Bank Rakyat Indonesia

  • Sector: Financial Services
  • Sub Sector: Banks
  • Region: Indonesia
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Fundamental View

AS OF 08 Jun 2023
  • Bank Rakyat Indonesia (BRI) is rated Baa2 (sta)/ BBB- (sta)/ BBB (sta). As the second largest bank in Indonesia that is majority-owned (53.19%) by the Indonesian government, and key role in servicing the ultra-micro and micro segments, we expect a very high likelihood of government support in times of need.
  • BRI’s credit strength had been its very high margins (>7%; rose after consolidating Pegadaian and PNM) and capital buffers (>20% CET 1 ratio) which are ahead of its country peers and among the highest in APAC.
  • The bank has a leading franchise in the country’s micro and small commercial segments with a long operating track record, well managed credit costs and that has in turn helped to support its high margins.

Business Description

AS OF 08 Jun 2023
  • The history of Bank Rakyat Indonesia can be traced back to 1895. It is now the second largest bank in Indonesia by assets.
  • BRI was listed on the Jakarta Stock Exchange in 1992, now the Indonesia Stock Exchange in 2003. The Indonesian government held a 53.2% stake in the bank as of end-December 2022. Foreign investors hold 35.7% of the bank's shares and domestic investors 11.1%.
  • Its core business focus is on the ultra-micro, micro and small commercial segments, which now account for just over two-thirds of its total loan book.

Risk & Catalysts

AS OF 08 Jun 2023
  • The Indonesian economy continues to be on good recovery momentum which is supportive for asset quality and loan growth; management targets 10-12% FY23 loan growth and credit costs of 220-240 bp (FY22: 255 bp).
  • BRI’s high exposure to ultra-micro and micro (~48% of loans) and small commercial loans (19%) leads to higher credit costs compared to its peers, but the bank is more than compensated by the higher margins generated. We are comfortable with the credit given its very high capital buffers.
  • Funding cost pressure is salient, but BRI’s interest margins have been resilient thanks to its increased focus on the higher yielding micro segment so its returns have continued to be strong. It expects a broadly stable NIM in FY23.

Key Metrics

AS OF 08 Jun 2023
IDR bn FY19 FY20 FY21 FY22 1Q23
PPP ROA 4.8% 4.2% 4.7% 5.2% 5.8%
ROA 2.5% 1.2% 1.9% 2.9% 3.4%
ROE 17.7% 8.6% 12.0% 17.4% 21.4%
Equity/Assets 14.6% 14.1% 17.2% 16.0% 15.3%
CET1 Ratio 21.7% 20.1% 26.2% 24.5% 23.9%
NPL Ratio 2.80% 2.88% 3.00% 2.67% 2.86%
Provisions/Loans 2.47% 3.43% 3.47% 2.51% 2.45%
LDR 88% 91% 92% 87% 94%
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CreditSights View

AS OF 28 Apr 2023

BRI has become the 2nd largest bank in Indonesia by assets, having been overtaken by Bank Mandiri after the latter’s sharia business consolidation. About 48% of its consolidated loan book consists of micro loans and another 19% of small commercial loans, leading to its higher Loan at Risk (LaR) at ~16% of its loan book. While we do not expect a high slippage rate from the LaR book, BRI and its country banking peers have the highest capital ratios in the region (23.9% CET1 ratio for BRI) and are therefore in the position to absorb losses. We like BRI because of its very strong profitability and capital. Spreads are relatively tight but the duration is short. We maintain our M/P reco.

Recommendation Reviewed: April 28, 2023

Recommendation Changed: July 08, 2022

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Mitsubishi UFJ Financial Group

  • Sector: Financial Services
  • Sub Sector: Banks
  • Region: Japan
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Fundamental View

AS OF 08 Jun 2023
  • MUFG is the largest of Japan’s three megabanks, and has the most diversified operations by business line and geography; it has also been the most acquisitive up until the recent couple of years.

  • Core profitability has been weak due to Japan’s ultra-low interest rates and growth; that has been improving post an efficiency drive (and a CEO change in April 2020) and the bank has committed to at least JPY 1 tn in net income going forward, which we see as achievable.

  • Given its size and systemic importance, MUFG is considered too big to fail, and will be supported by the Japanese government if needed.

