Sector: Financial Services
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Fundamental View
AS OF 25 Mar 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-.
TD’s overall credit profile is 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 25 Mar 2024- Toronto Dominion is the second largest depository institution in Canada with C$1,911 bn in assets as of F1Q24 and a market cap of US$107 bn as of March 21, 2024. The company has C$1,181 bn in total deposits.
- As of 2023, TD ranked 9th in terms of U.S. deposits with approximately US$303.9 bn in deposits and 1,182 branches (SNL). The U.S. footprint is focused on the Atlantic coast including Delaware, New Jersey, New York, Massachusetts, New Hampshire, Connecticut, Maine, Vermont, and Pennsylvania.
Risk & Catalysts
AS OF 25 Mar 2024Toronto Dominion has a strong, largely retail-driven deposit base in both Canada and the U.S., which should mitigate the potential for a liquidity event.
Toronto Dominion has been active in M&A in the U.S., as well as portfolio acquisitions in Canada. In 2023, it completed the acquisition of Cowen, Inc., building out its U.S.-based capital markets business which it has also grown organically in recent years.
The termination of the FHN deal leaves TD with substantial flexibility afforded by the excess capital position (CET1 13.9%) and without a bank deal to integrate in uncertain operating conditions.
We view real estate-related risk in Canada as manageable for TD given low LTV of exposures in vulnerable markets and conservative underwriting.
Key Metrics
AS OF 25 Mar 2024$ mn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Revenue | 30,311 | 31,801 | 35,848 | 33,866 | 34,821 |
Net Income | 8,846 | 11,371 | 13,544 | 7,883 | 8,801 |
ROAE | 1.30% | 1.05% | 1.05% | 1.05% | 1.05% |
NIM | 1.72% | 1.56% | 1.69% | 1.75% | 1.73% |
Net Charge-offs / Loans | 0.34% | 0.18% | 0.15% | 0.24% | 0.27% |
Total Assets | 1,289,484 | 1,394,270 | 1,406,122 | 1,407,709 | 1,428,288 |
Unsecured LT Funding | 55,061 | 67,073 | 88,875 | 90,998 | 81,846 |
CET1 Ratio | 13.1% | 15.2% | 16.2% | 14.4% | 13.9% |
CreditSights View
AS OF 26 Mar 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 still traded towards the tighter end of the sector but there has been less relative spread pickup for moving down in quality to names such as BMO, BNS, and CIBC. We therefore 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). TD has substantial excess capital as a result of the termination of the deal for First Horizon; CET1 was 13.9% at F1Q24.
Recommendation Reviewed: March 26, 2024
Recommendation Changed: March 08, 2023
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Fundamental View
AS OF 25 Mar 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 have been impacted by challenging conditions particularly for investment banking, but profitability has remained solid, helped by the revenue shift to Wealth.
Morgan Stanley (A1/A-/A+) was upgraded to A2 at Moody’s following the E*Trade deal closing and shortly thereafter was upgraded again to A1 on reduced risk of loss from the capital markets business. The S&P rating was upgraded to A- in May 2022.
Business Description
AS OF 25 Mar 2024- The company is now the sixth largest bank holding company by assets in the U.S. with $1.2 tn of assets as of 4Q23, and is the fourth largest by market capitalization ($144.5 bn as of Mar 18, 2024).
- Morgan Stanley maintains "significant market positions in each of its business segments," which include Institutional Securities, Wealth Management, and Investment Management.
Risk & Catalysts
AS OF 25 Mar 2024Ted Pick took over as CEO in 2024. The runner-up candidates for the job are staying with the company and Gorman is remaining as Executive Chairman, and we don’t expect major strategic changes.
Much of Morgan Stanley’s core business is tied to global macroeconomic trends and investor risk appetite. Additionally, it has significant trading risk and counterparty exposures, though such risk appears well-managed overall and is reflected in capital requirements.
Capital levels are governed by the annual DFAST process and the SCB regime. MS has typically run with capital levels at or near the highest among GSIBs given the trading losses included in the Fed’s model.
