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Fundamental View
AS OF 17 Apr 2024We expect the credit profile of Sinopec, which is one of the three Chinese national oil companies (NOCs) to continue to be underpinned by its strategic role in China’s energy security and the resulting strong government support.
We expect Sinopec’s standalone credit profile to remain supported in FY24 by resilient refined oil demand and improving demand for chemical products as industrial activities pick up and the destocking trend ends.
To note, we use the financials of HKEx listed Sinopec Corp (386.HK) as a proxy for the credit profile of its parent, the obligor of the outstanding $ bonds (BBG: SINOPE).
Business Description
AS OF 17 Apr 2024- Sinopec Group is a Chinese integrated oil and gas (O&G) company and is one of the largest globally & domestically. In FY23, 56.1% of Sinopec Corp' external revenues came from marketing and distribution (i.e. retail and direct sales of refined oil), 13.1% from chemicals, 5.4% from refining, and 5.7% from E&P. Corporate and others segment accounted for the remaining 19.7% of sales revenue, consisting of import and export business, R&D and managerial activities.
- The refining segment purchases crude oil from third parties as well as the E&P segment of the company, and processes crude oil into refined petroleum product. Most of the gasoline, diesel and kerosene are sold internally to the marketing and distribution segment of the company; part of the chemical feedstock is sold internally to the chemical segment, and the other refined petroleum products are sold externally to both domestic and overseas customers. The marketing and distribution segment purchases refined oil products from the refining segment and third parties, and mainly distributes to domestic customers via its wholesale and retail networks.
- In FY23, Sinopec's total oil and gas output was 504 mn barrels of oil equivalent (mmboe), up 3.1% YoY; this included 252/29 mmbbls (+0.3%/-1.9%) of domestically produced/overseas crude oil, as well as 1,338 bcf of natural gas (+7.1% YoY). The average realized price of its crude oil and natural gas was $76.6/bbl and $7.1/thousand cubit feet respectively.
Risk & Catalysts
AS OF 17 Apr 2024Risks: Lower-than-expected domestic sales of refined oil and chemical products due to a severe economic downturn, higher-than-expected crude oil and gas feedstock costs resulted from geopolitical tensions, elevated inventory losses due to tumbling oil & gas prices, and large capex overrun result in a weaker standalone credit profile. However, we expect the strong government support to offset these downside risks. US sanction related headline risks due to US-China tension and other geopolitical risks.
Catalysts: inflow into China $ bonds as a result of improving China macro outlook and US-China relationship; stronger-than-expected recovery in chemical product demand.
Key Metric
AS OF 17 Apr 2024| RMB bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Total Debt/Capitalization | 27.8% | 25.3% | 25.6% | 27.5% | 31.5% |
| Net Debt/Capitalization | 17.3% | 9.4% | 7.6% | 16.3% | 19.8% |
| Total Debt/Total Equity | 38.6% | 33.8% | 34.5% | 38.0% | 46.1% |
| Total Debt/Total Assets | 19.2% | 17.2% | 16.7% | 18.3% | 21.7% |
| Total Debt/EBITDA | 1.6x | 1.5x | 1.2x | 1.5x | 2.0x |
| Net Debt/EBITDA | 1.0x | 0.6x | 0.4x | 0.9x | 1.3x |
| EBITDA/Gross Interest | 12.9x | 16.8x | 20.1x | 16.1x | 14.5x |
| EBITDA Margin | 7.3% | 9.5% | 9.4% | 7.0% | 6.8% |
CreditSight View Comment
AS OF 17 Apr 2024We affirm our Market perform recommendation on Sinopec (A1/A+/A+). A-rated Chinese state-owned enterprises (SOEs), including Sinopec are trading tight due to a lack of new supply and as investors fly to quality amid macro uncertainties in China. We continue to prefer AA-rated Korean quasi-sovereign names for safe carry (like KOROIL, KORGAS, KEPCO) and higher-beta Chinese SOEs for spread pickup.
Recommendation Reviewed: April 17, 2024
Recommendation Changed: May 03, 2021
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Mizuho Financial Group
KB Financial Group
Woori Financial Group
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Fundamental View
AS OF 22 Mar 2024KEPCO is the sole integrated electricity utility company and a quasi-sovereign credit in Korea. Its credit profile is underpinned by the extremely high level of government support due to its critical policy role in ensuring the nation’s stable power supply.
KEPCO’s operating and net losses narrowed in FY23 thanks to electricity tariff hikes alongside lower fuel costs and its EBITDA turned around.
Its total debt/EBITDA and net debt/EBITDA was elevated at 18.2x/17.7x as of YE23 due to high debt burdens, and we expect its leverage metrics to improve from FY23 but remain at 7-9x due to large capex planned in FY24 and FY25 to develop its nuclear, LNG and renewable capacities.
Business Description
AS OF 22 Mar 2024- KEPCO is a quasi-sovereign credit and the sole integrated electric utilities company in Korea. The company was founded in 1898, 51% majority owned and controlled by the Korean government and Korean Development Bank, and listed on the Korea Stock Exchange/NYSE in 1989/1994.
