Sector: Financial Services
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Fundamental View
AS OF 15 Oct 2024ING displays robust and consistent asset quality, good earnings, solid capital ratios and a well-balanced funding profile.
These attributes are supported by its strong franchise in retail and wholesale banking in the Benelux region, its good geographic diversification, and its focus on low risk residential mortgage lending.
At the same time, it has sizeable exposures to cyclical industry sectors in its Wholesale Banking division, although these have been reduced in recent years.
Business Description
AS OF 15 Oct 2024- ING was founded in 1991 by a merger between Nationale-Nederlanden and NMB Postbank Group. It is now the largest Dutch financial institution by total assets.
- ING Bank is focused on retail and commercial banking in the Benelux countries, with direct banking franchises in Germany, Spain, Italy, Australia, as well as Poland, Romania, Turkey and the Philippines.
- In April 2016, it completed the process of divesting all of its insurance business (in Europe, the US and Asia), under the Restructuring Plan conditions imposed by the European Commission after it received state aid in 2008-2009.
- In November 2016, ING announced that its resolution entity would be its holding company, ING Groep NV. ING Groep is now the issuing entity for all TLAC/MREL-eligible debt (AT1, Tier 2 and senior unsecured), and its sole operating entity is ING Bank N.V.
Risk & Catalysts
AS OF 15 Oct 2024As of 1Q24 ING’s offshore exposure to Russia amounted to €1.2 bn, of which over €0.5 bn had cover from export credit agencies or credit and political risk insurance. The equity in its Russian subsidiary was €0.4 bn. To put these figures in context, the figures for Russian offshore exposure and equity in Russia at the beginning of the war in February 2022 were €5.3 bn (€2.2 bn covered by risk transfers to third parties) and €0.2 bn.
ING’s CET1 ratio will trend down towards its 12.5% target in the coming years, bringing it more in line with other major peers.
The impact of Basel 4 is expected to be benign at around 20 bp.
Customer deposits fund over 60% of ING’s balance sheet. 85% of deposits are insured.
Key Metric
AS OF 15 Oct 2024€ mn | Y20 | Y21 | Y22 | Y23 | 2Q24 |
---|---|---|---|---|---|
Return On Equity | 4.6% | 8.8% | 7.1% | 14.4% | 13.8% |
Total Revenues Margin | 1.9% | 2.0% | 1.9% | 2.3% | 2.2% |
Cost/Income | 63.2% | 60.5% | 60.3% | 51.2% | 49.8% |
CET1 Ratio (Transitional) | 15.5% | 15.9% | 14.5% | 14.7% | 14.0% |
CET1 Ratio (Fully-Loaded) | 15.5% | 15.9% | 14.5% | 14.7% | 14.0% |
Leverage Ratio (Fully-Loaded) | 4.8% | 5.9% | 5.1% | 5.0% | 4.6% |
Liquidity Coverage Ratio | 137.0% | 139.0% | 134.0% | 143.0% | 146.0% |
Impaired Loans (Gross)/Total Loans | 2.1% | 1.8% | 1.7% | 1.8% | 1.9% |
CreditSight View Comment
AS OF 12 Sep 2024After divesting its insurance operations, the remaining business, ING Bank, has stayed a solid Benelux-based bank with a strong direct banking arm in several countries. Profitability growth has been supported by a gradual recovery in the Dutch economy, but since 2018 heavily affected by higher compliance costs after ING was hit by a money-laundering charge. In the current higher rate environment, ING has benefited greatly from higher deposit margins, helping to offset any slowdown in loan income. Net interest revenues are declining but fundamentally, the bank looks in good shape versus several other core European banks. We move to Outperform on its HoldCo bonds on 2 May 2024, from Market perform.
Recommendation Reviewed: September 12, 2024
Recommendation Changed: May 02, 2024
Who We Recommend
Reliance Industries
BNP Paribas
China CITIC Financial Asset Management (Huarong)
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Fundamental View
AS OF 02 Oct 2024BNP’s financial strength is based on its strong franchises across retail, commercial and investment banking, particularly in Europe, and its wide business and geographic diversification.
Profitability is sound and fairly resilient, while asset quality has held up well despite the effects of COVID-19 and the war in Ukraine. However, its operations in Italy (less than 10% of credit exposure) and consumer finance (12% of lending) are potentially riskier.
Capital ratios look sound, especially in the context of its liquid and relatively low-risk balance sheet. They have improved considerably thanks to the exit from the USA.
Business Description
AS OF 02 Oct 2024- BNP is one of the most diversified banking groups in Europe, having been created from a merger of the retail/commercial bank BNP and the corporate/investment bank Paribas in 2000.