Business Description

AS OF 08 Jun 2023
  • The 2 main banks of MUFG are MUFG Bank (earlier the Bank of Tokyo-Mitsubishi UFJ or BTMU) & Mitsubishi UFJ Trust & Banking. In the early stages of Japan's long banking crisis Bank of Tokyo merged with Mitsubishi Bank, and in the late stages they absorbed UFJ (former Sanwa Bank & Tokai Bank) while Mitsubishi Trust absorbed Toyo Trust & Nippon Trust.
  • The group includes consumer lenders Mitsubishi-UFJ NICOS & ACOM, and securities/IB joint ventures with Morgan Stanley - MUFG invested in Morgan Stanley in 2008 and now has a ~20% stake. In Dec-22, it completed the sale of its US retail and commercial bank, MUFG Union Bank, to US Bancorp.
  • It has a majority stake in Thailand's Bank of Ayudhya (now Krungsri), 20% stakes in Vietnam's Vietinbank and Philippines' Security Bank, and has acquired control of Indonesia's Bank Danamon.
  • In August 2019, it acquired Colonial First State from Commonwealth Bank of Australia to strengthen its global asset management business, and in 2020 it invested $700 mn in SE Asia's Grab.

Risk & Catalysts

AS OF 08 Jun 2023
  • The group has a high cost-income ratio as it combines a much-delayed efficiency drive with new investments, and faces income challenges in its retail banking operations. However, it has finally moved decisively to improve its returns via the sale of MUFG Union Bank (MUB), its underperforming US retail and SME operations.

  • MUFG is exposed to Japanese equities through large unrealised gains but is in the process of reducing these shareholdings. It has taken actions to reduce the MTM impact of rising yields on its $ bond portfolio, as well as the potential impact on its JGB portfolio given likely modifications to yield curve controls.

  • MUFG had a good FY22 with impressive margin improvement, lower credit costs and the completion of the MUB sale. It has set a net income target of JPY 1.3 tn for FY23, by improving net operating profits in customer segments and expense control.

Key Metrics

AS OF 08 Jun 2023
¥ bn FY18 FY19 FY20 FY21 FY22
Net Interest Revenue/Average Assets 0.64% 0.60% 0.56% 0.57% 0.79%
Operating Income/Average Assets 1.24% 1.27% 1.16% 1.11% 1.22%
Operating Expense/Operating Income 71% 70% 68% 69% 65%
Pre-Impairment Operating Profit / Average Assets 0.36% 0.38% 0.37% 0.34% 0.43%
Impairment charge/Average Loans (0.01%) (0.21%) (0.48%) (0.30%) (0.61%)
ROAA 0.29% 0.17% 0.23% 0.32% 0.30%
ROAE 5.4% 3.3% 4.7% 6.7% 6.5%
CET1 Ratio excluding unrealised securities gains in AOCI 10.0% 9.8% 9.7% 9.5% 9.8%
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CreditSights View

AS OF 16 May 2023

MUFG is the largest of the megabanks with more diversified business lines and a larger proportion of business overseas. The bank has been acquisitive, taking large shareholdings in banks in South East Asia, and in the AM and aircraft leasing space. Digitalisation and operational efficiency improvements are underway and progress on making a more efficient institution has finally commenced with the sale of Union Bank in the US. Capital levels are adequate, $ liquidity is reasonable, and government support is assured. Lending discpline is helping lift international margins, which are still behind SMFG’s. Its ~20% shareholding in Morgan Stanley has been a boon for income. We see valuations as attractive for the name.

Recommendation Reviewed: May 16, 2023

Recommendation Changed: May 17, 2022

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State Bank of India

  • Sector: Financial Services
  • Sub Sector: Banks
  • Country: India
  • Bond: SBIIN 4.875 28
  • Indicative Yield-to-Maturity (YTM): 5.23%
  • Credit Rating (Moody’s/Standard & Poor’s/Fitch): -/BBB/-
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Fundamental View

AS OF 08 Jun 2023
  • State Bank of India (SBI) is the largest state-owned bank in India and is in some respects the country’s flagship bank. Given the bank’s close government links and systemic importance, government support for SBI is very strong.
  • It is rated Baa3(sta)/BBB-(sta)/BBB-(sta), the same as India’s sovereign ratings. Fitch revised its outlook to stable from negative while affirming its BBB- rating in June 2022. A sovereign downgrade to HY would be the greatest credit risk, but we assess that risk as low.
  • The bank’s capital buffers are relatively low, but we take comfort in the strong government support.

Business Description

AS OF 08 Jun 2023
  • State Bank of India is the largest commercial bank in India. Its predecessor banks date back to the 19th century. In the early 20th century, they merged to form the Imperial Bank of India which became the State Bank of India after India gained independence in 1947.
  • The Government of India remains the largest shareholder with a 56.9% stake. Per the SBI Act, the government's shareholding cannot fall below 55%.
  • SBI's merged with its 5 associate banks and Bharatiya Mahila Bank in 2018. The merger catapulted SBI into one of the world's 50 largest banks.
  • The bank has 85% of its loans in the domestic market, and has steadily increased its international business too over the past few years with offices across all international business centres.
  • It has diversified its operations with well regarded subsidiaries in the areas of fund management, credit cards, insurance, and capital markets.