- KEPCO is the sole provider of electricity transmission & distribution infrastructure and services, and controls ~60% of the nation's installed generation capacity and ~70% of power generation through its six wholly owned gencos: Korea Hydro & Nuclear Power (KHNP), Korea South-East Power (KOEN), Korea Western Power (KOWEPO), Korea East-West Power (EWP), Korea Midland Power (KOMIPO), and Korea Southern Power (KOSPO). In addition, KHNP is the sole nuclear power generation company in Korea. In FY23, KEPCO purchase ~65% of wholesale power from its genco subsidiaries and ~30% from independent power plants. On a consolidated basis, electricity transmission & distribution accounts for over 95% of KEPCO's annual revenues.
- KEPCO is a key implementation entity to carry out the Korean government's energy transition plan responding to climate change. KEPCO plans to fully stop coal generation by 2050. In order to achieve that, KEPCO plans to reduce its coal generation capacity to 23 GW in FY30 (FY23: 32.6 GW), and grow its renewable capacity to 37 GW in FY30 (FY23: 6.6 GW).
Risk & Catalysts
AS OF 22 Mar 2024Key risks to KEPCO’s standalone credit profile include: 1) higher-than-expected fuel costs due to continued increase of international prices of coal, natural gas and oil as well as a significant depreciation of the KRW against the $; (2) inability to pass through high fuel costs due to insufficient tariff adjustment; and (3) higher-than-expected capex and investments related to Korea’s green transition.
However, we do not foresee these risks to materially impair KEPCO’s ability to access funding, credit rating and overall credit profile as we expect KEPCO to continue receiving an extremely high level of support from the Korean government.
KEPCO’s exposure to nuclear power operations and coal-fired power generation may post ESG concerns for investors with an ESG mandate. But this risk exposure is partially alleviated by the company’s gradual shift towards renewable energy.
Key Metric
AS OF 22 Mar 2024| KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 55.2% | 55.3% | 60.1% | 76.9% | 80.5% |
| Net Debt to Book Cap | 54.0% | 54.1% | 58.7% | 75.3% | 78.4% |
| Debt/Total Equity | 1.2x | 1.2x | 1.5x | 3.3x | 4.1x |
| Debt/Total Assets | 42.9% | 43.0% | 46.7% | 59.6% | 64.3% |
| Gross Leverage | 8.7x | 5.6x | 16.5x | -6.9x | 18.2x |
| Net Leverage | 8.5x | 5.5x | 16.1x | -6.8x | 17.7x |
| Interest Coverage | 4.8x | 7.8x | 3.1x | -7.2x | 1.9x |
| EBITDA Margin | 16.5% | 26.5% | 9.8% | (28.3%) | 9.6% |
CreditSight View Comment
AS OF 22 Mar 2024KEPCO is the sole electricity distributor and transmitter in South Korea, undertaking irreplaceable policy role. Its credit profile is underpinned by excellent government support thanks to its strategical role. KEPCO enjoys strong access to the onshore and offshore funding channels, mitigating its elevated leverage and insufficient cash coverage for short-term debt. KEPCO is in the process of implementing a financial improvement plan and aim to restore its financial soundness by 2027. Its $ bonds provide attractive yield pick-ups compared to lower-rated Chinese SOEs and BBB-rated low beta Korean corporates, in our view.
Recommendation Reviewed: March 22, 2024
Recommendation Changed: July 24, 2023
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
How may we help you?
Search topics about wealth insights and investments.Mitsubishi UFJ Financial Group
- Sector: Financial Services
- Sub Sector: Banks
- Region: Japan
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Fundamental View
AS OF 07 Mar 2024MUFG 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 until recently.
Core profitability had been weak due to Japan’s ultra-low interest rates and growth; that improved post an efficiency drive and a CEO change in April 2020. The bank has committed to at least JPY 1 tn in annual 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 07 Mar 2024- 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, in 2020 it invested $700 mn in SE Asia's Grab, and more recently has bought Home Credit's Philippine and Indonesian subsidiaries, Link, an Australian pension fund administrator, auto loan companies in Indonesia, Albacore Capital, an alternates fund manager, and StanChart's Indonesian retail operations.
Risk & Catalysts
AS OF 07 Mar 2024The group’s cost-income ratio was previously in the high 60’s, but improved efficiency, the sale of MUFG Union Bank (MUB) in the US, and better revenues has led to this ratio falling to the high 50’s.
MUFG is exposed to Japanese equities through large unrealised gains, but has steadily been decreasing its shareholdings every year. It reduced the MTM impact of rising yields on its $ bond portfolio, as well as the potential impact on its JGB portfolio given the 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; it has met it in 9M23 aided by certain one-offs.
