Archives: CreditSights Issuer List
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Fundamental View
AS OF 12 Jun 2024KB Financial Group has grown steadily through the acquisitions of non-bank companies in Korea and small banks in Indonesia and Cambodia. Its banking subsidiary, Kookmin Bank, operates the largest branch network in Korea, with a particularly strong presence in the retail market. This makes it a systemically important bank with strong potential government support if needed.
The group has a good track record and its large mass-market franchise gives it a strong customer base. It has a well-diversified business and the highest CET1 ratio among its peers.
Business Description
AS OF 12 Jun 2024- A well-diversified and well-run group, KBFG's main subsidiaries, in addition to Kookmin Bank (KB), are Kookmin Card, KB Insurance, KB Securities, KB Capital (leasing), and KB Asset Management.
- KB was the result of several mergers after the Asian economic crisis of the late 1990s. Its main predecessors were Citizen's National Bank and Housing & Commercial Bank, both retail-focused banks that have given it the leading position in Korean retail banking.
- For the near term, the group doesn't expect further M&A opportunities. It has looked for growth overseas, focusing on Indonesia (where it has taken a 67% stake in Bank Bukopin) and Cambodia (it took a 100% shareholding in Prasac, a micro-finance lender, over 2020-21). It also bought Prudential Financial's Korean insurance business in 2020, which was subsequently merged with KB Insurance.
Risk & Catalysts
AS OF 12 Jun 2024As one of Korea’s “Big Four” financial groups, we believe that KBFG would likely receive governmental support if needed.
Credit costs decreased for the group from 67 bp in 4Q23 to 38 bp in 1Q24, mainly due to significant provisions in 2023.
Despite headwinds from the cost of funding in the credit card business, the group’s NIM increased by 3 bp QoQ to 2.11% in 1Q24, which is the highest amongst the FGs.
KBFG is expanding by business line and overseas with a focus on Indonesia and Cambodia—markets with more favourable demographics, growth potential, and profit margins than Korea but also more risk. The profit plan for the Indonesian investment has been slower than expected, and significant preemptive provisions were set aside in 4Q22 for it.
Key Metrics
AS OF 12 Jun 2024KRW bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 1.00% | 1.14% | 1.05% | 1.36% | 1.54% |
ROA | 0.61% | 0.69% | 0.57% | 0.65% | 0.59% |
ROE | 8.6% | 10.2% | 8.8% | 9.2% | 8.2% |
Provisions/Loans | 0.30% | 0.31% | 0.45% | 0.73% | 0.39% |
NPL ratio | 0.41% | 0.33% | 0.34% | 0.57% | 0.63% |
CET1 Ratio | 13.3% | 13.5% | 13.2% | 13.6% | 13.4% |
Equity/Assets | 7.1% | 7.3% | 7.9% | 8.2% | 8.1% |
Net Interest Margin | 1.76% | 1.83% | 1.96% | 2.08% | 2.11% |
CreditSights View
AS OF 30 Apr 2024KBFG enjoys the strongest franchise amongst the top 4. Capital standing is the key strength, with the current highest group CET1 ratio. It has a relatively good track record across its businesses, though it struggled with growth in FY22. Overall, KBFG reported a good FY23 with net income up moderately, driven by higher net interest income and other operating income. More recently, KBFG’s 1Q24 net profit fell 30.5% YoY due to KRW 862 bn of ELS compensation, mitigated by lower provisions and stable core income growth. Kookmin Bank, as a result of guidance from the authorities, provided compensation to investors with ELS exposures. The group’s capital ratios remained strong, with the CET1 ratio declining slightly to 13.40%
Recommendation Reviewed: April 30, 2024
Recommendation Changed: September 22, 2020
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Fundamental View
AS OF 12 Jun 2024Hana Financial Group (Hana FG) struggled for several years to make its acquisition of the former Korea Exchange Bank a success, but results improved dramatically in 2015 as revenues grew and cost efficiencies improved.
It has produced particularly strong results since 2020 and is the most improved of the financial groups; we see an improvement in NIM, some loan growth, good fee income growth and expense management, and a continued strong capital position in the latest quarter.
The group is looking for inorganic growth in its non-bank businesses as it has fallen behind Shinhan FG and KBFG in this area, but has so far shied away from a large acquisition.