Risk & Catalysts

AS OF 08 Jun 2023
  • SBI does not have a strong buffer vs. the regulatory minimum of 8%, but its size, systemic importance and majority government shareholding confer particularly strong government support. But consequentially, any deterioration in the sovereign ratings will also affect the bank’s credit.
  • Increasing consolidation in the country’s financial space may narrow the gap between SBI’s market leading position vs its peers.
  • The NIM should remain stable in the coming quarters as the bank has room to raise its MCLR and excess statutory liquidity ratio (SLR) reserves to unwind to fund loan growth, which is targeted at 12-14% in FY24.
  • Asset quality is trending well, but net slippages should normalize in FY24. Similar to the other PSBs, SBI has a large SME and mid-corporate book which could be impacted disproportionately by higher rates. However, SBI’s asset quality is better than the other PSBs and it is also better run due to the high caliber of its management team.

Key Metrics

AS OF 08 Jun 2023
INR mn FY19 FY20 FY21 FY22 FY23
Net Interest Margin 2.78% 2.97% 3.04% 3.12% 3.37%
ROA 0.02% 0.38% 0.48% 0.67% 0.96%
ROE 0.4% 6.4% 8.4% 11.9% 16.5%
Equity to Assets 6.0% 5.9% 5.6% 5.6% 5.9%
CET1 Ratio 9.8% 10.1% 10.3% 10.3% 10.6%
NPA ratio 7.53% 6.15% 4.98% 3.97% 2.78%
Provisions/Loans 2.48% 1.83% 1.77% 0.91% 0.54%
PPP ROA 1.55% 1.79% 1.65% 1.58% 1.59%
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CreditSights View

AS OF 19 May 2023

SBI is the largest bank in India and a well-run franchise. Government support underpins SBI’s relative positioning, while fundamentally, SBI has the lowest net NPA, a good CASA ratio, a sufficient (though could be higher) CET1 ratio, good operating metrics and business plans, and the best management among the Indian public sector banks. We thus like the SBI name for what it offers. Following a swift deterioration in asset quality post the delta variant outbreak, there has been a sustained improvement and restructured loans are low. FY23 performance was solid with good NIM improvement and loan growth, as well as asset quality. We maintain a M/P reco on the name.

Recommendation Reviewed: May 19, 2023

Recommendation Changed: December 07, 2020

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Mizuho Financial Group

  • Sector: Financial Services
  • Sub Sector: Banks
  • Region: Japan
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Fundamental View

AS OF 08 Jun 2023
  • Japanese banks are challenged to achieve stable and adequate returns and the problem is especially acute for Mizuho whose underlying profitability is low. In FY18 it undertook large restructuring charges to improve its weak returns. Its performance improved in FY20 and FY21, though a series of IT failures in its Japan IT system was a distraction. FY22 was a mixed year as revenue growth was challenged.

  • Mizuho’s CET1 ratio buffer is low, but acceptable given comfortable asset quality metrics.

  • As one of the three megabanks, Mizuho’s credit standing benefits from a strong expectation of government support, if needed.

Business Description

AS OF 08 Jun 2023
  • Mizuho is just about the third largest by asset size among Japan's three megabanks. It was formed in 2000 through the merger of the former "City" banks, Fuji and Dai-Ichi Kangyo and the Industrial Bank of Japan, a provider of long-term industrial credit financed by bond issues.
  • Its main units are Mizuho Bank and Mizuho Trust & Banking (focusing on asset management and related services). The group's other main business is Mizuho Securities, a leading player in debt capital markets in Japan and the US.
  • It expanded in North America in 2015 by acquiring assets and staff from RBS and has successfully captured more investment as well as commercial banking business in conjunction with its securities arm. It also acquired Greenhill, a boutique M&A firm, in 2023.
  • Mizuho is less diversified than its peers geographically and by business line; It has a more corporate focus and a weaker retail/consumer franchise.
  • To tackle its worsening cost/income ratio as well as Japan's poor demographics, it has been shrinking its domestic branch network and staff numbers over a multi-year plan.

Risk & Catalysts

AS OF 08 Jun 2023
  • Asset quality has been benign and not much affected by COVID-19 up to and throughout FY21; credit costs in FY22 decreased to a low 8 bp of loans.

  • The CET1 ratio (fully Basel III compliant and ex-security gains) was 1.5% above the 8% regulatory minimum at FY22, which is fairly low level but acceptable for now given benign asset quality.

  • FY22 was a mixed year for Mizuho as the bottomline was propped up by reduced credit costs, while revenue growth continued to be anaemic as was the case over the past few years. It is finally showing some ambition for FY23, aiming for net business profit, credit cost, and net income growth of 10%, to set the group on a path towards a P/B ratio >1x from its 0.5-0.6x range currently.