Key Metrics
AS OF 25 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | 4Q23 |
---|---|---|---|---|---|
ROAE (annual) | 11.1% | 12.4% | 14.3% | 10.8% | 9.1% |
ROAA (annual) | 1.0% | 1.0% | 1.3% | 0.9% | 0.8% |
PPNR / Avg. Assets | 1.27% | 1.40% | 1.64% | 1.22% | 1.04% |
Efficiency Ratio | 72% | 69% | 66% | 72% | 76% |
Net charge-offs (LTM) / Loans | 0.01% | 0.05% | 0.05% | 0.01% | 0.06% |
Common Dividend Payout | 23.9% | 20.9% | 25.4% | 46.3% | 59.3% |
CET1 Ratio | 16.4% | 17.4% | 16.1% | 15.3% | 15.2% |
Supplementary Leverage Ratio (SLR) | 6.4% | 7.4% | 5.6% | 5.5% | 5.5% |
Liquidity Coverage Ratio (LCR) | 134% | 129% | 134% | 132% | 129% |
CreditSights View
AS OF 05 Feb 2024We maintain our Market perform recommendation for Morgan Stanley as we head into 2024. We see better valuation among the money center banks (particularly Citi and BAC). While market conditions have pressured Morgan Stanley’s investment banking revenues in the past year, trading has held up well, notwithstanding a seasonally sluggish 4Q23. Morgan Stanley continues to invest in growth in the Wealth segment, putting some upward pressure on expenses while net interest income pressure and a slowdown in net new asset generation have slowed revenue growth; MS remains confident in its long-term target of ~30% pre-tax margin however.
Recommendation Reviewed: February 05, 2024
Recommendation Changed: March 14, 2016
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Fundamental View
AS OF 25 Mar 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 early 2024. 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 costs related to consumer banking and exits from those businesses.
Goldman Sachs’ (A2/BBB+/A) HoldCo long-term debt ratings have stable outlooks.
Business Description
AS OF 25 Mar 2024- Goldman Sachs is now the fifth largest bank holding company in the U.S. with approximately $1.64 tn in assets as of 4Q23 and a market capitalization of $131.8 bn as of Mar 19, 2024.
- Goldman Sachs presents its activities through three business segments: Global Banking & Markets, Asset & Wealth Management, and Platform Solutions.
- Goldman's historical strengths include equity and FICC sales & trading, investment banking, institutional investment management including alternatives, and high net worth wealth management. It has been expanding its wealth management client base, and adding other stable fee income streams amid a sluggish capital market environment.
Risk & Catalysts
AS OF 25 Mar 2024From a fundamental standpoint, the past several years have been a mixed bag. Goldman’s poorly-executed foray into consumer lending has thus far been a costly blunder, diverting capital and management attention away from its core businesses and providing a meaningful drag on profitability. Management is in the process of selling consumer-related businesses. Goldman’s performance has remained strong in its legacy areas of strength in trading and investment banking.
Goldman could participate in further M&A to achieve its long-term strategic goals, as it has in recent years with mixed results; most likely through add-on deals related to asset/wealth management.
Goldman could be impacted by the lack of liquidity in the secondary markets during periods of market turmoil, but for the most part, has been positively impacted by bouts of volatility.
Key Metrics
AS OF 25 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | 4Q23 |
---|---|---|---|---|---|
ROAE (annual) | 9.4% | 10.3% | 21.3% | 9.7% | 7.3% |
ROAA (annual) | 0.9% | 0.8% | 1.5% | 0.7% | 0.5% |
PPNR / Avg. Assets | 1.20% | 1.34% | 1.86% | 1.08% | 0.75% |
Efficiency Ratio | 68% | 66% | 54% | 65% | 72% |
Net charge-offs (LTM) / Loans | 0.46% | 0.70% | 0.19% | 0.30% | 0.68% |
Common Dividend Payout | 18.2% | 19.0% | 10.6% | 28.4% | 42.2% |
CET1 Ratio | 13.3% | 14.1% | 13.6% | 15.0% | 14.4% |
Supplementary Leverage Ratio (SLR) | 6.2% | 6.9% | 5.5% | 5.8% | 5.5% |
Liquidity Coverage Ratio (LCR) | 127% | 128% | 122% | 129% | 128% |
CreditSights View
AS OF 16 Apr 2024We maintained 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, which we believe have been pulled tighter by a lack of HoldCo issuance by GS since the start of 2023. We see Goldman Sachs as an improving credit story despite messy results in 2023 as it exited a number of consumer-facing businesses, and 1Q24 results were stronger in core business lines within Global Banking & Markets and Asset & Wealth Management with less of a drag from Platform Solutions.