Key Metric
AS OF 07 Mar 2024| ¥ bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| Net Interest Revenue/Average Assets | 0.60% | 0.56% | 0.57% | 0.79% | 0.63% |
| Operating Income/Average Assets | 1.27% | 1.16% | 1.11% | 1.22% | 1.27% |
| Operating Expense/Operating Income | 70% | 68% | 69% | 65% | 58% |
| Pre-Impairment Operating Profit / Average Assets | 0.38% | 0.37% | 0.34% | 0.43% | 0.50% |
| Impairment charge/Average Loans | (0.21%) | (0.48%) | (0.30%) | (0.61%) | (0.31%) |
| ROAA | 0.17% | 0.23% | 0.32% | 0.30% | 0.45% |
| ROAE | 3.3% | 4.7% | 6.7% | 6.5% | 9.6% |
| CET1 Ratio excluding unrealised securities gains in AOCI | 9.8% | 9.7% | 9.5% | 9.8% | n/m |
CreditSight View Comment
AS OF 06 Jan 2025MUFG is the largest of the megabanks with more diversified business lines. Digitalisation and operational efficiency improvements, in addition to higher rates in Japan and the US, has led to much better results in 1H24. Lending discipline has lifted international margins, which are now well higher than the other two. Its ~20% shareholding in Morgan Stanley has been a boon. Acquisitions have become more targeted. The CET1 ratio on a post Basel 3 basis ex security gains has the highest buffer (2.7%) compared to the other megabanks, its $ liquidity is also the best amongst its peers, and government support is assured. NPLs have jumped because of certain Americas exposure. Its senior TLAC bonds trade marginally behind JPM; we see flat as fair given the credit trajectory and govt support.
Recommendation Reviewed: January 06, 2025
Recommendation Changed: January 02, 2024
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
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Fundamental View
AS OF 29 Feb 2024Toyota’s slower ramp of battery electric vehicle (BEV) production and sales relative to its peers was a common investor concern a year ago. However, with the recent slowdown in consumer adoption of BEVs in North America and Europe and Toyota’s dominance in the hybrid electric vehicle (HEV) market, those concerns have abated, at least for the time being. Importantly, Toyota management has indicated its profitability of its HEV portfolio is on par with its ICE portfolio profitability. We continue to believe that Toyota’s market leading position in HEVs provides consumers with a more eco-friendly option than traditional ICE vehicles that can serve as a bridge to EVs while the charging infrastructure is built out and the cost of producing EVs is reduced.
Business Description
AS OF 29 Feb 2024- Toyota Motor Corp. (TMC) engages in the manufacture and sale of motor vehicles and parts. The Financial Services segment offers purchase or lease financing to Toyota vehicle dealers and customers. It also provides retail leasing through lease contracts purchased by dealers. The company was founded by Kiichiro Toyoda on August 28, 1937, and is headquartered in Toyota, Japan. In July 2000, the company established Toyota Financial Services Corporation (TFSC), a wholly owned subsidiary, to oversee the management of its finance companies worldwide.
- Toyota Financial Services Corporation (TFSC), a wholly owned subsidiary of TMC, oversees the management of Toyota's finance companies worldwide. Toyota Motor Credit Corporation (TMCC) is the company’s principal financial services subsidiary in the United States and is an indirect wholly owned subsidiary. Under terms of the credit support agreement between TFSC and TMCC, TFSC agrees to: (1) maintain 100% ownership of TMCC; (2) cause TMCC and its subsidiaries to have a tangible net worth of at least $100,000; (3) make sufficient funds available to TMCC so that it will be able to service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper. The terms of the credit support agreement between TMC and TFSC are very similar to the terms of the TFSC and TMCC credit support agreement.
Risk & Catalysts
AS OF 29 Feb 2024Toyota Motor Credit Corporation (TMCC) credit metrics stable. TMCC F3Q24 earnings before taxes increased 50% YoY and 3x sequentially. At F3Q24 the delinquency rate expanded 10 bp YoY to 0.9%, nearly double pre-pandemic levels, while the retail charge-off rate expanded 10bp YoY to 0.7%. The company notes that changes in interest rates or unemployment could increase credit losses and additional provisioning. Additionally, elevated prices and high borrowing costs have impacted some consumers’ ability to make scheduled payments resulting in an increase in consumer delinquencies and charge-offs.
Key Metric
AS OF 29 Feb 2024| ¥ bn | FY20 | FY21 | FY22 | FY23 | F3Q24 |
|---|---|---|---|---|---|
| Total Company Earning Assets | 110,621 | 116,546 | 117,659 | 120,018 | 129,320 |
| Cash and Investments | 6,790 | 8,195 | 7,670 | 6,398 | 6,458 |
| Total Liquidity | 31,390 | 35,895 | 36,070 | 33,498 | 35,058 |
| Unsecured Debt | 83,172 | 85,513 | 82,288 | 78,949 | 85,744 |
| Secured Debt | 14,568 | 24,212 | 26,864 | 32,736 | 33,262 |
| Total Debt | 97,740 | 109,725 | 109,152 | 111,685 | 119,006 |
| Allowance % Retail Rece. | 0.86% | 1.64% | 1.66% | 1.83% | 1.81% |
| Allowance / Net Charge-offs | 1.58x | 4.50x | 6.68x | 3.03x | 2.56x |
| Net Charge-offs % Avg. Receivable | 0.56% | 0.39% | 0.26% | 0.63% | 0.72% |
| 30+ Day Delinquency Rate | 1.8% | 1.2% | 1.8% | 2.3% | 3.1% |
CreditSight View Comment
AS OF 13 May 2024We reiterate our Underperform recommendations on notes of Toyota Motor Co. (TOYOTA: A1/A+/A+; S/S/S) and Toyota Motor Credit Corporation (TMCC: A1/A+/A+; S/S/S) based primarily on relative value. Toyota reported record profit in FY24 and announced increased investments in labor, suppliers, and BEVs in FY25 that it expects to reduce operating profit 20%. We applaud the investments that we believe should further its new energy vehicle offerings well beyond its hybrid electric vehicles (HEVs), which account for more than one-third of its sales. We believe the Toyota bond complex is fairly valued at current levels but will continue to underperform the broader market and the A-rated index owing to its high-A credit rating and short duration.