Key Metrics

AS OF 08 Jun 2023
¥ bn FY18 FY19 FY20 FY21 FY22
Net Interest Revenue/Ave Assets 0.39% 0.36% 0.42% 0.44% 0.41%
Operating Income/Average Assets 0.92% 1.02% 1.03% 1.01% 0.96%
Operating Expense/Operating Income 79% 67% 64% 62% 63%
Pre-Impairment Operating Profit / Average Assets 0.20% 0.33% 0.37% 0.38% 0.34%
Loan impairment (charge) or reversal/ave. loans (0.02%) (0.21%) (0.25%) (0.28%) (0.10%)
ROAA 0.05% 0.22% 0.22% 0.24% 0.23%
ROAE 1.1% 5.2% 5.3% 5.8% 6.1%
CET1 Ratio excl. unrealised securities gains in AOCI 10.8% 11.0% 10.5% 11.5% 11.3%
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CreditSights View

AS OF 23 May 2023

Mizuho has historically trailed its peers on profitability and capital, as the merger that formed it included the former IBJ, a large wholesale bank with thin profit margins. Lower profitability and capital prevented investments in new business opportunities. FY20-21 saw good improvements in net interest income and mostly lower credit costs vs. peers. Credit costs related to Russia in 4Q21 and Japan corporates in 1Q22 affected results but this took a better turn in Q2. Previous issues with its Japan IT system have not resurfaced recently. CET1 capital has a ~1.5% buffer which is low but acceptable. Mizuho is the weakest of the megabanks, but also had improved most over FY20-21. FY22 net income declined with low credit costs. It trades ~20 bp behind MUFG which we see as fair.

Recommendation Reviewed: May 23, 2023

Recommendation Changed: December 05, 2022

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JD.com

  • Sector: Media and TelecommunicationsTechnology
  • Sub Sector: Technology
  • Country: China
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Fundamental View

AS OF 05 Jun 2023

  • We maintain our Market perform recommendation on JD. JD’s 1Q23 revenues were up 1.4% YoY and beat expectations thanks to continued strength of its net services revenues. JD’s EBITDA margins also improved but it incurred a net operating cash outflow in 1Q23 due to higher working capital investments.

  • We expect JD’s topline growth to gradually recover and achieve mid-to-high single digit growth for FY23. We expect JD’s EBITDA margin to edge lower in FY23 compared to FY22 due to the subsidy program and upcoming large promotional events in 2Q23 (6.18), offset in part by its continued improvement in fulfillment efficiency and economies of scale. We expect JD to continue to generate strong operating cash flow in FY23, and marginally reduce its total debt and Total debt/EBITDA.

Business Description

AS OF 06 Jun 2023
  • JD is one of China's leading e-commerce and retail infrastructure service providers.
  • JD has a large fulfillment infrastructure which includes over 1,500 warehouses with an aggregate gross floor area of approximately over 31 mn square meters, as of 31 March 2023.
  • JD has 4 operating segments, namely JD Retail, JD Logistics, Dada and New businesses. Dada began reporting as a standalone segment with effect from 28 February 2022.
  • New businesses mainly include JD Property, Jingxi business group, CNLP, overseas businesses and technology initiatives
  • JD had a market capitalization of RMB 396.5 bn as of 5 June 2023.

Risk & Catalysts

AS OF 05 Jun 2023
  • Chinese tech companies have been facing increasing scrutiny by the Chinese government. Any regulatory clampdowns may adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).

  • A prolonged economic slowdown in China would weigh on consumption and JD’s business outlook.

  • There are regulatory risks involving the use of variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs). Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.

  • JD may be subject to lawsuits for items listed on its marketplaces, which may be pirated, counterfeit or illegal. JD cooperates with 3rd party logistics cos to help deliver products to buyers. Failure to provide reliable delivery services or unexpected logistics bottleneck may materially affect the business.

Key Metrics

AS OF 05 Jun 2023
RMB mn FY19 FY20 FY21 FY22 LTM 1Q23
Debt to Book Cap 15.7% 12.5% 12.2% 19.2% 19.4%
Debt/Total Equity 18.7% 14.2% 13.8% 23.7% 24.1%
Debt/Total Assets 7.2% 7.5% 6.9% 10.9% 12.0%
Gross Leverage 1.6x 1.7x 3.3x 2.4x 2.2x
Interest Coverage 16.2x 16.4x 8.5x 12.8x 12.5x
EBITDA Margin 2.0% 2.5% 1.1% 2.6% 2.8%
Note: Difference between reported EBITDA and adjusted EBITDA mainly due to operating lease costs and share-based compensation. JD held a net cash position since FY17.
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CreditSights View

AS OF 12 May 2023

We maintain our Market perform recommendation on JD. Within A-rated China tech, we continue to prefer Alibaba and Tencent for similar/higher yields despite being rated 2-3 notches higher. For total return investors, we continue to like JD Apr-26, which yields higher than JD Jan-30 due to the inverted US Treasury curve. We expect JD’s revenue growth to improve to 15% YoY for FY23 (FY22: 10% YoY). We expect revenue growth of JD Logistics, Dada Nexus and new business lines to decelerate from the high bases in FY22 but remain strong. We expect JD’s EBITDA margin to decline marginally to 3.7% from 3.9% in FY22 as the company engages in more promotional activities. We expect JD’s cash flow generation to improve and the company to maintain a net cash position in FY23.