Business Description
AS OF 12 Jun 2024- Hana FG is the third-largest financial group in South Korea. From small origins as a finance company in the 1970s, after the 1997 Asian crisis, Hana grew by acquiring three other banks, including the much older Seoul Bank, which had a banking and trust management business.
- Hana FG bought Korea Exchange Bank (KEB) from Lone Star in 2012 after overcoming many hurdles, but due to staff union opposition, it could not merge with Hana Bank until 2015.
- Hana FG's overseas business is smaller than peers and is complemented by KEB's extensive international operations. KEB was started in 1967 as a government-owned bank specialising in foreign exchange. It has a leading share in FX transactions and trade finance among Korean banks.
- Hana FG has shown good growth in its credit card and securities non-bank businesses, but is less diversified than its larger peers KB and Shinhan, which have also acquired insurance companies. Its latest acquisition (in 2019) was a 15% stake in Vietnam's state-owned Bank for Investment & Development (BIDV). Hana FG has recently decided not to proceed with the acquisition of KDB Life Insurance after two months of due diligence.
Risk & Catalysts
AS OF 12 Jun 2024Similar to peers, Hana FG reported a decline in credit costs to 25 bp in 1Q24 (4Q23: 39 bp), benefiting from the base effect of last year’s high provisioning and some loss recovery at Hana Bank; the group is prepared to increase provisioning from Q2 onwards given the FSS guidance and potential market defaults on the horizon.
The group’s NIM performance has been weaker than peers these years but increased marginally in 1Q24.
Hana FG took provisions in 4Q19 for a JV investment with China Minsheng Investment and for potentially mis-selling high-risk investment funds to retail investors, and in 2Q20 for private equity exposure, with limited further details. Some fines/regulatory action are expected due to the mis-selling of equity-linked securities to retail investors in 2021.
Key Metrics
AS OF 12 Jun 2024KRW bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 1.07% | 1.07% | 1.10% | 1.11% | 1.22% |
ROA | 0.61% | 0.74% | 0.66% | 0.59% | 0.70% |
ROE | 9.0% | 10.9% | 10.1% | 9.0% | 10.4% |
Provisions/Loans | 0.30% | 0.16% | 0.34% | 0.45% | 0.27% |
NPL Ratio | 0.40% | 0.32% | 0.34% | 0.49% | 0.53% |
CET1 Ratio | 12.0% | 13.8% | 13.2% | 13.2% | 12.9% |
Equity/Assets | 6.7% | 6.8% | 6.4% | 6.6% | 6.6% |
Net Interest Margin | 1.60% | 1.66% | 1.83% | 1.82% | 1.77% |
CreditSights View
AS OF 30 Apr 2024Hana FG grew through acquisitions but only in 2015 was it able to merge its two main bank units to form KEB-Hana Bank. Hana’s management has a good record but for some years struggled to extract value from its acquisitions. The group reported a decline in credit cost to 25 bp in 1Q24, benefiting from the base eff ect of last year’shigh provisioning and some loss recovery at Hana Bank. Nonetheless, As the group anticipates restructuring in Q2 and Q3, starting with bridge loans, it is preparing for more aggressive provisioning. In 1Q24, the group’s CET1 ratio declined by 34 bp to 12.88% QoQ due to the FX impact of KRW depreciation and ELS provisioning, but remained well above regulatory requirements.
Recommendation Reviewed: April 30, 2024
Recommendation Changed: April 24, 2017
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Fundamental View
AS OF 04 Jun 2024JPMorgan is one of the strongest and best positioned banks to navigate the current environment, with a well-diversified business model and good competitive positioning across a variety of lending and capital markets areas.
The company continues to deploy its considerable earnings power into reinvestment, specifically around technology where we are bullish on its ability to drive competitive advantages through strategic enhancements and efficiency gains.
Business Description
AS OF 04 Jun 2024- JPMorgan ranks as the largest U.S. bank by total assets ($4.09 tn at 1Q24) and deposits ($2.43 tn at 1Q24).
- JPMorgan ranks 1st in terms of U.S. deposits with approximately $2.07 tn in deposits at YE23 across 4,918 branches (S&P Capital IQ). JPMorgan's footprint includes New York (#1), Texas (#1), California (#2), Illinois (#1), Michigan (#1), Arizona (#1), Ohio (#5), and Florida (#4), among others.