Recommendation Reviewed: May 13, 2024
Recommendation Changed: January 13, 2023
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
How may we help you?
Search topics about wealth insights and investments.Sumitomo Mitsui Financial Group
- Sector: Financial Services
- Sub Sector: Banks
- Region: Japan
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Fundamental View
AS OF 26 Feb 2024SMFG has had a relatively good record of managing risk and returns. It is has the highest headline CET1 ratio amongst the three megabanks, although it has been reduced by acquisitions, which have been used to bulk up its presence in aircraft leasing, capital markets, Southeast Asia, and India.
The profitability of SMFG, just about the second largest Japanese megabank, was affected by poor results from its non-SMBC subsidiaries in FY22. However, the non-SMBC subsidiaries appear to have turned a corner since 3Q22, while SMBC had a better 3Q23 after a more challenging 1H23.
Given its size and systemic importance, SMFG is considered too big to fail, and will be supported by the Japanese government if needed.
Business Description
AS OF 26 Feb 2024- The core unit of SMFG is Sumitomo-Mitsui Banking Corp (SMBC), whose main predecessors were Sumitomo Bank and Mitsui Bank.
- SMFG does not have a large trust business as Sumitomo Trust and Chuo Mitsui Trust chose not to join SMFG, but merged with each other to form the separate Sumitomo Mitsui Trust Holdings.
- SMFG's group companies include the securities firm SMBC Nikko, SMBC Trust Bank, SMBC Card Company, SMBC Consumer Finance, Sumitomo Mitsui Finance and Leasing, SMFG India Credit Company (SMICC) Sumitomo Mitsui DS Asset Management, and SMBC Aviation Capital.
- It has been acquisitive over the years, particularly in higher margin leasing assets. In 2021, the group took a 49% stake in Vietnam's FE Credit, 74.9% of Indian NBFI Fullerton Capital (now called SMICC), 4.99% of Philippines' RCBC, and 4.5% of US investment bank Jefferies. In 2022, it increased its stake in RCBC to 20%. In 2023, it acquired a 15% stake in Vietnam's VP Bank, and announced its intention to increase its stake in Jefferies from 4.5% to 15%.
Risk & Catalysts
AS OF 26 Feb 2024Asset quality has been good in recent years, but COVID-19 caused a big jump in credit costs, particularly in the leasing business and SME segment. Overall credit costs dropped in FY21 and improved in FY22 except at its consumer businesses. In 9M23 bank level credit costs are good but worse at the card and personal unsecured loans units.
SMFG has taken stakes in FE Credit (49%) and VP Bank (15%) in Vietnam, Fullerton in India (74%) and RCBC in the Philippines (20%), which we see as a sensible buildup of exposure to emerging growth areas. It supported SMBC Aviation in its acquisition of Goshawk, and is increasing its 4.5% stake in Jefferies to 15% as an expansion of its strategic alliance with the US firm for M&A/ECM/DCM opportunities. However, FE Credit is not doing well and will probably need a few years to restructure following large losses.
In FY23, international loan growth has been a struggle, and SMFG has been overtaken by MUFG on international margins.
Key Metric
AS OF 26 Feb 2024| ¥ bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| Net Interest Revenue/Average Assets | 0.65% | 0.60% | 0.64% | 0.68% | 0.68% |
| Operating Income/Average Assets | 1.37% | 1.27% | 1.23% | 1.26% | 1.38% |
| Operating Expense/Operating Income | 63% | 62% | 62% | 61% | 60% |
| Pre-Impairment Operating Profit / Average Assets | 0.54% | 0.49% | 0.48% | 0.51% | 0.61% |
| Impairment charge/Average Loans | (0.21%) | (0.43%) | (0.31%) | (0.22%) | (0.18%) |
| ROAA | 0.35% | 0.23% | 0.30% | 0.32% | 0.40% |
| ROAE | 6.5% | 4.5% | 5.9% | 6.5% | 8.0% |
| CET1 excl Unrealised Securities Gains in AOCI | 13.3% | 12.8% | 12.1% | n/m | n/m |
CreditSight View Comment
AS OF 15 Nov 2024SMFG’s banking business had performed well, while its non-bank subsidiaries had underperformed over FY21-22. The group had a better 2H vs a poor 1H23, with improved trading and fee revenues, partially offset by higher credit costs at the non-bank businesses. The group became acquisitive in 2021, taking a 49% stake in a leading Vietnamese NBFI and 15% of its parent (VP Bank), 20% of RCBC of the Philippines, 74.9% of NBFI Fullerton India (now 100%), and 4.5% in US investment bank Jefferies (increasing to 15%), so as to provide the base for the next stage of growth. Its high CET1 ratio has been whittled down by acquisitions. Its 1H24 results have been boosted by share sales and structured investment trusts.