Recommendation Reviewed: May 12, 2023

Recommendation Changed: November 21, 2022

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Tencent

  • Sector: Technology Media and Telecommunications
  • Sub Sector: Technology
  • Country: China
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Fundamental View

AS OF 30 May 2023
  • We affirm our Outperform recommendation on Tencent. We like Tencent’s 24,25 for total return investors given its relatively flat yield curve, and the belly part of its curve (29,30,31) for spread investors.

  • Tencent’s revenue growth in 1Q23 was ahead of our/market expectations thanks to a solid and broad-based recovery across its business segments, including domestic gaming, payment transactions, and online advertising. EBITDA margin was 5 ppt ahead of our expectation thanks to the recovering topline growth of its higher-margin businesses and continued cost optimization. We expect Tencent’s credit profile to improve in FY23 with continued recovery in advertising and gaming revenues, effective cost control measures, which result in improving EBITDA and free operating cash flow.

Business Description

AS OF 30 May 2023
  • Founded in November 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has ventured into instant messaging, social networking, online payments, digital entertainment, and PC and smartphone gaming. Most recently, it has also forayed into high-tech areas such as artificial intelligence, and cloud computing.
  • Tencent's leading Internet platforms in China include Weixin/WeChat (online messaging), QQ Instant Messenger (online messaging), Tencent Games (gaming), Tencent Video/Weixin Video Accounts (video platforms), WeChat Pay (payments), and Tencent Cloud. The combined monthly average users (MAU) of Weixin and Wechat reached 1.3 bn as of 31 March 2023.
  • In 1Q23, 53% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 32% came from FinTech and Business Services (e.g. commercial payments and cloud), 14% from Online Advertising and 1% from Others.
  • Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.0 tn as of 30 May 2023.

Risk & Catalysts

AS OF 30 May 2023
  • Any regulatory clampdowns abroad and domestically (e.g. antitrust rules, data security, personal information protection laws) may affect Tencent’s business. Tencent’s gaming, music streaming, and online payment units are among those that have come under regulatory scrutiny in the past. In addition, Tencent uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers, which poses regulatory risks. Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.

  • Tencent operates in a competitive market alongside other Chinese tech giants. Failure to continually innovate may result in loss of market share and profitability. Monetization of its social-network base may take time and heavy investment in payments, cloud, AI and retail businesses may weigh on margins.

  • The potential restructuring and spin-off of Tencent’s finance-related business into a financial holding company as ordered by the Chinese government could be a credit negative event depending on the final structural reorganization.

Key Metrics

AS OF 30 May 2023
RMB bn FY19 FY20 FY21 FY22 LTM 1Q23
Debt to Book Cap 32.2% 25.2% 27.0% 31.4% 30.1%
Net Debt to Book Cap 7.3% 4.0% 6.0% 8.5% 4.8%
Debt/Total Equity 47.6% 33.7% 36.9% 45.9% 43.0%
Debt/Total Assets 24.4% 19.7% 20.1% 22.8% 23.9%
Gross Leverage 1.7x 1.5x 1.9x 2.2x 2.0x
Net Leverage 0.4x 0.2x 0.4x 0.6x 0.3x
Interest Coverage 17.9x 22.9x 21.9x 16.4x 16.7x
EBITDA Margin 36.4% 35.4% 30.9% 29.6% 31.4%
Year-end: 31 December.
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CreditSights View

AS OF 18 May 2023

We affirm our Outperform recommendation on Tencent. We expect Tencent ‘s credit profile to improve in FY23 with continued recovery in advertising and gaming revenues, effective cost control measures, which result in improving EBITDA and free operating cash flow. Tencent’s revenue growth in 1Q23 was ahead of our/market expectations thanks to a solid and broad-based recovery across its business segments, including domestic gaming, payment transactions, and online advertising. EBITDA margin was 5 ppt ahead of our expectation thanks to the recovering topline growth of its higher-margin businesses and continued cost optimization. We like the short-end (24,25) of Tencent’s curve, given its relatively flat yield curve. For spread investors, we like the belly part of its curve (29,30,31).

Recommendation Reviewed: May 18, 2023

Recommendation Changed: August 18, 2022

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Baidu

  • Sector: Media and TelecommunicationsTechnology
  • Sub Sector: Technology
  • Country: China
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Fundamental View

AS OF 30 May 2023
  • We maintain our Market perform recommendation on Baidu following its strong 1Q23 results. Baidu posted a solid beat in revenues and EBITDA, and maintained its healthy leverage metrics. Baidu maintained its good cost controls, which led to a better EBITDA margin and improved FOCF in 1Q23. We expect Baidu to maintain healthy debt metrics in FY23, and believe the company is well positioned to benefit from China’s macro recovery. Management sees continued recovery of online advertising in 2Q23 and opportunities in generative AI.