- JPMorgan's major business lines include investment banking, retail banking, card services, treasury & securities services, commercial banking, and asset & wealth management.
Risk & Catalysts
AS OF 04 Jun 2024Succession planning at JPMorgan has a higher profile than many peers, with CEO Dimon (66 year-old) having held the top spot for over 15 years. Another recent round of shuffling top management did not yield much clarity, with presumed frontrunners Marianne Lake becoming sole CEO of the Consumer Bank and Jennifer Piepszak moving over to co-CEO of the new Commercial & Investment Bank segment, alongside Troy Rohrbaugh who has been running Markets & Securities Services.
The sector remains exposed to reputational, legislative/administrative risk, and cyber threats, although the significant tech spend over the past few years should (theoretically) result in a stronger position for JPM to manage the security threats.
Although not likely a credit risk, JPMorgan may continue to be acquisitive around non-bank financial and ancillary services; but we would expect any deal to be conservatively funded and looking to further technology and fee income strategies (e.g. payments or asset management).
Key Metrics
AS OF 04 Jun 2024$ mn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
ROAE (annual) | 10.9% | 17.0% | 13.2% | 16.0% | 15.9% |
ROAA (annual) | 0.9% | 1.3% | 1.0% | 1.3% | 1.3% |
PPNR / Avg. Assets | 1.52% | 1.32% | 1.39% | 7.06% | 1.82% |
Efficiency Ratio | 57% | 59% | 58% | 214% | 55% |
Net Interest Margin (Annual) | 1.98% | 1.63% | 2.00% | 2.70% | 2.72% |
Net charge-offs (LTM) / Loans | 0.52% | 0.26% | 0.25% | 0.48% | 0.53% |
Common Dividend Payout | 38% | 24% | 32% | 101% | 25% |
CET1 Ratio | 13.1% | 13.1% | 13.2% | 15.0% | 15.0% |
Supplementary Leverage Ratio (SLR) | 6.9% | 5.4% | 5.6% | 6.1% | 6.1% |
Liquidity Coverage Ratio (LCR) | 110% | 110% | 110% | 112% | 112% |
CreditSights View
AS OF 15 Apr 2024We moved back down to a Market perform on JPM following the SVB debacle and subsequent selloff; JPM was (rightfully) viewed as a flight-to-quality name amid the volatility, but continues to trade that way with spreads anchored ~10 bp tighter to money center peers even after the rally. Supply could be a modest relative value technical headwind with banks returning to the market to re-up regulatory needs; JPM is generally more exposed on the new issuance front to LTD/TLAC needs from the regulatory changes. Value against broader corporates is still attractive however, supporting the overall M/P view, and there remain no real concerns with the core credit: the strength and resiliency of the diverse franchises has been on full display the past several years.
Recommendation Reviewed: April 15, 2024
Recommendation Changed: April 17, 2023
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Fundamental View
AS OF 04 Jun 2024PLN enjoys extremely strong ties with the Government of Indonesia (GoI) given its critical policy role of electrifying the nation.
We see a modestly poorer FY24 credit outlook as resilient domestic power demand, flattish power tariffs and insulation from input cost volatility are offset by sizable capex for coal and renewable capacity additions.
President Prabowo’s plans to tamp down on PLN’s monopoly could induce longer-term regulatory uncertainties.
Business Description
AS OF 04 Jun 2024- PLN is involved in the entire electricity value-chain, from power generation, to transmission, distribution and retail.
- It alone accounts for 76% (~47 GW) of Indonesia's generation capacity (of which 8 GW is renewable capacity), while IPPs provide the remainder.
- The company controls and operates the entire transmission and distribution network in the country. It is the sole buyer of electricity produced by IPPs, through power purchase agreements (PPAs).
- It sells electricity to well-diversified off-takers – 41% to households, 25% to industrial customers, 21% to businesses and 12% to others.
- Since 2015, the GoI has gradually implemented monthly tariff adjustments for 13 customer groups, so that rates charged to customers are better matched with production costs.
- However, under the Public Service Obligation (PSO), the company will continue to sell electricity at subsidized rates of 50% to 450-volt amperes (VA) power households and 25% to 900 VA power households. The GoI subsequently reimburses the company for the difference between the subsidized tariff rate and production cost, typically within 2-3 months.