- Domestic Markets (DM) comprises the Group's four retail banking networks in the eurozone and its three specialised business lines (including leasing and digital banking). The retail banks are French Retail Banking (FRB), BNL in Italy, BNP Paribas Fortis in Belgium and BGL BNP Paribas in Luxembourg.
- International Financial Services (IFS) includes consumer finance, asset management and private banking, and subsidiaries in non-eurozone countries, including TEB in Turkey and BNP Paribas Bank Polska.
- Corporate & Institutional Banking (CIB) is a global provider of financial solutions to corporate and institutional clients and includes BNP's extensive trading and investment banking businesses.
Risk & Catalysts
AS OF 03 Oct 2024BNP’s Polish subsidiary has taken higher provisions for legal risks in its FX mortgage portfolio – these have been absorbed readily, and should have peaked.
Pressure on margins is high in Personal Finance, and despite the change in product mix – reducing the concentration in Personal loans and credit cards and moving to Auto loans, it was still a difficult FY23.
BNP Paribas remains the subject of various claims concerning the Madoff matter; amongst other claims. The bank says it has substantial defenses in the face of these claims. Litigation provisions on the balance sheet stood at €841 mn at 30 June 2024. BNP says the latest claims against it stand at $1.1 bn as of June 2024.
There is a lot of uncertainty around France’s budget deficit and subsequently its sovereign ratings. If there was a negative rating action on the sovereign via an outlook change or notch downgrade, it is possible that BNP’s ratings will be impacted but it is difficult to say with any uncertainty.
Key Metric
AS OF 02 Oct 2024mn | 2Q24 | Y23 | Y22 | Y21 | Y20 |
---|---|---|---|---|---|
Return On Equity | 11.0% | 9.0% | 8.2% | 8.2% | 6.4% |
Total Revenues Margin | 1.8% | 1.7% | 1.7% | 1.8% | 1.9% |
Cost/Income | 58.5% | 62.6% | 60.7% | 67.3% | 68.2% |
CET1 Ratio (Transitional) | 13.0% | 13.2% | 12.3% | 12.9% | 12.8% |
CET1 Ratio (Fully-Loaded) | 13.0% | 13.2% | 12.3% | 12.9% | 12.8% |
Leverage Ratio (Fully-Loaded) | 4.4% | 4.6% | 4.4% | 4.1% | 4.9% |
Liquidity Coverage Ratio | 132% | 148% | 129% | 143% | 154% |
Impaired Loans (Gross)/Total Loans | 2.9% | 2.9% | 2.9% | 3.3% | 3.6% |
CreditSight View Comment
AS OF 21 Oct 2024BNP remains one of the more diversified bank names in Europe and we regard it as a core holding. Its strong business and geographic diversification has helped it maintain good profitability and asset quality. It has extensive operations in Italy via its subsidiary BNL, where asset quality is now beginning to improve. Earnings have been resilient and CIB in particular a stand-out performer. Liquidity and funding metrics look sound. Asset quality has held up well, although an outlier is the group’s personal finance business. The latter is being restructured, to focus more on auto finance rather than personal lending. BNP is no longer a capital laggard in Europe after the sale of Bank of the West in the US. It is looking to expand now in insurance and asset management.
Recommendation Reviewed: October 21, 2024
Recommendation Changed: October 30, 2018
Who We Recommend
ING Groep
Reliance Industries
China CITIC Financial Asset Management (Huarong)
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Fundamental View
AS OF 02 Oct 2024A large impairment loss in FY20 brought HRINTH to the brink of insolvency, but a state-led rescue plan provided HRINTH with liquidity support and brought its capital back above minimum requirements. CITIC has replaced the MoF as HRINTH’s largest shareholder. HRINTH remains as one of the Big 5 state-owned AMCs in China and will continue to perform national services.
On the guidance of the authorities, HRINTH has divested almost all of its non-core subsidiaries.
We expect HRINTH’s operational performance to remain weak until China’s economy is back on the upswing, residents regain confidence in the property market, and improved capital markets lead to better valuations on their securities books.
Business Description
AS OF 02 Oct 2024- China CITIC Financial Asset Management (formerly Huarong) is one of the five major state-owned asset management companies in China. It was first set up in 1999 to take over the bad debts of ICBC.
- The AMCs were originally due to be wound up after dealing with these "policy loans" that had come onto the books of the banks under government direction before their commercialisation, but the AMCs found a new role as commercial bad debt managers.
- HRINTH was commercialised in 2012 and completed its IPO on the HK stock exchange in 2015. Since then, HRINTH expanded its financial services to banking, financial leasing, securities & futures, trust, as well as consumer finance. However, after heavy losses in FY20, HRINTH divested much of its non-core business as directed by the authorities.