  • However, we think Baidu’s $ bonds are expensive compared to Alibaba and Tencent. For those seeking exposure to Baidu, we prefer Baidu short-end (24, 25s, 26) on a total return basis, as its yield curve is relatively, and we prefer Baidu 26 and 30s for spread investors.

Business Description

AS OF 30 May 2023
  • Founded in 2000, Baidu started out as an internet search provider and has since added another two segments, transaction services and iQIYI. Transaction services include Baidu Nuomi, Baidu Deliveries, Baidu Mobile Game, Baidu Wallet, and Baidu Maps. iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
  • "Baidu Core" (primarily marketing services triggered by internet search queries) made up around 75% of 1Q23 revenues, but generated the majority of Baidu's operating profit. Baidu's other key segment, iQIYI, turned profitable only from 1Q22.
  • Baidu has also been pouring investment into artificial intelligence (AI), self-driving vehicles, and smart bikes. According to the company, Baidu has been deploying AI since 2010 - 2011 and launched Apollo, its autonomous driving platform, in 2017. Baidu also launched ERNIE bot in Mar-23, a generative AI chatbot based on a large language model
  • Baidu has a market capitalization of RMB 312.6 bn as of 30 May 2023.

Risk & Catalysts

AS OF 30 May 2023
  • Any regulatory clampdowns abroad and domestically (e.g. potential US investment ban, antitrust rules, data security and personal information protection laws) may adversely affect the business of Baidu. The interpretation of Chinese laws and regulations involves some degree of uncertainty.

  • There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).

  • Baidu has made significant investments into long-term AI-related projects, which may take time to turn profitable. A potential escalation of the US chip restriction could have a material negative impact its AI related business (ie. cloud, ernie bot, autonomous driving).

Key Metrics

AS OF 30 May 2023
RMB bn FY19 FY20 FY21 FY22 LTM 1Q23
Debt to Book Cap 30.0% 30.4% 29.7% 28.5% 28.3%
Net Debt to Book Cap n/m n/m n/m n/m n/m
Debt/Total Equity 42.8% 43.8% 42.2% 39.8% 39.5%
Debt/Total Assets 24.4% 24.8% 24.1% 23.4% 23.5%
Gross Leverage 3.5x 2.7x 3.3x 2.8x 2.6x
Net Leverage n/m n/m n/m n/m n/m
Interest Coverage 7.2x 9.8x 8.2x 11.4x 11.9x
EBITDA Margin 19.7% 28.5% 22.6% 26.8% 28.3%
Baidu has historically maintained a net cash position. Year-end: 31 December.
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CreditSights View

AS OF 17 May 2023

We maintain our Market perform recommendation on Baidu following its strong 1Q23 results. Baidu posted a solid beat in revenues and EBITDA, and maintained its healthy leverage metrics. Baidu maintained its good cost controls, which led to a better EBITDA margin and improved FOCF in 1Q23. We expect Baidu to maintain healthy debt metrics in FY23, and believe the company is well positioned to benefit from China’s macro recovery. Management sees continued recovery of online advertising in 2Q23 and opportunities in generative AI. However, we think Baidu’s $ bonds are expensive compared to Alibaba and Tencent. For those seeking exposure to Baidu, we prefer Baidu short-end (24, 25s, 26) on a total return basis, as its yield curve is relatively, and we prefer Baidu 26 and 30s for spread investors.

Recommendation Reviewed: May 17, 2023

Recommendation Changed: August 31, 2022

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ICICI Bank

  • Sector: Financial Services
  • Sub Sector: Banks
  • Region: India
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Fundamental View

AS OF 23 May 2023
  • ICICI Bank is one of the leading private banks in India and has a good diversified business model, with well regarded life and general insurance subsidiaries.

  • Under its previous CEO, the bank suffered setbacks from sizeable bad debt problems in FY17/18 but the situation has since stabilised following a leadership change and the bank has done well ever since.

  • The bank’s Baa3(sta)/BBB-(sta)/ BB+(sta) ratings make it a cross-over credit but we assess fallen angel risk to be low. ICICI Bank performed very well in FY22 and Moody’s upgraded its standalone rating to baa3 in June 2022. It has continued the good performance in FY23.

Business Description

AS OF 23 May 2023
  • The original Industrial Credit and Investment Corporation of India (ICICI) was established in 1955 by the World Bank, the Government of India and representatives of Indian industry as a financial institution to provide Indian businesses with medium and long-term project financing.
  • In 1994, ICICI established a commercial banking subsidiary, ICICI Bank as India's financial sector opened up, and in 2002 ICICI merged with ICICI Bank, keeping the latter's name.
  • Retail now accounts for 54% of its loan book, corporates are at 23%, while rural, business banking and SMEs are at 8%, 7% and 5% respectively, and overseas (which is being de-emphasised) consists of just 3% at FY23.
  • The bank has well regarded life insurance (ICICI Prudential) and general insurance (ICICI Lombard) businesses.