Recommendation Reviewed: November 15, 2024
Recommendation Changed: January 02, 2024
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
How may we help you?
Search topics about wealth insights and investments.Australia & New Zealand Bank
- Sector: Financial Services
- Sub Sector: Banks
- Region: Australia
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Fundamental View
AS OF 22 Dec 2023- ANZ (Aa3/AA-/A+) has the leading corporate banking franchise in Australia and New Zealand, and is the largest bank in New Zealand. It has a relatively small share of the Australian domestic retail market (and so it is acquiring Suncorp). Its Asia-focused regional business suffered from weak returns post-GFC but, after restructuring, has achieved better results.
- Its core institutional business continues to do well, capital levels are comfortable, as are asset quality metrics with good collective provisioning.
Business Description
AS OF 22 Dec 2023- ANZ is a Melbourne-based bank with a history dating back to the early 19th century. Historically, its strength has been in corporate banking. It is the largest bank in New Zealand and was previously active in Asia but cut back, pulling out of India in the 1990s. It subsequently built up minority stakes in Indonesia (Panin, 39%), Malaysia (AMMB 24%) and China (Bank of Tianjin 12%), all of which it is trying to sell. After the crisis it acquired banking operations from RBS in several Asian countries including Hong Kong, Singapore, Taiwan, Philippines and Indonesia, much of which it subsequently sold to DBS.
- Its broader strategy is to shift capital allocations away from institutional towards retail and commercial in Australia where its market share is relatively small. To grow its mortgage marketshare, it announced the acquisition of Suncorp's banking business in Jul-22; final approval for the deal is expected in early 2024.
Risk & Catalysts
AS OF 22 Dec 2023- The limited impact of COVID-19 on the Australian economy has seen ANZ able to reverse provisions with little sign of credit risk deterioration. It is well positioned for a housing market downturn with collective provisions of ~70 bp.
- ANZ has a relatively small share of the Australian domestic retail market, but it aims to increase market share through the acquisition of Suncorp Bank (final authority approval/rejection will come through in early 2024).
- ANZ’s large presence in New Zealand makes it more exposed to that economy, but there has been no negative impact so far, nor is one anticipated.
Key Metric
AS OF 26 Dec 2023| AUD mn | Y19 | Y20 | Y21 | Y22 | Y23 |
|---|---|---|---|---|---|
| Return on Equity | 10.8% | 6.2% | 9.9% | 10.1% | 10.9% |
| Total Revenues Margin | 2.0% | 1.8% | 1.7% | 1.8% | 1.9% |
| Cost/Income | 47.7% | 52.9% | 51.9% | 51.6% | 48.5% |
| CET1 Ratio (APRA) | 11.4% | 11.3% | 12.3% | 12.3% | 13.3% |
| CET1 Ratio (International) | 16.4% | 16.7% | 18.3% | 19.2% | 19.2% |
| APRA Leverage Ratio | 5.6% | 5.4% | 5.5% | 5.4% | 5.4% |
| Liquidity Coverage Ratio | 143% | 139% | 136% | 129% | 132% |
| Gross Impaired Loans/Gross Loans | 0.3% | 0.4% | 0.3% | 0.2% | 0.2% |
CreditSight View Comment
AS OF 08 Jan 2024ANZ has a relatively small share of the Australian domestic retail market, which it has overhauled and aims to improve through the acquisition of Suncorp Bank (approval for the merger is before a tribunal), but it is the largest bank in New Zealand and is the leading corporate bank in both countries; both divisions are performing well, as is a new commercial division. The bank’s recent focus has been on a new retail app, an improved payments business, and sustainable finance. The NIM hit a bottom in 1H22, improved, and is on its way down again. Asset quality is strong, with ~57 bp of collective provisions. Pro-forma for the Suncorp acquisition, its CET1 ratio is ~12.1%. We see better value in its Tier 2 and its sole $ AT1. We do not see call risk with the Australian bank majors.
Recommendation Reviewed: January 08, 2024
Recommendation Changed: October 05, 2016
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
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Fundamental View
AS OF 12 Dec 2023- Having run off its non-core assets and sold Barclays Africa, Barclays is now focusing on improving profitability.
- It benefits from its wide diversification in UK and US markets, with investment banking performing well in recent periods despite being perceived as volatile and higher risk.
- Barclays’ large consumer finance business might prove to be vulnerable to rising interest rates and the cost of living crisis, but group earnings have been bolstered by good trading income and have, overall, benefited from the higher rates.
- Economic uncertainty clouds the near term outlook, but Barclays has strengthened its balance sheet metrics, with improved capital/leverage ratios, strong liquidity, and good loss-absorbing capacity.