Recommendation Reviewed: April 16, 2024
Recommendation Changed: January 12, 2022
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Fundamental View
AS OF 21 Mar 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 21 Mar 2024- JPMorgan ranks as the largest U.S. bank by total assets ($3.88 tn at 4Q23) and deposits ($2.40 tn at 4Q23).
- JPMorgan ranks 1st in terms of U.S. deposits with approximately $2.07 tn in deposits at YE23 across 4,906 branches (S&P Capital IQ) and a total market share of 13.7%. JPMorgan's footprint includes New York (#1), Texas (#1), California (#2), Illinois (#1), Michigan (#1), Arizona (#1), Ohio (#5), and Florida (#4), among others.
- JPMorgan's major business lines include investment banking, retail banking, card services, treasury & securities services, commercial banking, and asset & wealth management.
Risk & Catalysts
AS OF 21 Mar 2024Succession planning at JPMorgan has a higher profile than many peers, with CEO Dimon (66 year-old) having held the top spot for over 15 years. Another recent round of shuffling top management did not yield much clarity, with presumed frontrunners Marianne Lake becoming sole CEO of the Consumer Bank and Jennifer Piepszak moving over to co-CEO of the new Commercial & Investment Bank segment, alongside Troy Rohrbaugh who has been running Markets & Securities Services.
The sector remains exposed to reputational, legislative/administrative risk, and cyber threats, although the significant tech spend over the past few years should (theoretically) result in a stronger position for JPM to manage the security threats.
Although not likely a credit risk, JPMorgan may continue to be acquisitive around non-bank financial and ancillary services; but we would expect any deal to be conservatively funded and looking to further technology and fee income strategies (e.g. payments or asset management).
Key Metrics
AS OF 21 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | 4Q23 |
---|---|---|---|---|---|
ROAE (annual) | 14.0% | 10.9% | 17.0% | 13.2% | 16.0% |
ROAA (annual) | 1.3% | 0.9% | 1.3% | 1.0% | 1.3% |
PPNR / Avg. Assets | 1.80% | 1.52% | 1.32% | 1.39% | 1.83% |
Efficiency Ratio | 57% | 57% | 59% | 58% | 54% |
Net Interest Margin (Annual) | 2.46% | 1.98% | 1.63% | 2.00% | 2.70% |
Net charge-offs (LTM) / Loans | 0.57% | 0.52% | 0.26% | 0.25% | 0.48% |
Common Dividend Payout | 30% | 38% | 24% | 32% | 24% |
CET1 Ratio | 12.4% | 13.1% | 13.1% | 13.2% | 15.0% |
Supplementary Leverage Ratio (SLR) | 6.3% | 6.9% | 5.4% | 5.6% | 6.1% |
Liquidity Coverage Ratio (LCR) | 116% | 110% | 110% | 110% | 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 21 Mar 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 21 Mar 2024- Wells Fargo ranks as the U.S.'s 4th largest bank by total assets ($1.93 tn at 4Q23) and 3rd largest by total deposits ($1.36 tn).
- Wells Fargo ranks 3rd in terms of U.S. deposits with approximately $1.37 tn in deposits at YE23 and 4,359 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 21 Mar 2024The asset cap and associated regulatory remediation remains a millstone with a wholly unknown timeframe even after years of efforts. There is some risk that Wells could bleed share and franchise value in an economic recovery if loan demand rebounds and the company cannot fully capture the business opportunity due to the asset cap, though so far that has not been the case.
Wells Fargo faces reputational risk tied to those misconduct and business practices scandals, though likely fading with time and remediation progress; at 4Q23, WFC high-end estimable loss above legal accruals was $1.7 bn.
Wells has less fee income diversification as peers, largely due to the much smaller scale of the capital markets businesses and smaller presence in credit cards though the latter is a point of emphasis under Scharf as Wells embarked on aggressive product refreshes.