Risk & Catalysts
AS OF 04 Jun 2024The company provides subsidized electricity to certain households for which it subsequently receives reimbursements from the GoI; though these payments tend to get delayed during major events such as COVID-19 pandemic.
In order to increase the country’s electrification ratio to 97%, the company had been mandated by the GoI to develop large electricity capacities through the Fast Track II and 35,000 MW Programs. Implementation of such complex programs has required significant capital expenditure, which has led PLN’s FCF to fall deep into the red in recent years and created a funding gap.
The success of the above programs is also contingent on the company’s ability to source coal cheaply, select quality contractors, acquire land rights and receive adequate subsidy reimbursements from the GoI.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Key Metrics
AS OF 04 Jun 2024IDR bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 32.5% | 32.2% | 29.7% | 28.9% | 27.8% |
Net Debt to Book Cap | 29.1% | 28.2% | 26.9% | 25.2% | 23.7% |
Debt/Total Equity | 48.1% | 47.4% | 42.2% | 40.7% | 38.5% |
Debt/Total Assets | 28.2% | 28.1% | 25.7% | 24.6% | 23.4% |
Gross Leverage | 5.6x | 5.5x | 5.0x | 4.2x | 4.3x |
Net Leverage | 5.0x | 4.8x | 4.6x | 3.7x | 3.7x |
Interest Coverage | 2.6x | 2.5x | 3.2x | 4.3x | 3.6x |
EBITDA Margin | 27.8% | 29.0% | 28.0% | 30.1% | 26.4% |
CreditSights View
AS OF 04 Jun 2024We have an Underperform recommendation on PLN. Its shorter-dated and longer-dated bonds trade only 1-20 bp and 15-33 bp wider than Pertamina’s similar maturity bonds respectively. We see a fair differential of 50-60 bp wider given PLN’s weaker net leverage, smaller EBITDA, higher coal-related ESG risks, poorer FY24 credit outlook, and potential longer-term unfavorable regulatory changes that could be implemented by Indonesia’s new Presidential candidate. We remain comfortable with its resilient credit profile aided by healthy domestic power demand amid flattish power tariffs, and good insulation from thermal coal cost volatility (given PLN has access to domestic coal at a maximum price of $70/ton). Capex for coal and renewable capacity additions could strain FCF and credit metrics.
Recommendation Reviewed: June 04, 2024
Recommendation Changed: December 13, 2023
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Fundamental View
AS OF 28 May 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 1Q24 results; Topline growth in 1Q24 was ahead of our expectations, while EBITDA margin and debt metrics improved. Tencent also turned to a net cash position in 1Q24 on the back of stable FOCF. We see positive earnings catalysts over the next 12 month as the company delivers better domestic gaming revenues, further improve EBITDA margin, and maintain a rock solid balance sheet.
We continue to see value in Tencent compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Tencent curve (38,41) as a core holding for investors looking to add duration in the Asia credit space.
Business Description
AS OF 28 May 2024- 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 1.36 bn as of 31 March 2023.
- In 1Q24, 49% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 33% came from FinTech and Business Services (e.g. commercial payments and cloud), 17% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.6 tn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024While Chinese regulators have adopted a more friendly stance towards tech companies, 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.
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.
Key Metrics
AS OF 28 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 25.2% | 27.0% | 31.4% | 29.8% | 29.0% |
Net Debt to Book Cap | 4.0% | 6.0% | 8.5% | 1.0% | n/m |
Debt/Total Equity | 33.7% | 36.9% | 45.9% | 42.5% | 40.8% |
Debt/Total Assets | 19.7% | 20.1% | 22.8% | 23.5% | 22.7% |
Gross Leverage | 1.4x | 1.7x | 1.9x | 1.6x | 1.5x |
Net Leverage | 0.2x | 0.4x | 0.5x | 0.1x | n/m |
Interest Coverage | 24.8x | 24.7x | 19.0x | 19.9x | 20.5x |
EBITDA Margin | 38.3% | 34.9% | 34.3% | 38.9% | 40.2% |
CreditSights View
AS OF 15 May 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 1Q24 results; Topline growth in 1Q24 was ahead of our expectations, while EBITDA margin and debt metrics improved. Tencent also turned to a net cash position in 1Q24 on the back of stable FOCF. We see positive earnings catalysts over the next 12 month as the company delivers better domestic gaming revenues, further improve EBITDA margin, and maintain a rock solid balance sheet. We continue to see value in Tencent compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Tencent curve (38,41) as a core holding for investors looking to add duration in the Asia credit space.