- Following the CITIC-led rescue plan of HRINTH and the planned equity transfer from the Ministry of Finance (MOF) to CITIC, CITIC has become HRINTH's largest shareholder (26.46%). Other significant shareholders include MOF (24.76%), Zhongbaorongxin (18.08%), Cinda AMC (4.89%), China Life Insurance (4.50%), National Social Security Fund (3.08%), Warburg Pincus (2.57%), and ICBC Financial AM (2.44%). HRINTH was renamed to share the "CITIC" brand in Nov-23.
Risk & Catalysts
AS OF 02 Oct 2024CITIC’s support is strong (name change, investment in CEB and CITIC Ltd, subsidiary disposal, new management team, etc.) and more meaningful to the company compared to direct ownership by the government.
Derisking continues with lower property exposure, non-core businesses have largely been disposed of and the company is able to focus on its main DDA business per the guidance of the authorities.
While HRINTH was able to deliver profit growth on the back of CITIC support and its associate interest holdings in CEB and Citic Ltd, core performance remains weak, and there could be continued volatility in the name.
AMCs may find it harder to dispose DDAs at good valuations amid a deceleration economic cycle. Longer holding periods and lower fair values of acquired DDAs could dampen return yields and increase the NPL ratio of restructuring-type DDAs.
Key Metric
AS OF 02 Oct 2024CNY mn | FY20 | FY21 | FY22 | FY23 | 1H24 |
---|---|---|---|---|---|
ROA | (6.40%) | 0.10% | (2.20%) | 0.02% | 1.00% |
ROE | (147.6%) | 1.0% | (49.8%) | 3.6% | 21.2% |
Total Capital Ratio | 4.2% | 13.0% | 15.1% | 15.1% | 16.1% |
Leverage Ratio | 1,330.0x | 14.2x | 16.1x | 11.5x | 10.1x |
Equity/Assets | 1.1% | 3.8% | 5.2% | 5.0% | 5.0% |
CreditSight View Comment
AS OF 02 Sep 2024CITIC AMC continued to post profits in 1H24, on the back large fair value gains from volatile other financial assets as well as on DDAs, reduced impairment losses and shared profits from its investments in CEB and CITIC Ltd. CITIC’s support is strong and more meaningful to the company compared to direct ownership by the government, derisking continues with substantially lower property exposures, non-core businesses have almost all been cleared, and the company is able to focus on main DDA business per the authorities’ guidance. However, we expect to continue to see high earnings volatility and poor disclosure is turning poorer still. We maintain our Market perform recommendation.
Recommendation Reviewed: September 02, 2024
Recommendation Changed: August 31, 2021
Who We Recommend
ING Groep
Reliance Industries
BNP Paribas
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Fundamental View
AS OF 06 Sep 2024IBK benefits from a legally binding solvency guarantee from the Korean government and is viewed as a Korean quasi-sovereign issuer. The bank is listed, but remains majority state-owned. Previous governments had proposed privatizing it, but subsequent governments scrapped these plans. The government intends to keep its stake above 50%, and wants IBK to focus on lending to SMEs and provide earlier stage investment capital.
IBK manages the difficult feat of combining its policy role to support Korean SMEs with performance that compares creditably with Korean commercial banks.
Business Description
AS OF 04 Sep 2024- IBK was established under its own Act in 1961 to assist the development of Korea's small business sector. It claims a 23% market share in SME lending.
- It was listed in the early 1990s, but was re-nationalised following heavy losses in the Asian economic crisis of the late 1990s. It was re-listed in 2003, and is majority owned by the government which holds 59.5%; the National Pension Scheme holds 5.6%, and other policy banks have small stakes (7.2% by Korea Development Bank and 1.8% by the Export-Import Bank of Korea).
- Under Article 43 of the IBK Act, if the bank incurs losses they should be set against its reserves and "if the reserves are not sufficient the Government shall assume the remaining loss". Although this is a solvency guarantee and not an explicit guarantee for the timely payment of debts, we believe the Korean government will ensure IBK is in a position to make such timely payments.
Risk & Catalysts
AS OF 06 Sep 2024The bank’s ratings (Aa2/AA-/AA-) are closely tied to the Korean sovereign’s ratings (Aa2/AA/AA-) due to its quasi-sovereign status.
Its ratings and its default risk should therefore not be impacted by any deterioration in its financials, provided the government continues to inject new capital when needed, which it is expected to.
Its policy mandate requires it to use at least 70% of its funding for SMEs. Risks are mitigated by its granular SME exposures which are more than 80% secured, including guarantee from state-owned credit guarantee agencies. Korean governments have also always been quick to provide support including capital injections to IBK when needed, with the most recent injection of KRW 1.3 tn during the COVID.