Key Metrics
AS OF 21 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | 4Q23 |
---|---|---|---|---|---|
ROAE (annual) | 9.9% | 1.8% | 11.4% | 7.3% | 10.5% |
ROAA (annual) | 1.01% | 0.17% | 1.11% | 0.70% | 1.00% |
PPNR / Avg. Assets | 1.39% | 0.72% | 1.26% | 0.91% | 1.42% |
Efficiency Ratio | 70% | 81% | 70% | 78% | 67% |
Net Interest Margin (Annual) | 2.72% | 2.27% | 2.05% | 2.63% | 3.05% |
Net charge-offs (LTM) / Loans | 0.29% | 0.34% | 0.18% | 0.17% | 0.37% |
Common Dividend Payout | 43% | 152% | 11% | 32% | 25% |
CET1 Ratio | 11.1% | 11.6% | 11.4% | 10.6% | 11.4% |
Supplementary Leverage Ratio (SLR) | 7.1% | 8.1% | 6.9% | 6.9% | 7.1% |
Liquidity Coverage Ratio (LCR) | 120% | 133% | 118% | 122% | 125% |
CreditSights View
AS OF 15 Apr 2024We are comfortable with Wells Fargo as a credit; our Market perform view is underpinned by strong credit quality and cheap spreads against broader corporates, and we have an increasingly positive bias on the name especially as the technical supply risk overhang abates with the Basel III endgame looking delayed and watered down. The company remains under the 6-year running asset cap, but we don’t think resolution is necessarily a catalyst; market readthrough may well be for increased issuance to support balance sheet growth after years of the cap, though fundamentally we think Wells would have a very strong claim to the best-in-class risk management and compliance structure among peers.
Recommendation Reviewed: April 15, 2024
Recommendation Changed: April 15, 2022
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Fundamental View
AS OF 11 Mar 2024UnionBank of the Philippines (UBP) is rated Baa2 (neg) by Moody’s. The rating outlook was affirmed at negative in April 2023 due to uncertainty over the bank’s ability to shore up its capital buffers back to levels of domestic and regional peers, after being depleted by its acquisition of Citi’s local retail unit.
The bank has historically generated higher returns than peers, but trading-related income as a key contributor to profits introduces greater volatility to operating performance.
The bank has geared its focus significantly towards the retail segment in recent years, taking the retail proportion of total loans to more than half its total book with the Citi acquisition in 2022. This gives a good boost to core revenues but also brings along higher AQ risks in a growth downturn.
Business Description
AS OF 11 Mar 2024- UnionBank of the Philippines was incorporated in 1968, and listed on the Philippine Stock Exchange in June 1992. Principal shareholders are Aboitiz Equity Ventures (49.66%), Insular Life (16%), & Social Security System (18%).
- UBP undertook mergers with International Corporate Bank in 1994 and International Exchange Bank in 2006. City Savings Bank (a thrift bank) was purchased in Jan 2013. City Savings received merger approval with PR Savings (a bank engaged in motorcycle, agri-machinery, & teachers' salary loans) in Dec 2018 from the BSP. It acquired the Citi Philippines retail franchise in 2022.
- The loan book is broadly split 18% commercial loans, 26% corporate loans, and the remaining 56% retail loans (this includes teachers loans, salary loans and motorcycle loans by the thrift bank subsidiary, City Savings Bank).
Risk & Catalysts
AS OF 11 Mar 2024Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) or reduction of shareholding by Aboitiz Equity Ventures would negatively impact UBP’s credit ratings.
The bank is focusing heavily on the higher yielding retail segments to boost the NIM. This has strengthened topline revenues but brought up normalized credit costs. We have sounded caution given the current macro backdrop of high interest rates and inflation, while the bank’s reserve cover and capital levels are on the thinner side. Credit costs saw a particularly sharp jump in 2H23 and the NPL ratio has risen to ~6.3% from 4.8% a year ago.
We view the Citi acquisition as credit positive in the long term given the latter’s larger scale and greater strength in the upscale consumer market and wealth management businesses, high margins and strong profitability record. The upfront capital impact and integration costs are significant, but the bank benefits from good shareholder support.
Key Metrics
AS OF 11 Mar 2024PHP mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
PPP ROA | 2.26% | 2.68% | 2.59% | 2.17% | 2.31% |
Reported ROA (Cumulative) | 1.9% | 1.5% | 1.6% | 1.3% | 0.8% |
Reported ROE (Cumulative) | 15.3% | 11.5% | 11.5% | 9.7% | 5.6% |
Total Equity/Total Assets | 12.7% | 13.6% | 13.5% | 13.6% | 15.3% |
CET1 Ratio | 13.2% | 15.0% | 16.3% | 11.3% | 13.9% |
Gross NPL Ratio | 3.10% | 5.10% | 5.00% | 4.80% | 6.27% |
Net LDR | 81.2% | 64.3% | 63.1% | 67.4% | 73.8% |
Net Interest Margin | 3.60% | 4.50% | 4.60% | 4.80% | 5.50% |
Liquidity Coverage Ratio | 131% | 207% | 272% | 148% | 163% |
Net Stable Funding Ratio | 106% | 133% | 149% | 124% | 124% |
CreditSights View
AS OF 12 Mar 2024UBP’s NIM and core revenue generation have remained strong despite the challenging operating environment, thanks to its pivot towards higher yielding retail segments via organic growth and acquiring Citi’s local retail portfolio. We see the Citi acquisition as credit positive in the long haul as it provides a significant NIM uplift, but the upfront capital impact and integration costs are significant. We are cautious about asset quality given the heavy focus on growing in high yield retail amid headwinds from high interest rates and inflation, as well as a relatively thin reserve cover. Credit costs have jumped in 2H23 which weighed on the bottomline. We maintain UBP on U/P as it trades tight for its size, and its business model carries higher risks particularly if growth flags.