Recommendation Reviewed: May 15, 2024
Recommendation Changed: August 18, 2022
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Fundamental View
AS OF 28 May 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its largely in-line 1Q24 revenue. Growth accelerated on a pick up of general merchandise sales, marketing and logistic service revenues. Gross/EBITDA margin improved and FOCF narrowed on lower capex. Net cash position shrank as the company used internal cash to fund share buybacks. We expect the intense competition among Chinese eCommerce platforms to cap revenue upside and pressure EBITDA margin in FY24; we expect continued strong positive FOCF, but the bulk would be used for shareholder rewards, resulting in flat Total debt/EBITDA and net cash position. We continue to prefer Alibaba and Tencent (especially the 10-20Y part) among A-rated China tech. We think JD’s 2050 is relatively more attractive.
Business Description
AS OF 28 May 2024- JD is one of China's leading e-commerce and retail infrastructure service providers.
- JD has a large fulfillment infrastructure which includes over 1,600 warehouses operated by the company, and and 2,000 cloud warehouses operated by third-party warehouse owner-operators under JD Logistics Open Warehouse Platform. Its warehouse network had an aggregate gross floor area of approximately over 32 mn square meters, as of 31 December 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 335.6 bn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024While Chinese regulators have adopted a friendlier stance towards tech companies, any regulatory clampdowns may still adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).
Intensifying competition amongst Chinese eCommerce platforms with the entrance of new live-streaming/short-form video platforms and group buying discount platforms may result in slower topline growth and weaker EBITDA margins for JD as its increase its user/merchant incentives and promotional activities to defend its market share.
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 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 28 May 2024RMB mn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 12.5% | 12.2% | 19.2% | 18.8% | 19.6% |
Debt/Total Equity | 14.2% | 13.8% | 23.7% | 23.1% | 24.3% |
Debt/Total Assets | 7.5% | 6.9% | 10.9% | 10.9% | 11.6% |
Gross Leverage | 1.4x | 1.8x | 1.9x | 1.5x | 1.5x |
Interest Coverage | 20.1x | 16.1x | 16.3x | 15.5x | 16.3x |
EBITDA Margin | 3.0% | 2.0% | 3.3% | 4.1% | 4.3% |
CreditSights View
AS OF 17 May 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its largely in-line 1Q24 revenue. Growth accelerated on a pick up of general merchandise sales, marketing and logistic service revenues. Gross/EBITDA margin improved and FOCF narrowed on lower capex. Net cash position shrank as the company used internal cash to fund share buybacks. We expect the intense competition among Chinese eCommerce platforms to cap revenue upside and pressure EBITDA margin in FY24; we expect continued strong positive FOCF, but the bulk would be used for shareholder rewards, resulting in flat Total debt/EBITDA and net cash position. We continue to prefer Alibaba and Tencent (especially the 10-20Y part) among A-rated China tech. We think JD’s 2050 is relatively more attractive.
Recommendation Reviewed: May 17, 2024
Recommendation Changed: November 21, 2022
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Fundamental View
AS OF 28 May 2024We maintain our Market perform recommendation on Baidu (A3/NR/A) post its uninspiring 1Q24 results. 1Q24 topline growth decelerated to 1.2% YoY as the core advertising slowed and revenues from iQiyi contracted YoY on a falling number of subscribers. 1Q24 EBITDA margin was stable 28.9%. Baidu’s Total debt/EBITDA weakened, FOCF dropped YoY due to higher capex, and net cash position narrowed from YE23. We see limited earnings upside due to the intense competition of the domestic ads market and largely homogeneous competition; we do not expect its AI-related initiatives to translate to better topline and Margin in FY24.
We continue preferring Tencent and Alibaba among A-rated China tech. We prefer Baidu 2030s.
Business Description
AS OF 28 May 2024- Founded in 2000, Baidu started out as a search engine business and began its development into artificial intelligent (AI) since 2010.