Business Description
AS OF 12 Dec 2023- Barclays is a major global financial services provider, engaged in personal banking, credit cards in the US, UK and Europe (Barclaycard), corporate and investment banking, and wealth and investment management.
- Having had an extensive international presence in Europe, the Americas, Africa and Asia, it has narrowed its focus to the UK & US markets, and has sold its stake in Absa (Barclays Africa).
- Its operations were previously split into Core and Non-Core, with Barclays Non-Core (BNC) containing the Group's non-strategic assets and businesses. Following an accelerated wind-down, Barclays closed BNC on 1 July 2017 with residual RWAs of £23 bn re-absorbed by the bank's business divisions.
- Barclays has implemented its ring-fencing split under which the newly established Barclays Bank UK PLC has become its UK ring-fenced bank (from 1 April 2018) and Barclays Bank PLC continues as the non-ring-fenced bank (accounting for around 80% of group assets).
Risk & Catalysts
AS OF 12 Dec 2023- With the UK and US economies beset by high inflation and high interest rates, asset quality is likely to come under pressure, and credit losses look set to rise, although so far there are no material signs of stress.
- Barclays has substantial credit card businesses in the UK and US, which could be vulnerable to the economic weakness.
- There is an ongoing debate about the weight of investment banking in the group as peers scale back or exit certain activities.
- A rescission offer to bondholders after the over-issuance of structured securities in the US resulted in large losses in 2021 and 1H22, partially offset by hedges, but that appears to have been an isolated case.
Key Metric
AS OF 12 Dec 2023| £ mn | 3Q23 | Y22 | Y21 | Y20 | Y19 |
|---|---|---|---|---|---|
| Return On Equity | 7.4% | 8.7% | 10.5% | 3.8% | 5.3% |
| Total Revenues Margin | 1.6% | 1.7% | 1.6% | 1.7% | 1.9% |
| Cost/Income | 63.1% | 67.0% | 66.8% | 63.8% | 71.3% |
| CET1 Ratio (Transitional) | 14.0% | 13.9% | 15.1% | 15.1% | 13.8% |
| CET1 Ratio (Fully-Loaded) | 14.0% | 13.7% | 14.7% | 14.3% | 13.5% |
| Leverage Ratio (Fully-Loaded) | 5.0% | 5.3% | 5.2% | 5.3% | 4.5% |
| Liquidity Coverage Ratio | 159% | 165% | 168% | 162% | 160% |
| Impaired Loans (Gross)/Total Loans | 2.1% | 2.0% | 2.2% | 2.6% | 2.3% |
CreditSight View Comment
AS OF 22 Jan 2024We have a Market perform recommendation on the senior debt of Barclays PLC (holding company) and an Outperform on Barclays Bank (operating bank). We also see its Tier 2 as Cheap. Barclays has benefited from the diversification of its balance sheet and earnings, both geographically, with a large part of its business in the US, and by business, encompassing personal and business banking in the UK, consumer finance in the UK and US, and investment banking. While some of these businesses carry higher credit risk (e.g. credit cards) or market risk, recent performance has been solid, and asset quality remains benign. Capital ratios have improved, and it looks well protected against economic headwinds. Liquidity and funding metrics are strong.
Recommendation Reviewed: January 22, 2024
Recommendation Changed: January 13, 2020
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
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Fundamental View
AS OF 12 Dec 2023Bank Negara Indonesia (BNI) is the fourth largest commercial bank in Indonesia by assets, and is rated Baa2(stable)/BBB-(stable)/BBB-(stable).
The bank is majority-owned by the Indonesian government (60%) and receives strong state support in the form of well-established relationships with SOEs, an area that the bank heavily loans to.
BNI’s asset quality is showing a steady improvement after COVID headwinds in Indonesia, mainly driven by its corporate loan book. It is de-risking its loan portfolio by focusing growth on top tier private corporates.
Business Description
AS OF 12 Dec 2023- Bank Negara Indonesia was founded in 1946, initially as a central bank, before becoming a commercial bank in 1968. It is now the 4th largest commercial bank in Indonesia by assets.
- The bank is majority-owned by the state (60%) and focuses its lending toward SOEs and domestic corporates. The loan book is split 52% corporates, 29% small and medium enterprises and 18% retail, with the remaining coming from its subsidiaries at end-September 2023.
- BNI employs ~27,000 staff across its ~1,800 outlets. It also has over 170,000 E-channels and over 13,000 ATMs across Indonesia as of end-September 2023.
Risk & Catalysts
AS OF 12 Dec 2023BNI’s NIM is much lower compared to Mandiri and BRI, and it is likely to remain so as the bank is shifting its loan mix towards safer but lower yielding top tier private corporates, focusing on the risk-adjusted NIM (net of credit costs) instead. Credit costs remain higher than Mandiri so profitability is slightly weaker, but is still generally quite strong with ROE at >15%.
Growth momentum is expected to hold up well in 2023 which would support asset quality and loan growth; management targets 7-9% FY23 loan growth and credit costs of <150 bp.