Key Metric
AS OF 04 Sep 2024KRW bn | FY20 | FY21 | FY22 | FY23 | 1H24 |
---|---|---|---|---|---|
Pre-Provision Operating Profit / Average Assets | 1.33% | 1.30% | 1.49% | 1.59% | 2.78% |
ROAA | 0.5% | 0.6% | 0.6% | 0.6% | 0.6% |
ROAE | 6.4% | 9.2% | 9.5% | 8.8% | 8.7% |
Provisions/Average Loans | 0.60% | 0.34% | 0.50% | 0.67% | 1.03% |
Nonperforming Loans/Total Loans | 1.08% | 0.85% | 0.85% | 1.05% | 1.30% |
CET1 Ratio | 11.1% | 11.3% | 11.1% | 11.3% | 11.6% |
Total Equity/Total Assets | 6.95% | 6.92% | 6.79% | 7.10% | 7.06% |
NIM | 1.55% | 1.51% | 1.78% | 1.79% | 1.73% |
CreditSight View Comment
AS OF 23 Sep 2024IBK is not wholly government owned – 59.5% direct government ownership, 7.2% KDB and 1.8% KEXIM – but is a policy bank benefiting from a Korean government solvency guarantee. For a policy bank it also has a fairly good track record and manages the difficult feat of combining its policy role to support Korean SMEs with performance that compares creditably with Korean commercial banks. As the leading lender to Korea’s medium and small businesses, IBK plays a key role in the country’s economy, enhanced by the longstanding objective of numerous administrations to achieve a more diversified economy less reliant on the “chaebol”. Successive Korean governments have always been quick to provide support including capital injections to the policy banks when needed.
Recommendation Reviewed: September 23, 2024
Recommendation Changed: March 17, 2017
Who We Recommend
ING Groep
Reliance Industries
BNP Paribas
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Fundamental View
AS OF 29 Aug 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 29 Aug 2024- JPMorgan ranks as the largest U.S. bank by total assets ($4.14 tn at 2Q24) and deposits ($2.40 tn at 2Q24).
- JPMorgan ranks 1st in terms of U.S. deposits with approximately $2.07 tn in deposits at YE23 across 4,891 branches (S&P Capital IQ). JPMorgan's footprint includes New York (#1), Texas (#1), California (#2), Illinois (#1), Michigan (#1), Arizona (#1), Ohio (#5), and Florida (#4), among others.
- JPMorgan's major business lines include investment banking, retail banking, card services, treasury & securities services, commercial banking, and asset & wealth management.
Risk & Catalysts
AS OF 29 Aug 2024Succession planning at JPMorgan has a higher profile than many peers, with CEO Dimon (68 year-old) having held the top spot for over 15 years. Another recent round of shuffling top management did not yield much clarity, with presumed frontrunners Marianne Lake becoming sole CEO of the Consumer Bank and Jennifer Piepszak moving over to co-CEO of the new Commercial & Investment Bank segment, alongside Troy Rohrbaugh who has been running Markets & Securities Services.
The sector remains exposed to reputational, legislative/administrative risk, and cyber threats, although the significant tech spend over the past few years should (theoretically) result in a stronger position for JPM to manage the security threats.
Although not likely a credit risk, JPMorgan may continue to be acquisitive around non-bank financial and ancillary services; but we would expect any deal to be conservatively funded and looking to further technology and fee income strategies (e.g. payments or asset management).
Key Metric
AS OF 29 Aug 2024$ mn | FY20 | FY21 | FY22 | FY23 | 2Q24 |
---|---|---|---|---|---|
ROAE (annual) | 10.9% | 17.0% | 13.2% | 16.0% | 16.7% |
ROAA (annual) | 0.9% | 1.3% | 1.0% | 1.3% | 1.3% |
PPNR / Avg. Assets | 1.52% | 1.32% | 1.39% | 7.06% | 1.91% |
Efficiency Ratio | 57% | 59% | 58% | 214% | 56% |
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% | 0.58% |
Common Dividend Payout | 38% | 24% | 32% | 101% | 24% |
CET1 Ratio | 13.1% | 13.1% | 13.2% | 15.0% | 15.3% |
Supplementary Leverage Ratio (SLR) | 6.9% | 5.4% | 5.6% | 6.1% | 6.1% |
Liquidity Coverage Ratio (LCR) | 110% | 110% | 110% | 112% | 112% |
CreditSight View Comment
AS OF 14 Oct 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 5-10 bp tighter to money center peers even after the rally. Supply could be a modest relative value technical headwind, though YTD issuance volumes have not been nearly as bad as feared; the prospects of a significantly watered-down Basel III endgame also reduces any supply overhang. There’s still value against broader corporates though JPM is no longer offering positive carry over IG, 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: October 14, 2024
Recommendation Changed: April 17, 2023
Who We Recommend
ING Groep
Reliance Industries
BNP Paribas
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Fundamental View
AS OF 29 Aug 2024WFC is a leading domestic bank with strong positioning across consumer and commercial lending asset classes and a top 3 deposit market share in the U.S.