Recommendation Reviewed: March 12, 2024
Recommendation Changed: April 17, 2020
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Fundamental View
AS OF 08 Mar 2024UBS agreed to acquire Credit Suisse in March 2023 after the latter collapsed following a severe liquidity crisis.
CS was a large and complex organisation, so the integration, and the inevitable associated losses and costs, will dominate UBS’s strategic outlook and financial performance for several years.
However, UBS was able to negotiate substantial downside protection which should shield it from losses at CS.
Away from CS, UBS has reshaped its business model, with a greater emphasis on wealth management and less focus on investment banking, particularly fixed income.
Its earnings remain somewhat dependent on capital market conditions, but its capital, asset quality and profitability ratios have been among the best for European banks.
Business Description
AS OF 08 Mar 2024- Headquartered in Zurich, Switzerland, UBS has private, corporate and institutional clients worldwide and retail clients in Switzerland. It is one of the world's largest wealth managers.
- It completed the acquisition of CS on 12 June 2023. It has promised a strategic update with its 4Q23 earnings but confirmed that it will retain CS’s domestic Swiss bank (Credit Suisse Schweiz AG) and will merge it with its own domestic bank (UBS Switzerland AG) in 2024, keeping the CS brand “for the time being”.
- CS’s holding company (Credit Suisse Group AG) has been merged into UBS Group AG, so that the group has a single holding company, but so far the operating subsidiaries, including UBS AG and Credit Suisse AG, have been kept separate. UBS plans to merge the CS operating subsidiaries into UBS’s in 2024.
- UBS operates through its Corporate Center and four business divisions: Global Wealth Management, Personal & Corporate Banking, Asset Management, and the Investment Bank, plus a new Non-core and Legacy division following the acquisition of CS.
- The Investment Bank has been restructured in recent years to scale back fixed income trading and focus on equities trading and origination & advisory business.
Risk & Catalysts
AS OF 08 Mar 2024The acquisition of CS will be a long and complex process, and the necessary restructuring is likely to result in heavy losses and costs, although UBS has substantial protection, not least in the large negative goodwill.
Litigation costs have been a feature of UBS’s results in recent years, although it has agreed settlements in various cases recently.
A French court imposed fines and civil damages of €4.5 bn ($5.1 bn) in February 2019, which UBS appealed. The Court of Appeal retried the case de novo in March 2021 and reduced the fine to €3.75 mn plus civil damages of €800 mn and confiscation of €1 bn. UBS has appealed again and has set aside reserves of €1.1 bn ($1.2 bn) so far.
Key Metrics
AS OF 08 Mar 2024$ mn | 4Q23 | Y23 | Y22 | Y21 | Y20 |
---|---|---|---|---|---|
Return On Equity | (1.3%) | 40.3% | 13.0% | 12.4% | 11.6% |
Total Revenues Margin | 2.6% | 2.9% | 3.1% | 3.2% | 3.2% |
Cost/Income | 105.7% | 95.0% | 72.1% | 73.6% | 73.0% |
CET1 Ratio (Transitional) | 14.5% | 14.5% | 14.2% | 15.0% | 13.8% |
CET1 Ratio (Fully-Loaded) | 14.5% | 14.5% | 14.2% | 15.0% | 13.8% |
Leverage Ratio (Fully-Loaded) | 5.5% | 5.5% | 5.7% | 5.7% | 5.4% |
Liquidity Coverage Ratio | 216% | 216% | 164% | 155% | 152% |
Impaired Loans (Gross)/Total Loans | n/m | n/m | 0.4% | 0.4% | 0.6% |
CreditSights View
AS OF 17 Apr 2024We have a Market perform recommendation on UBS AG (operating bank) but changed our recommendation on UBS Group (holding company) to Underperform on 10 January 2024. UBS was one of the first investment banks to restructure, exiting much of its fixed income trading business, leaving it with a greater emphasis on wealth management. Its capital and asset quality ratios are among the best for European banks, and it has had no problems complying with Swiss TLAC rules. Its takeover and rescue of Credit Suisse in March 2023 carries significant execution risk, the main reason for our Underperform recommendation, but UBS has substantial downside protection, and we expect its financials to remain relatively sound.