- Baidu Core is the main revenue driver of the company (75% of 1Q24 revenues) which provides search-based, feed-based and other online marketing services (total: 54% of 1Q24 revenues), as well as products and services from new AI initiatives (22% of 1Q24 revenues); Baidu's AI initiatives include AI cloud (enterprise & public sector cloud, and personal cloud), Intelligent Group Driving (Apollo Go, Apollo auto solutions, and intelligent EVs under Jidu Auto), Mobile Ecosystem (Baidu App, ERNIE Bot, Haokan and Baidu Post), and other growth initiatives (ie. Xiaodu smart devices powered by DuerOS smart assistant and AI chips).
- iQiyi accounts for the remaining revenues of Baidu; iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
- Baidu launched ERNIE bot in Mar-23, a generative AI chatbot powered by ERNIE, Baidu's in-house foundation model.
- Baidu has a market capitalization of RMB 254.7 bn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024Any 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 28 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 30.4% | 29.7% | 28.5% | 25.0% | 25.7% |
Debt/Total Equity | 43.8% | 42.2% | 39.8% | 33.4% | 34.7% |
Debt/Total Assets | 24.8% | 24.1% | 23.4% | 20.8% | 21.6% |
Gross Leverage | 2.7x | 3.3x | 2.8x | 2.2x | 2.3x |
Interest Coverage | 9.8x | 8.2x | 11.4x | 12.1x | 12.3x |
EBITDA Margin | 28.5% | 22.6% | 26.8% | 29.2% | 29.2% |
CreditSights View
AS OF 23 Aug 2024We maintain our Market perform recommendation on Baidu post its 2Q24 results; topline growth contracted, EBTIDA margin was flat, and free operating cash flow declined YoY during the quarter. Looking into 2H24, we expect Baidu’s topline growth to turn around to a low single digit in 2H24 thanks to higher AI cloud revenues but online ads and iQiyi revenues to continue facing headwinds; we expect EBITDA margin to sequentially improve. We expect the better topline growth and EBITDA margin to support higher FOCF, and total leverage to improve over the next 6-12 months. Baidu $ bond spreads trade roughly in line with the comparable $ bonds of Tencent and Alibaba, which we view as rich. We prefer BIDU 4.125% Jun-25 for total return investors, and BIDU 3.625% Jul-27 for spread investors.
Recommendation Reviewed: August 23, 2024
Recommendation Changed: August 31, 2022
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Fundamental View
AS OF 24 May 2024Our credit view on AGRBK (credit ratings: A1(neg)/A(stb)/A(neg)) is based on a strong likelihood of state support, given its large size, systemic importance and majority state ownership. This is enhanced by AGRBK’s extensive presence in rural areas.
AGRBK’s capital standing is weaker than those of peer-group leaders ICBCAS and CCB and in line with BCHINA; however it has peer-leading reserve coverage ratio. The Big 4 have been managed more prudently in recent years than the smaller and more aggressive joint stock banks.
We view it as a strong credit taking into account its structural profitability, robust balance sheet metrics, large size, and systemic importance that assure it of state support if needed.
Business Description
AS OF 24 May 2024- AGRBK has surpassed CCB to become the second-largest bank in China in terms of total assets and has been moved from bucket 1 to bucket 2 in the G-SIB list with a capital surcharge of 1.5%.
- It was founded in 1951 as the Agricultural Cooperative Bank, merged with the central bank and spun out as AGRBK in 1979, charged with financing the rural and agricultural sectors. It was recapitalised in 1999 and again in 2007 by special MOF bonds. It also received $19 bn in equity capital from Huijin, funded by China's FX reserves.
- Due to its poorer asset quality and weaker profitability, AGRBK was the last of the Big 4 banks to be listed in 2010.
- The Chinese government is a majority shareholder of AGRBK via Central Huijin (40.14%), MOF (35.29%) and the Social Security Fund (6.72%).
- AGRBK has the second largest branch network in China after Postal Bank, with a particularly good presence in rural areas.
Risk & Catalysts
AS OF 24 May 2024China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) are a key factor behind AGRBK’s credit standing.