The core credit risk profile remains solid; the company has actively shed non-core assets and business lines (including WFAM), both as a means of managing under the Fed’s asset cap and part of new-ish CEO Scharf’s streamline strategy.
The balance sheet is strong, but WFC continues to suffer from internal deficiencies across a range of compliance and risk mgmt. functions unearthed after the fake account scandal. Positively, the Fed reportedly approved WFC’s overhaul plans, a crucial step in the remediation process; WFC also continues to close outstanding consent orders, though some remain outstanding.
Business Description
AS OF 29 Aug 2024- Wells Fargo ranks as the U.S.'s 4th largest bank by total assets ($1.94 tn at 2Q24) and 3rd largest by total deposits ($1.37 tn).
- Wells Fargo ranks 3rd in terms of U.S. deposits with approximately $1.37 tn in deposits at YE23 and 4,379 branches across the U.S. (S&P Capital IQ). The company has leading market shares across its geographically diverse footprint, including in California (#3), South Dakota (#2), Florida (#2), Texas (#3), Minnesota (#2), and Georgia (#3).
- Wells Fargo's major business lines include U.S. retail banking, mortgage banking, consumer finance, corporate and middle market banking, and wealth management.
Risk & Catalysts
AS OF 29 Aug 2024The asset cap and associated regulatory remediation remains a millstone with a wholly unknown timeframe even after years of efforts. There was some risk that Wells could bleed share and franchise value in an economic recovery if the company cannot fully capture the business opportunity due to the asset cap, though so far that has not been the case given freed up balance sheet capacity earlier in 2020-22 and the sharp slowdown in loan growth since.
Wells Fargo faces reputational risk tied to those misconduct and business practices scandals, though likely fading with time and remediation progress; at 2Q24, WFC high-end estimable loss above legal accruals was $2 bn.
Wells has less fee income diversification as peers, largely due to the much smaller scale of the capital markets businesses and smaller presence in credit cards, both points of emphasis under Scharf as Wells embarked on aggressive card product refreshes and trading buildout.
Key Metric
AS OF 29 Aug 2024$ mn | FY20 | FY21 | FY22 | FY23 | 2Q24 |
---|---|---|---|---|---|
ROAE (annual) | 1.8% | 11.4% | 7.3% | 10.5% | 10.2% |
ROAA (annual) | 0.17% | 1.11% | 0.70% | 1.00% | 0.97% |
PPNR / Avg. Assets | 0.72% | 1.26% | 0.91% | 5.14% | 1.37% |
Efficiency Ratio | 81% | 70% | 78% | 281% | 68% |
Net Interest Margin (Annual) | 2.27% | 2.05% | 2.63% | 3.05% | 2.88% |
Net charge-offs (LTM) / Loans | 0.34% | 0.18% | 0.17% | 0.37% | 0.49% |
Common Dividend Payout | 152% | 11% | 32% | 108% | 27% |
CET1 Ratio | 11.6% | 11.4% | 10.6% | 11.4% | 11.0% |
Supplementary Leverage Ratio (SLR) | 8.1% | 6.9% | 6.9% | 7.1% | 6.7% |
Liquidity Coverage Ratio (LCR) | 133% | 118% | 122% | 125% | 125% |
CreditSight View Comment
AS OF 14 Oct 2024Our Outperform view is supported by a) spread value within the Big 6 peer group with WFC anchored at the wide end since SVB, despite trading firmly through bellwether JPM for most of the past decade; b) waning supply risk as a lighter touch Basel III endgame meaningfully reduces issuance needs with WFC the only bank bound by RWA; c) though unlikely to move spreads, when WFC is finally released from the asset cap it will have credible claim to the best-in-class risk management and compliance framework, which we think has real value for bondholders and should reduce headline/noise risk going forward; d) strong fundamental risk profile highlighted by 11%+ CET1 and improved/improving profitability; e) our bullishness on management, with CEO Scharf’s focus on growing cards and markets.
Recommendation Reviewed: October 14, 2024
Recommendation Changed: October 14, 2024
Who We Recommend
ING Groep
Reliance Industries
BNP Paribas
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Fundamental View
AS OF 26 Aug 2024BMO Financial Group is rated Aa2/A+/AA-, but bail-in senior debt for BMO is rated A2 by Moody’s and A- by S&P.