Recommendation Reviewed: April 17, 2024
Recommendation Changed: January 10, 2024
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Fundamental View
AS OF 08 Mar 2024BDO Unibank (BDO) is the largest bank in the Philippines in terms of assets & market share and is rated Baa2(stb)/NR/BBB-(stb).
Given its size and systemic importance, BDO is considered too big to fail and is strongly likely to be supported by its controlling shareholder SM Investments, as well as the Philippine government in times of stress.
BDO is widely viewed as the soundest bank in the country given its strong fundamentals, well-diversified businesses, and good management. Its CET1 ratio is lower than its first-tier peers, BPI and Metrobank, but it is being steadily built up through internal profit generation.
Business Description
AS OF 08 Mar 2024- BDO Unibank was established as Acme Savings Bank in 1968, and was then acquired by SM Investments in 1976. It became a commercial bank in 1994 and a universal bank in 1996.
- BDO was listed in May 2002. SM Investments remains the bank's largest shareholder with a 41% stake.
- BDO has expanded through a series of M&As. Among its key transactions, it merged with Dao Heng Bank Philippines in 2001, Banco Santander Philippines in 2003, UOB Philippines in 2005, Equitable PCI Bank in 2007, GE Money Bank in 2009, Citibank Savings, DB Trust and Real Bank in 2014, One Network Bank in 2015 (the largest rural bank in the Philippines), and RB Pandi's banking business in 2019. It also acquired the insurance business of Generali in the Philippines in 2016.
- BDO has the largest distribution network in the country and is ranked the largest bank in terms of consolidated resources, total assets, loans, deposits and trust funds under management.
- Its loan book is split 50% large corporates, 26% middle market, and 24% consumer at end-December 2023. 47% of the consumer book comprises mortgages, 24% are credit cards, 13% are auto loans and the remaining are personal loans and others.
Risk & Catalysts
AS OF 08 Mar 2024Sustaining or further improving returns will be a challenge without the rates tailwind in 2024, but management is confident of achieving that through good volume growth in loans and CASA this year, while maintaining a stable NIM because of its strong deposit franchise. Credit costs are expected to trend down as well; BDO’s asset quality has held up well in spite of high interest rates and inflation. Its large corporates-focused book (51% of total loans) and build up of loss absorption buffers give comfort.
Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would negatively impact BDO’s credit ratings.
Key Metrics
AS OF 08 Mar 2024PHP mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
NIM | 4.15% | 4.36% | 4.05% | 4.14% | 4.65% |
Reported ROA (Cumulative) | 1.4% | 0.9% | 1.2% | 1.5% | 1.7% |
Reported ROE (Cumulative) | 12.6% | 7.6% | 10.4% | 13.0% | 15.2% |
Equity/Assets | 11.6% | 11.6% | 11.7% | 11.3% | 11.5% |
CET1 Ratio | 12.7% | 13.2% | 13.6% | 13.4% | 13.8% |
NPL ratio | 1.2% | 2.7% | 2.8% | 2.0% | 1.9% |
Provisions/Loans | 0.29% | 1.34% | 0.72% | 0.64% | 0.59% |
PPP ROA | 2.1% | 2.3% | 2.1% | 2.3% | 2.7% |
Liquidity Coverage Ratio | 108% | 127% | 145% | 141% | 123% |
Net Stable Funding Ratio | 117% | 122% | 124% | 124% | 124% |
CreditSights View
AS OF 12 Mar 2024BDO is the largest bank in the Philippines. Management is well-regarded, the business is well-diversified and it is the market leader in many of the business lines. Asset quality and liquidity are well-managed. The NIM has peaked but should remain fairly stable, non-interest income is a third of operating income given good fee generation, and overall core profitability is strong. Management expects to sustain the upward trajectory in returns, which will be tricky in absence of rate tailwinds. Asset quality has been resilient despite high interest rates and inflation. The large corporates book and management’s conservative rebuild of the reserve cover back to >180% provide comfort around asset quality risks. Capital is acceptable with the CET1 ratio at 13.8%.