AGRBK’s loan growth has been the strongest among the Big 5 banks since FY22, but the impact on net interest income growth was largely offset by a significant contraction in NIM. Rapid loan growth has led to a widened capital ratio differential between AGRBK and other Big 4 banks. It was promoted to a Bucket 2 G-SIB in Nov-23 and currently has a substantial TLAC shortfall to meet by 1 January 2025 and 1 January 2028. It plans to issue up to RMB 50 bn of TLAC notes this year.
AGRBK is managed on commercial terms but the government may call on it to perform “national service” that overrides profitability considerations. However, we do not see it as a clear credit negative as these actions reflect close state links that underpin ABC’s credit standing.
Key Metrics
AS OF 24 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
PPP ROA | 1.65% | 1.64% | 1.43% | 1.20% | 1.32% |
Reported ROA | 0.83% | 0.86% | 0.82% | 0.73% | 0.69% |
Reported ROE | 11.4% | 11.6% | 11.3% | 10.9% | 11.4% |
Total Equity/Total Assets | 8.1% | 8.3% | 7.9% | 7.2% | 7.1% |
CET1 Ratio | 11.0% | 11.4% | 11.2% | 10.7% | 11.4% |
NPL Ratio | 1.56% | 1.43% | 1.37% | 1.33% | 1.32% |
Credit Costs | 1.16% | 1.03% | 0.79% | 0.64% | 0.96% |
Loan-Deposit Ratio | 74% | 78% | 79% | 78% | 77% |
CreditSights View
AS OF 03 Sep 2024AGRBK is the 2nd-largest Chinese banks by assets and has a strong presence in rural areas, which gives it access to a large pool of low-cost deposits. We view it as a strong credit due to its structural profitability, robust balance sheet metrics, large size and systemic importance that assure it of state support. Its loan growth has led peers for many years, which has put its capital ratios under pressure, with some distance vs. the other Big 4 banks. Reserve cover is a strength at ~300%. AGRBK was the only Big 5 bank that reported profit growth in 1H24, due to stronger loan growth. Due to China’s weaker macro outlook, challenging prospects for the sector, and tighter spreads compared to elsewhere in Asia, we have a U/P recommendation.
Recommendation Reviewed: September 03, 2024
Recommendation Changed: August 22, 2023
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Fundamental View
AS OF 24 May 2024Our credit view on China Construction Bank (CCB; ratings: A1(neg)/A(stb)/A(neg)) is based on a 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 the key role it plays in financing China’s economic development and its close government links (and large government shareholding).
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 24 May 2024- CCB is one of the Big 4 Chinese banks and is classified as a G-SIB requiring an additional capital surcharge of 1.5%.
- CCB was originally formed in 1954 as a subsidiary of China's MOF to disburse funds intended for fixed asset investment. In the early 1980s, it started taking deposits and making loans outside of direct MOF control. In 1998, its NPLs were transferred to Cinda AMC in exchange for RMB 247 bn of Cinda bonds.
- The bank was re-capitalised again in 2003 with an injection of $23 bn by the PBOC. It was listed in 2005 but the Chinese government remains its controlling shareholder with a 57.14% stake held through state-owned Central Huijin.
- The bank owns CCB Asia and CCB International in Hong Kong as well as operations in a number of countries.
Risk & Catalysts
AS OF 24 May 2024China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) underpin CCB’s credit standing; any deterioration in the sovereign ratings will negatively affect CCB’s ratings.
CCB may be asked by the government to perform “national service” that overrides profitability considerations, e.g. supporting troubled property developers and the real economy by extending loans at lower rates. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.
As a G-SIB, CCB has a substantial TLAC shortfall to meet by 1 January 2028, whereas meeting the 1 January 2025 requirement appears manageable. It has announced a proposal to issue up to RMB 50 bn of TLAC bonds this year.
Key Metrics
AS OF 24 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
PPOP ROA | 1.96% | 1.87% | 1.66% | 1.44% | 1.54% |
Reported ROA | 1.02% | 1.04% | 1.00% | 0.91% | 0.89% |
Reported ROE | 12.1% | 12.6% | 12.3% | 11.6% | 11.6% |
Equity/Assets | 8.4% | 8.6% | 8.3% | 8.2% | 8.2% |
CET1 Ratio | 13.6% | 13.6% | 13.7% | 13.1% | 14.1% |
NPL Ratio | 1.56% | 1.42% | 1.38% | 1.37% | 1.36% |
Provisions/Average Loans | 1.19% | 0.95% | 0.77% | 0.61% | 0.79% |
Loan-Deposit Ratio | 81% | 84% | 85% | 86% | 85% |
CreditSights View
AS OF 11 Jul 2024CCB is the 2nd-largest of the Chinese state-owned commercial banks and benefits from a strong franchise and close state links. It has the second strongest capital ratios among Chinese banks, just behind ICBC. 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. Profits declined YoY in 1Q24 due to lower core topline revenues on NIM compression and lower fee income. Due to China’s weaker macro outlook, challenging prospects for the sector, and tighter spreads compared to elsewhere in Asia, we have an Underperform recommendation on the bank.