BMO is geographically diversified within Canada & via its commercial banking business in the U.S. BMO has improved its revenue mix by building wealth & capital markets, though the latter has been pressured across the industry over the past year.
Business Description
AS OF 26 Aug 2024- BMO Financial Group is the fourth largest depository institution in Canada with C$1,374 bn in assets as of F2Q24 and a market capitalization of US$61 bn. Total deposits were C$938 bn at F2Q24.
- BMO operates 1,890 branches in Canada and the United States in 2024.
- As of YE23, BMO had 1,015 branches within the United States, mostly in the Midwest. BMO ranked 11th in deposit market share in the U.S. (SNL), with a top-2 share in Illinois.
Risk & Catalysts
AS OF 26 Aug 2024BMO has a strong core deposit base in Canada and in the U.S., which mitigates the potential for a liquidity event.
BMO closed the acquisition of Bank of the West from BNP Paribas in February 2023, significantly expanding its footprint in the U.S. We don’t expect deal integration to have much impact on the credit profile. Capital remains well above requirements following deal closing, with CET1 at 13.1% at F2Q24.
We view real estate-related risk in Canada as manageable for BMO given low LTV of exposures in vulnerable markets and conservative underwriting. Commercial real estate accounts for ~10% of total loans, and office is quite manageable at ~1% of total.
Key Metric
AS OF 26 Aug 2024$ mn | FY20 | FY21 | FY22 | FY23 | LTM 2Q24 |
---|---|---|---|---|---|
Revenue | 17,461 | 20,509 | 26,727 | 21,694 | 23,717 |
Net Income | 3,790 | 6,167 | 10,519 | 3,291 | 4,764 |
ROAE | 0.94% | 0.85% | 0.85% | 0.85% | 0.85% |
NIM | 1.58% | 1.75% | 1.75% | 1.75% | 1.75% |
Net Charge-offs / Loans | 0.25% | 0.14% | 0.08% | 0.14% | 0.21% |
Total Assets | 713,376 | 797,018 | 860,451 | 969,851 | 999,748 |
Unsecured LT Funding | 51,916 | 51,915 | 64,886 | 63,418 | 62,954 |
CET1 Ratio (Fully-Phased-In) | 11.9% | 13.7% | 16.7% | 12.5% | 13.1% |
CreditSight View Comment
AS OF 04 Sep 2024We maintain our Market perform for BMO, with our view largely unchanged by the deal for Bank of the West, now closed. Results in F3Q24 featured solid revenue growth in Canadian P&C, capital markets, and even slight growth in U.S. P&C; however provisions were higher once again as normalization combined with lumpy commercial credits. We still see asset quality as manageable. On valuation grounds with the sector trading in a tight range at the 5Y part of the curve we have a preference for the highest quality names in the group such as RBC and TD, but like BMO relative to Scotia and CIBC.
Recommendation Reviewed: September 04, 2024
Recommendation Changed: August 26, 2020
Who We Recommend
ING Groep
Reliance Industries
BNP Paribas
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Fundamental View
AS OF 26 Aug 2024Goldman Sachs has had solid but mixed results in recent years, with strength in trading results particularly during periods of market volatility. Investment banking results have weakened in line with market conditions but Goldman’s market share remains strong. Investment banking appears to be rebounding in 1H24. The funding profile has improved over time with increased deposit funding.
Goldman remains well behind “Big 6” peers in diversifying its revenue base beyond its historical strong points. Wealth and Asset Management are now the most likely areas of growth in the coming years. Goldman’s results have been weighed by consumer banking exits though those costs are subsiding.
Goldman Sachs’ (A2/BBB+/A) HoldCo long-term debt ratings have stable outlooks.
Business Description
AS OF 26 Aug 2024- Goldman Sachs is now the fifth largest bank holding company in the U.S. with approximately $1.65 tn in assets as of 2Q24 and a market capitalization of $152.9 bn as of Aug 6, 2024.
- Goldman Sachs presents its activities through three business segments: Global Banking & Markets, Asset & Wealth Management, and Platform Solutions.
- Goldman's historical strengths include equity and FICC sales & trading, investment banking, institutional investment management including alternatives, and high net worth wealth management. It has been expanding its wealth management client base, and adding other stable fee income streams amid a sluggish capital market environment.
Risk & Catalysts
AS OF 26 Aug 2024From a fundamental standpoint, the past several years have been a mixed bag. Goldman’s foray into consumer lending was costly and ultimately did not work, diverting capital and management attention away from its core businesses and providing a meaningful drag on profitability. Management through most of the process of selling consumer-related businesses. Goldman’s performance has remained strong in its legacy areas of strength in trading and investment banking.