The COVID-19 impact is still being played out with regulatory forbearance measures being selectively extended to March 2024. However, similar to Mandiri, BNI is looking into pare down its LAR and NPL coverage ratios back to pre-pandemic levels starting next year so lower credit costs of ~100 bp are expected by 2025, along with an ~18% ROE. Capital is solid with a >19% CET1 ratio.
Key Metric
AS OF 12 Dec 2023| IDR bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| PPP ROA | 3.33% | 3.20% | 3.35% | 3.42% | 3.43% |
| ROA | 1.9% | 0.4% | 1.2% | 1.8% | 2.1% |
| ROE | 13.5% | 2.9% | 9.9% | 15.0% | 15.7% |
| Equity/Assets | 14.49% | 11.56% | 12.07% | 12.32% | 13.92% |
| CET1 Ratio | 18.7% | 16.0% | 17.4% | 17.5% | 19.6% |
| NPL Ratio | 2.27% | 4.26% | 3.70% | 2.81% | 2.27% |
| Provisions/Average Loans | 1.60% | 4.21% | 3.23% | 1.83% | 1.37% |
| LDR | 90.6% | 81.4% | 79.9% | 84.0% | 88.8% |
CreditSight View Comment
AS OF 01 Nov 2023BNI is the 4th largest commercial bank in Indonesia by assets with a 60% government shareholding. The bank thus has well-established relationships with SOEs and benefits from a strong domestic franchise. Despite its corporate-focused loan book, its asset quality was weaker than Bank Mandiri with a higher NPL ratio and credit costs. The bank switched its growth strategy to focus growth on better quality segments and risk-adjusted NIM (net of credit costs) in 2021 which is bearing fruit. Funding cost pressure has eroded the NIM but this appears to have turned a corner, and profitability is generally quite strong. The CET1 ratio is high at ~19%. We affirm our M/P recommendation on the $ Tier 2 as it does not have senior bonds outstanding. The $ AT1 however is on our preferred AT1s list.
Recommendation Reviewed: November 01, 2023
Recommendation Changed: July 26, 2023
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
How may we help you?
Search topics about wealth insights and investments.Société Générale
- Sector: Financial Services
- Sub Sector: BanksInsuranceSpecialty Finance
- Region: EuropeFrance
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Fundamental View
AS OF 04 Dec 2023- SocGen’s business is not geared to benefit significantly from the higher rate environment, given the quirks of the French market. Its investment banking business is doing well and looks less risky these days.
- The sale of its Russian businesses entailed a large write-down in 1H22, but it had a minimal capital impact and has benefited SocGen’s credit profile.
- Capital ratios have improved sizeably in recent years, making its MDA cushion comfortable.
- Asset quality also looks good, with a relatively low cost of risk and decreasing non-performing loans.
Business Description
AS OF 04 Dec 2023- SocGen is one of the leading retail and commercial banks in France and is also active in corporate and investment banking internationally. It has strong franchises in equipment financing, car leasing and fleet management.
- Its operations are split into French Retail Banking, Private Banking & Insurance, International Retail Banking, Mobility & Leasing Services, Global Banking & Investor Solutions, and a Corporate Centre.
- Retail banking in France includes the Société Générale, Crédit du Nord and Boursorama brands. In December 2020, it announced the merger of the Société Générale & Crédit du Nord networks, largely in order to reduce the number of branches.
- International Retail Banking includes operations in Western Europe, Czech Republic, Romania, Africa/Asia & Other Mediterranean regions.
- The acquisition of LeasePlan, and Boursorama’s agreement to take over ING’s French retail business, highlight SocGen’s determination to extend its franchise.
Risk & Catalysts
AS OF 04 Dec 2023- Exposure to Russia has been managed down significantly. While not completely gone, it now makes up only a small percentage of the bank’s balance sheet.
- It has substantial investment banking and capital markets operations that are somewhat less diversified than those of peers, but the business’s risk profile has improved.
- Trends in retail banking remain subdued, not helped by low rates and a changing operating environment, although management has already implemented changes in its French business.
- Our central scenario is that earnings will be lumpy for a little while. We expect SocGen to reshape the perimeter of its business operations several times over the next 12-24 months.
Key Metric
AS OF 04 Dec 2023| € mn | 3Q23 | Y22 | Y21 | Y20 | Y19 |
|---|---|---|---|---|---|
| Return On Equity | 1.7% | 2.8% | 8.9% | (0.4%) | 5.2% |
| Total Revenues Margin | 1.6% | 1.8% | 1.8% | 1.6% | 1.9% |
| Cost/Income | 70.4% | 66.3% | 68.2% | 75.6% | 71.9% |
| CET1 Ratio (Transitional) | 13.3% | 13.5% | 13.7% | 13.4% | 12.7% |
| CET1 Ratio (Fully-Loaded) | 13.2% | 13.5% | 13.6% | 13.2% | 12.7% |
| Leverage Ratio (Fully-Loaded) | 4.2% | 4.3% | 4.8% | 4.7% | 4.3% |
| Liquidity Coverage Ratio | 147% | 145% | 129% | 153% | 124% |
| Impaired Loans (Gross)/Total Loans | 3.3% | 3.1% | 8.6% | 3.7% | 3.5% |
CreditSight View Comment
AS OF 10 Jan 2024SocGen’s main business divisions have seen good growth post-COVID 19 and improving profitability, helped by rising interest rates. Global Markets earnings have been volatile over the years, but trading income has been strong in recent periods. Asset quality ratios are good, all things considering. Its financial services business – mainly auto leasing, helped by the acquisition of LeasePlan, has been making an increased contribution. The outlook for French Retail is quite weak until 2024. Capital and leverage ratios look much better than they did in the past. We moved its Tier 2 to Cheap from Fair, and its AT1 from Cheap to Fair, on 10 January 2024.