Recommendation Reviewed: July 11, 2024
Recommendation Changed: August 22, 2023
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Fundamental View
AS OF 24 May 2024Standard Chartered has been making good progress in the past few years, improving its asset quality and profitability and dealing with legacy litigation issues. Capital, funding and liquidity look solid.
However, the Russia/Ukraine conflict and global economic headwinds continue to cloud the near term outlook.
Its unusual business mix – headquartered and regulated in the UK but operating primarily in Asia, Africa and the Middle East – means it is well diversified but sensitive to geopolitical developments and emerging market volatility.
Business Description
AS OF 24 May 2024- Standard Chartered PLC is the holding company and listed entity of the group, in which Standard Chartered Bank is the main operating company.
- Although Standard Chartered is headquartered in London and therefore subject to UK banking regulation, its operations are mainly in Asia (Hong Kong is its biggest single market, as part of its Greater China & North Asia region), Africa and the Middle East. It is present in over 60 markets.
- It has the usual variety of businesses across these regions, including corporate and institutional banking, retail banking, commercial banking and private banking. It specialises in trade finance and cross-border cash management.
- The group announced a revised strategy in 2019 aimed at improving profitability after several years of de-risking, with a targeted return on tangible equity of 10%.
- It is classified as a G-SIB, with a regulatory capital buffer of 1%.
Risk & Catalysts
AS OF 24 May 2024Anti-government protests in Hong Kong, a slowing economy in China and a weak commercial real estate sector, and US/China trade tensions have threatened the growth and stability of some of Standard Chartered’s key markets.
A number of Standard Chartered’s markets have underperformed in the past and have therefore been seen as turnaround stories, including India, Korea, Indonesia and the UAE.
The group has had to improve its AML and sanctions controls. In April 2019, it paid a $947 mn fine to US authorities over breaches of US sanctions and a £102 mn fine to the UK FCA for AML weaknesses.
Key Metrics
AS OF 24 May 2024$ mn | 1Q24 | Y23 | Y22 | Y21 | Y20 |
---|---|---|---|---|---|
Return on Equity | 11.1% | 7.0% | 5.7% | 4.5% | 1.4% |
Total Revenues Margin | 2.5% | 2.2% | 2.0% | 1.8% | 2.0% |
Cost/Income | 58.4% | 64.1% | 66.9% | 74.3% | 70.4% |
CET1 Ratio (Transitional) | 13.6% | 14.1% | 14.0% | 14.1% | 14.4% |
CET1 Ratio (Fully-Loaded) | 13.6% | 14.1% | 13.9% | 14.1% | 14.3% |
Leverage Ratio (Fully-Loaded) | 4.8% | 4.7% | 4.8% | 4.9% | 5.2% |
Loan Impairment Charge | 0.2% | 0.2% | 0.3% | 0.1% | 0.8% |
Impaired Loans (Gross)/Total Loans | 2.4% | 2.5% | 2.5% | 2.7% | 3.2% |
CreditSights View
AS OF 02 May 2024We revised our recommendation on Standard Chartered HoldCo senior from Underperform to Market perform on 26 April 2023, but we changed our recommendations on Tier 2 and AT1 from Fair to Rich on 10 January 2024. The changes reflect StanChart’s recent resilient performance, with no impact on its deposit base from recent stresses in the banking system, while taking into account that the Chinese real estate market, a source of credit impairments in recent periods, remains weak. Capital and liquidity ratios are robust, but the bank continues to face geopolitical tensions inherent in its extensive operations in Hong Kong, China and the rest of Asia.
Recommendation Reviewed: May 02, 2024
Recommendation Changed: April 26, 2023
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