Goldman could participate in further M&A to achieve its long-term strategic goals, as it has in recent years with mixed results; most likely through add-on deals related to asset/wealth management.
Goldman could be impacted by the lack of liquidity in the secondary markets during periods of market turmoil, but for the most part, has been positively impacted by bouts of volatility.
Key Metric
AS OF 26 Aug 2024$ mn | FY20 | FY21 | FY22 | FY23 | 2Q24 |
---|---|---|---|---|---|
ROAE (annual) | 10.3% | 21.3% | 9.7% | 7.3% | 9.6% |
ROAA (annual) | 0.8% | 1.5% | 0.7% | 0.5% | 0.7% |
PPNR / Avg. Assets | 1.34% | 1.86% | 1.08% | 3.29% | 0.92% |
Efficiency Ratio | 66% | 54% | 65% | 282% | 68% |
Net charge-offs (LTM) / Loans | 0.70% | 0.19% | 0.30% | 0.68% | 0.66% |
Common Dividend Payout | 19.0% | 10.6% | 28.4% | 158.9% | 33.1% |
CET1 Ratio | 14.1% | 13.6% | 15.0% | 14.4% | 14.9% |
Supplementary Leverage Ratio (SLR) | 6.9% | 5.5% | 5.8% | 5.5% | 5.5% |
Liquidity Coverage Ratio (LCR) | 128% | 122% | 129% | 128% | 126% |
CreditSight View Comment
AS OF 16 Oct 2024We maintain our Market perform recommendation for Goldman Sachs; we remain quite comfortable with the name fundamentally but see better value at money center banks as well as Morgan Stanley, given recent spread levels. Goldman should be back to a normal pace of issuance so technicals should not be quite as much of a tailwind going forward as they had been in 2023 and early 2024, though the fundamental picture continues to improve with improved capital markets conditions as well as reduced drag from exited businesses. The SCB beginning in 4Q24 rises to 6.2%, resulting in a CET1 requirement of 13.7%. Results in 3Q24 showed further momentum in the investment banking businesses and particularly strong equities activity; conditions are helping A&WM as well.
Recommendation Reviewed: October 16, 2024
Recommendation Changed: January 12, 2022
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Fundamental View
AS OF 26 Aug 2024We view Morgan Stanley’s credit profile positively, supported by high capital levels, diversification in revenues and continued progress on building out wealth/asset management both organically and through acquisition.
Capital markets revenues were impacted by challenging conditions in 2022-23, but have rebounded nicely thus far in 2024. Wealth Management revenue growth has slowed compared to previous years but remains a solidly profitable and growing business for MS, providing stable and diversified revenues.
Morgan Stanley (A1/A-/A+) was upgraded by Moody’s to A1 on reduced risk of loss from the capital markets business in 2021. The S&P rating was upgraded to A- in May 2022.
Business Description
AS OF 26 Aug 2024- The company is now the sixth largest bank holding company by assets in the U.S. with $1.21 tn of assets as of 2Q24, and is the fifth largest by market capitalization ($150.4 bn as of Aug 7, 2024).
- Morgan Stanley maintains "significant market positions in each of its business segments," which include Institutional Securities, Wealth Management, and Investment Management.
Risk & Catalysts
AS OF 26 Aug 2024Ted Pick took over as CEO in 2024. The runner-up candidates for the job are staying with the company and Gorman is remaining as Executive Chairman, and we don’t expect major strategic changes.
Much of Morgan Stanley’s core business is tied to global macroeconomic trends and investor risk appetite. Additionally, it has significant trading risk and counterparty exposures, though such risk appears well-managed overall and is reflected in capital requirements.
Capital levels are governed by the annual DFAST process and the SCB regime. MS has typically run with capital levels at or near the highest among GSIBs given the trading losses included in the Fed’s model.
