve high gross profit margins ("GPMs") of ~50% or above, while those in Wuhan (mid Tier-2 city) were in excess of 30%. Projects in Hefei were also at a decent GPM of above 25%, despite being a lower Tier-2 city. Given the decent to high GPMs, we can understand why many developers want to operate in these 4 cities.
    • The Chinese developers and the local governments seem to be engaged in a game of 'tug-of-war'. The local governments are delaying or suspending fresh pre-sales permits for projects with high average selling prices ("ASPs"). On the other hand, Chinese developers are not willing to lower their ASPs to meet the price caps imposed by the local governments. Most local governments' revenues are dependent on business/sales tax on property transactions, land sales, and income and land appreciation taxes from the developers. Developers are dependent on the sale of properties to generate cash flow to fund their operations. Who will cave in eventually? We think it depends which party has deeper pockets.
    • The supply-demand mismatch has led to an inventory shortage especially in the larger cities. On one hand, developers want to delay the launches of their projects in hopes of higher ASPs. On the other hand, home buyers are bringing forward the purchases in view that ASPs may increase after restrictions are lifted and borrowing might become more expensive in the future. Aggravated by the influx of migrants, entire phases of projects are sold out in a matter of days. Please refer to the body of this report for the common themes across the property markets for all 4 cities.
  • PBOC Monthly: Onshore Corporate Bonds - Dead or Alive?

    22 Jun 2017

    • Local government bond issuance has roared back to life but corporate bond financing saw the largest monthly net decline since at least 2011. Other non-bank financing was also weak in May, with outstanding entrusted loans and undiscounted bills falling on a net basis. 
    • Bank lending rose by 12.8% YoY and was the main driver of social financing growth which grew 13.0%. Household loan growth peaked in April and decelerated slightly to 24.3% YoY in May. There are multiple reports of tighter controls on the housing market, though there is not yet specific data on mortgage lending for May. Corporate loan growth picked up further to 8.5%. 
    • The weak corporate bond market is a major risk for economic growth and for corporate credit quality.  The PBOC could inject liquidity to bring down short term rates, which should reopen the bond market, but this means shifting the focus away from 'deleveraging' and might also risk renewed concerns over capital outflows. China has enjoyed relative external stability this year but this could change if the USD strengthens as and when US inflation and rates pick up or as the Fed commences plans to reduce its balance sheet. 
    • Refinancing costs have risen by over 100 bp on short dated commercial paper issued in 2015-16 when yields were low. They have risen by less on longer-dated bonds issued prior to 2015. There is some RMB 1.4 bn of commercial paper due to mature in the remaining months of 2017, with the largest issuance from the manufacturing, utilities and mining sectors.
    • Issuers of longer-dated bonds might not face a big increase in refinancing costs but could instead face the risk of being entirely unable to issue. The real estate sector in particular has a sizable amount of bonds coming due or turning putable in the remaining months of 2017 but gross issuance has been negligible in the last few months due to regulatory restrictions. Other sectors with large amounts of issuance coming due include manufacturing, conglomerates, construction and mining.