Risk & Catalysts

AS OF 23 May 2023
  • Despite ICICI’s relatively smaller SME book (~4.8% of total loans), we are cautious about the bank’s rapid loan growth in this sector, as well as that in business banking and unsecured retail loans given the sharp rise in interest rates, but India’s growth momentum looks comfortable for FY24.

  • ICICI Bank has a strong franchise and its profitability has caught up with that of HDFC Bank in recent quarters thanks to a very strong NIM momentum as well as loan growth. From an asset quality perspective it is still behind HDFC Bank, but the gap has been narrowing.

  • Leadership and governance issues under the previous CEO Ms. Chanda Kochhar have been dealt with well, since her replacement in Oct-18.

Key Metrics

AS OF 23 May 2023
INR bn FY19 FY20 FY21 FY22 FY23
Net Interest Margin 3.42% 3.73% 3.69% 3.96% 4.48%
ROA 0.36% 0.77% 1.39% 1.77% 2.13%
ROE 3.2% 7.1% 12.3% 14.7% 17.2%
Equity/Assets 11.2% 10.6% 12.0% 12.1% 12.6%
CET1 Ratio 13.4% 13.2% 16.7% 17.3% 16.9%
NPA Ratio 6.70% 5.53% 4.96% 3.60% 2.81%
Provisions/Loans 3.02% 1.95% 2.05% 0.97% 0.65%
PPP ROA 2.54% 2.72% 3.13% 2.97% 3.28%
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CreditSights View

AS OF 25 Apr 2023

ICICI Bank is a preferred name among the Indian FIs we cover. We like the bank’s robust capital and loan loss buffers, high margins and strong profitability. Under its previous CEO, the bank suffered setbacks from sizeable bad debt problems in FY17/18 but the situation has since stabilised following a leadership change. The bank has emerged stronger from a capital, asset quality and earnings perspective, as it de-risked its book, and took pro-active actions to protect its capital by raising equity and selling small stakes in its well-regarded insurance subsidiaries to raise funds and set aside more general provisions. We are slightly cautious about its brisk expansion in riskier segments of late. We have a M/P reco. ICICI last issued a $ bond in 2017.

Recommendation Reviewed: April 25, 2023

Recommendation Changed: December 07, 2020

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  • Industrial and Commercial Bank of China

Industrial and Commercial Bank of China

  • Sector: Financial Services
  • Sub Sector: Banks
  • Region: China
  • Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View

AS OF 18 May 2023
  • Our credit view on ICBCAS (ratings: A1/A/A) is based on the strong likelihood of state support in the event of distress, given its large size, systemic importance and majority government ownership.

  • Its systemic importance is enhanced by its status as China’s largest lender, and it plays a key role in financing the country’s economic development.

  • The Big 4 banks are generally more prudently managed than their more aggressive smaller competitors, but they are also expected to support the real economy in a downturn.

Business Description

AS OF 18 May 2023
  • With total assets in excess of RMB 42 tn, ICBCAS is the world's largest bank by assets and is classified as a G-SIB with a capital surcharge of 1.5%.
  • ICBCAS was originally set up in 1984 to provide loans to China's large state-owned industrial corporations.
  • ICBCAS was recapitalised in 2005 with an injection of $15 bn, following which it was listed in Hong Kong and Shanghai in 2006.
  • The government owns a majority of ICBCAS's shares through Central Huijin and the Ministry of Finance, which own stakes of 35% and 31% respectively.
  • In addition to a strong onshore presence, ICBC has an extensive international network as well.

Risk & Catalysts

AS OF 18 May 2023
  • China’s sovereign ratings (A1/A+/A+) underpin ICBCAS’s credit standing; any deterioration in the sovereign ratings could negatively affect ICBCAS’s ratings.

  • Asset quality risk remains as China’s economic momentum slows and the property sector remains under stress. Transparency is limited and credit risks are hard to assess in China as these often depend on the government’s willingness to socialise losses.

  • ICBCAS is managed on commercial terms but the government may call on it to perform “national service” that overrides profitability considerations. Its profitability has recently been impacted by its social duties to support the real economy including stepping up lending at lower rates, but we do not regard such actions as credit-negative as they reflect the close government links that also underpin the bank’s credit standing.