Key Metric
AS OF 26 Aug 2024$ mn | FY20 | FY21 | FY22 | FY23 | 2Q24 |
---|---|---|---|---|---|
ROAE (annual) | 12.4% | 14.3% | 10.8% | 9.1% | 10.5% |
ROAA (annual) | 1.0% | 1.3% | 0.9% | 0.8% | 0.9% |
PPNR / Avg. Assets | 1.40% | 1.64% | 1.22% | 4.41% | 1.15% |
Efficiency Ratio | 69% | 66% | 72% | 298% | 74% |
Net charge-offs (LTM) / Loans | 0.05% | 0.05% | 0.01% | 0.06% | 0.04% |
Common Dividend Payout | 20.9% | 25.4% | 46.3% | 215.5% | 53.4% |
CET1 Ratio | 17.4% | 16.1% | 15.3% | 15.2% | 15.2% |
Supplementary Leverage Ratio (SLR) | 7.4% | 5.6% | 5.5% | 5.5% | 5.5% |
Liquidity Coverage Ratio (LCR) | 129% | 134% | 132% | 129% | 131% |
CreditSight View Comment
AS OF 17 Oct 2024We maintain our Market perform recommendation for Morgan Stanley, with our positive view of fundamentals supported by another solid quarter in 3Q24, where Morgan Stanley’s investment banking and trading results continued to improve along with market conditions. We see slightly better valuation among some of the money center banks (increasingly WFC, as well as Citi and BAC) but like MS relative to GS given similar spread levels recently. Performance rebounded in the Wealth segment from a difficult 2023.
Recommendation Reviewed: October 17, 2024
Recommendation Changed: March 14, 2016
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Fundamental View
AS OF 26 Aug 2024Toronto Dominion is rated Aa2/AA-/AA- by Moody’s/S&P/Fitch, but bail-in senior debt for TD is rated A1/A/AA-. S&P and Moody’s assigned a Negative outlook in May 2024, which was associated with the regulatory investigations into TD’s U.S. AML program, while Moody’s maintains a Stable outlook.
TD’s overall credit profile remains stable, supported by diversification by revenue & geography, history of strong risk management & conservative underwriting.
TD still has substantial excess capital above all-in requirements, having built up capital levels in advance of the First Horizon deal that ended up being terminated in 2023.
Business Description
AS OF 26 Aug 2024- Toronto Dominion is the second largest depository institution in Canada with C$1,967 bn in assets as of F2Q24 and a market cap of US$95 bn as of June 17, 2024. The company has C$1,204 bn in total deposits.
- As of 2024, TD ranked 9th in terms of U.S. deposits with approximately US$303.9 bn in deposits and 1,173 branches (SNL). The U.S. footprint is focused on the Atlantic coast including Delaware, New Jersey, New York, Massachusetts, New Hampshire, Connecticut, Maine, Vermont, and Pennsylvania.
Risk & Catalysts
AS OF 26 Aug 2024Toronto Dominion has a strong, largely retail-driven deposit base in both Canada and the U.S., which should mitigate the potential for a liquidity event.
Uncertainties in the ultimate outcome of the regulatory investigations into TD’s AML program in the U.S. as well as the ongoing remediation represent a near-to-medium term headwind on TD’s earnings profile. However, we still view TD as a solid credit and expects the impacts to be manageable, given its solid market position, established presence in the U.S. through past acquisitions, strong financial flexibility, adequate capital and robust liquidity positions.
TD has now taken over US$3 bn in provisions related to BSA/AML investigations, in preparation for a possible global settlement. The impact to capital will be mitigated by sale of a portion of its investment in SCHW.
We view real estate-related risk in Canada as manageable for TD given low LTV of exposures in vulnerable markets and conservative underwriting.
Key Metric
AS OF 26 Aug 2024$ mn | FY20 | FY21 | FY22 | FY23 | LTM 2Q24 |
---|---|---|---|---|---|
Revenue | 30,311 | 31,801 | 35,848 | 33,866 | 35,757 |
Net Income | 8,846 | 11,371 | 13,544 | 7,883 | 8,250 |
ROAE | 1.30% | 0.99% | 0.99% | 0.99% | 0.99% |
NIM | 1.72% | 1.56% | 1.69% | 1.75% | 1.70% |
Net Charge-offs / Loans | 0.34% | 0.18% | 0.15% | 0.24% | 0.30% |
Total Assets | 1,289,484 | 1,394,270 | 1,406,122 | 1,407,709 | 1,430,928 |
Unsecured LT Funding | 55,061 | 67,073 | 88,875 | 90,998 | 90,492 |
CET1 Ratio | 13.1% | 15.2% | 16.2% | 14.4% | 13.4% |
CreditSight View Comment
AS OF 17 Oct 2024We maintain our Outperform recommendation for Toronto Dominion. Historically TD has traded as one of the tightest names in the Canadian bank peer group. However, over the past several quarters TD has traded towards the middle of the pack among Canadian banks, closer to BMO and BNS than to RBC. We continue to believe the best value in the sector in current conditions involves trading up in quality to TD and RBC (which we already rate at Outperform). Despite the more than US$3 bn set aside in provisions, including a moderate net loss in F3Q24, we believe going forward the BSA/AML concerns are largely a manageable earnings headwind and not overly impactful to our long-term view of the credit.
Recommendation Reviewed: October 17, 2024
Recommendation Changed: March 08, 2023