Recommendation Reviewed: January 10, 2024
Recommendation Changed: May 12, 2023
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group
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Fundamental View
AS OF 27 Nov 2023- Citigroup is a solid global money center bank that has done a decent job cleaning up legacy issues and fortifying the risk profile in the wake of the GFC, though it still lags peers on several fronts including profitability.
- Citi has more geographic diversification than peers owing to its international presences, though the retail side is shrinking considerably as Citi exits most of Asia and Mexico, refocusing around a global wealth management/private bank strategy.
- Citi lags on the domestic deposit front, with less than half of the deposit base of money center peers and a much smaller physical footprint, though it has been focused on driving deposit flows the past couple of years.
Business Description
AS OF 27 Nov 2023- Citigroup ranks as the 3rd largest U.S. bank by total assets ($2.37 tn) at 3Q23 and 3rd largest by Total Equity ($210 bn).
- Citi is 4th in terms of U.S. deposits with approximately $757 bn as of 3Q23 across 665 branches (S&P Capital IQ). Given the significantly smaller branch footprint, Citi does not generally possess leading market shares in most states besides South Dakota (#1).
- Citi's major business lines include U.S. consumer (mortgages and credit cards) and retail banking, global consumer, global corporate & investment banking, and global payments. The company is in the process of exiting 13 international consumer markets, refocusing the non-US footprint around four regional hubs and combining wealth management and the private bank to drive synergies out of the hubs.
Risk & Catalysts
AS OF 27 Nov 2023- Citi is still lagging peers on profitability (both ROA and ROTCE); new CEO Fraser seems to have adopted the profitability gap as a key focus point as well, and we see Fraser’s strategic moves (e.g. int’l consumer exits) as aimed at capital optimization to improve ROE.
- While not as severe as a Wells-type situation, Citi’s regulatory mishaps introduces risks should the bank fail to show improvement in internal controls, or if another major risk management failure crops up. Our base case: Citi will be able to satisfy regulators and end up with improved infrastructure, though it will likely be a multi-year process with resultant upward cost pressures.
- Citi’s global footprint makes it more exposed to emerging markets and non-domestic economies, though pending exits of ‘riskier’ consumer loan books in Asia and Mexico should help the EM risk profile; Citi has also demonstrated an ability to unwind other riskier exposures (e.g. Russia).
Key Metric
AS OF 27 Nov 2023| $ mn | FY19 | FY20 | FY21 | FY22 | LTM 3Q23 |
|---|---|---|---|---|---|
| ROAE (annual) | 9.9% | 5.7% | 10.9% | 7.5% | 6.6% |
| ROAA (annual) | 0.97% | 0.48% | 0.92% | 0.61% | 0.56% |
| PPNR / Avg. Assets | 1.61% | 1.28% | 1.02% | 0.97% | 4.05% |
| Efficiency Ratio | 58% | 61% | 68% | 67% | 267% |
| Net Interest Margin (Annual) | 2.59% | 2.14% | 1.94% | 2.20% | 2.36% |
| Net charge-offs (LTM) / Loans | 1.12% | 1.08% | 0.70% | 0.55% | 0.83% |
| Common Dividend Payout | 23% | 39% | 19% | 27% | 113% |
| CET1 Ratio | 11.8% | 11.5% | 12.3% | 13.0% | 13.6% |
| Supplementary Leverage Ratio (SLR) | 6.2% | 7.0% | 5.7% | 5.8% | 6.0% |
| Liquidity Coverage Ratio (LCR) | 115% | 118% | 115% | 118% | 117% |
CreditSight View Comment
AS OF 16 Jan 2024We are comfortable with Citi and like it for the spread value over mid-A banks and compelling carry against IG corporates. We see technical support over the next 2-3 years as Citi exits int’l consumer and reduces RWAs, in turn lowering regulatory debt needs; Banamex retail is the big remaining piece, but a 2025 event at the earliest. Citi’s lagging profitability to peers is a real differentiator, but we are constructive on CEO Fraser’s overhaul and expect (and need) to see more momentum in 2024. Citi showed no ill effects from the SVB collapse, and the largely non-US commercial deposit base is inextricably tied into the bank’s broader product/service offerings with extensive and long-dated customer relationships exemplified by stable (if more costly) deposit bases and solid NIM expansion.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: January 12, 2017
Who We Recommend
Mizuho Financial Group
KB Financial Group
Woori Financial Group