Key Metrics

AS OF 18 May 2023
RMB bn FY19 FY20 FY21 FY22 1Q23
PPP ROA 1.97% 1.87% 1.82% 1.61% 1.67%
Reported ROA 1.08% 1.00% 1.02% 0.97% 0.89%
Reported ROE 13.1% 12.0% 12.2% 11.4% 11.2%
Total Equity/Total Assets 8.9% 8.7% 9.3% 8.8% 8.5%
CET1 Ratio 13.2% 13.2% 13.3% 14.0% 13.7%
NPL Ratio 1.43% 1.58% 1.42% 1.38% 1.38%
Provisions/Average Loans 1.11% 1.15% 1.03% 0.83% 1.09%
Loan Deposit Ratio 73% 74% 78% 78% 77%
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CreditSights View

AS OF 24 May 2023

ICBCAS is the largest bank by assets in the world and has a very strong franchise in China. Its majority government ownership adds to its systemically important status – we view ICBC as a very strong and stable credit. Its profitability has recently been impacted by its social duties to support the real economy including stepping up lending at lower rates, but we do not regard such actions as credit-negative as they reflect the close government links that also underpin the bank’s credit standing. Its 1Q23 operating performance lagged its peers and it is the only Big 5 bank that saw a decline in operating income in 1Q23. Capital ratios remained the highest among Chinese banks.

Recommendation Reviewed: May 24, 2023

Recommendation Changed: July 16, 2021

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Bank of China

  • Sector: Financial Services
  • Sub Sector: Banks
  • Country: China
  • Region: China
  • Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View

AS OF 18 May 2023
  • The Bank of China (BCHINA; ratings: A1/A/A) is one of the Big 4 banks in China. Its subsidiary, BOC Hong Kong, is one of the major banks in Hong Kong.

  • BCHINA’s systemic importance is enhanced by the leading role it plays in China’s international trade and investment and strong government links.

  • BCHINA’s financial metrics are a little weaker than ICBCAS and CCB due to its larger overseas exposure, but the Big 4 banks have generally been managed more prudently compared to the smaller and more aggressive joint stock banks.

Business Description

AS OF 18 May 2023
  • While its origins date back to China's last imperial dynasty, BCHINA was formally established in 1912 and has played the role of China's international bank for more than a century. Its operations outside mainland China include its 66%-owned subsidiary Bank of China (HK) Ltd.
  • After 1949, BCHINA became a state entity but was focused on FX and financing of foreign trade. It was set on a path of commercialisation in 1994 but only became a corporate entity in 2003 prior to its listings in HK and Shanghai in 2006. BCHINA is controlled by the government via a 64% stake held by Central Huijin.
  • BCHINA was effectively insolvent in the late 1990s and the removal of NPLs to an AMC in 1999 did not fully deal with its legacy bad loans. In 2003, the bank received another $22.5 bn capital injection, paving the way for BOC's HK listing in 2006.
  • BCHINA is a G-SIB with a capital surcharge of 1.5%. BOCHK is a D-SIB in HK and is the holding company for all of BCHINA's Southeast Asian operations excluding Singapore.

Risk & Catalysts

AS OF 18 May 2023
  • China’s sovereign ratings (A1/A+/A+) are a key factor behind BCHINA’s credit standing.

  • BCHINA is managed on commercial terms, but fulfilling the government’s socioeconomic objectives may at times override profitability considerations and require the bank to perform “national service”. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.

  • BCHINA’s overseas footprint has to some extent offset the onshore NIM pressure and led to a stabler NIM compared to peers in FY22. However, as overseas funding costs go up, its NIM will also be under pressure in FY23.

Key Metrics

AS OF 18 May 2023
RMB bn FY19 FY20 FY21 FY22 1Q23
PPP ROA 1.60% 1.55% 1.48% 1.40% 1.52%
Credit Costs 0.82% 0.87% 0.70% 0.63% 0.73%
Reported ROA 0.92% 0.87% 0.89% 0.85% 0.83%
Reported ROE 11.5% 10.6% 11.3% 10.8% 11.1%
Total Equity/Total Assets 8.1% 8.4% 8.3% 8.4% 8.2%
CET1 Ratio 11.3% 11.3% 11.3% 11.8% 11.6%
NPL Ratio 1.36% 1.46% 1.33% 1.32% 1.18%
Loan-Deposit Ratio 83% 84% 87% 87% 85%
Credit costs are calculated using provisions divided by average loans
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CreditSights View

AS OF 15 Jun 2023

BCHINA is one of the Big 4 banks (the 4th-largest by assets) with a reasonable capital stack and sufficient liquidity. Its majority government ownership and systemic importance also assures it of strong state support. Its NIM and profitability has trailed its more domestically-focused peers due to higher cost-income ratios of its overseas operations, but its credit costs are also the lowest among the Big 5 banks. Its overseas footprint has to some extent offset the onshore NIM pressure and led to a stabler NIM compared to peers in FY22. However, as overseas funding costs go up, its NIM will also be under pressure in FY23.

Recommendation Reviewed: June 15, 2023

Recommendation Changed: July 16, 2021

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