Recommendation Reviewed: March 12, 2024
Recommendation Changed: November 28, 2023
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Fundamental View
AS OF 08 Mar 2024OCBC’s Aa1/ AA-/ AA- ratings are based on its strong stand-alone credit profile as well as the likelihood of support from the government of Singapore, where OCBC is one of the three large local banks.
The bank is conservatively run, though it was late amongst the Singapore banks to write down its oil & gas exposure in the latter half of the 2010’s.
Its CET1 ratio compares favourably with that of DBS and UOB, and helps to counter the volatility from its insurance business.
Business Description
AS OF 08 Mar 2024- OCBC is one of the three large Singapore banks with business focused on commercial, retail, private banking and insurance in Singapore, SE Asia and Greater China.
- OCBC's origins date back to 1912. Its founding Lee family controls 26% of the shares, though the bank has been professionally managed for many years.
- OCBC has held a stake in Great Eastern Insurance (GE) since the 1960s and in 2006 raised this to 87% as part of its strategy of growing its wealth management businesses.
- It owns an asset-management company, Lion Global Investors. OCBC acquired ING's Asian private banking (PB) business in 2010 and renamed it Bank of Singapore, and added the Barclays Asian PB business in 2016.
- OCBC has a long-standing presence in Malaysia, and is present in Indonesia via Bank OCBC NISP. In China, it has a 20% stake in Bank of Ningbo as well as its own subsidiary. It acquired Hong Kong's Wing Hang Bank in 2014; it is now named OCBC Bank (Hong Kong) Ltd. More recently it acquired CBA's Indonesia business and GE acquired an AmBank-MetLife insurance JV in Malaysia.
Risk & Catalysts
AS OF 08 Mar 2024Asset quality is comfortable with ~20 bp of credit costs and ~SGD 3bn in collective provisions.
In volatile markets, the MTM on its insurance assets has led to lower levels of profitability and the need for OCBC to have a higher CET1 ratio than the other two Singapore majors.
Acquisition risk is high but guidance has been for more of the bolt-on type.
OCBC had a strategy refresh with a focus on the Greater China-ASEAN axis. It aims for SGD 3 bn in incremental revenue by FY25 as a result of new initiatives. Wealth/investments/trade flows are expected to drive 70% of the incremental revenue, and sustainability and new economy the remaining 30%.
Key Metrics
AS OF 08 Mar 2024SGD mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
PPOP / Average Assets | 1.28% | 1.10% | 1.08% | 1.15% | 1.44% |
ROA | 1.26% | 0.85% | 1.13% | 1.21% | 1.46% |
ROE | 11.4% | 7.6% | 9.6% | 11.1% | 13.7% |
Equity to Assets | 9.6% | 9.5% | 9.7% | 9.2% | 9.3% |
CET1 Ratio | 14.9% | 15.2% | 15.5% | 15.2% | 15.9% |
NPL Ratio | 1.50% | 1.50% | 1.50% | 1.20% | 1.00% |
Provision/Loans | 0.35% | 0.78% | 0.33% | 0.21% | 0.25% |
Liquidity Coverage Ratio | 155% | 139% | 151% | 152% | 145% |
Net Stable Funding Ratio | 111% | 125% | 121% | 117% | 116% |
CreditSights View
AS OF 29 Feb 2024OCBC has a strong position in the Singapore banking sector with a good consumer and business banking franchise to which it has added private banking and insurance operations. It has always maintained a strong liquidity and capital position, and its CET1 ratio has typically been the highest of the three majors. In a volatile and inflationary markets environment, its insurance assets MTM has led to lower levels of profitability than the other two Singapore banks. On balance we are more than comfortable with the name given its strong capital and liquidity. Its overall credit metrics are better than UOB but behind DBS. The bank has only 3 $ Tier 2 bonds outstanding. Its recent strategy refresh targets SGD 3 bn in addl. revenue through new initiatives.
Recommendation Reviewed: February 29, 2024
Recommendation Changed: February 25, 2019
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Fundamental View
AS OF 08 Mar 2024UOB’s Aa1/ AA-/ AA- ratings are based on its strong stand-alone credit profile and the high likelihood of support from the government of Singapore, where it is one of the three large local banks.
The bank is more focused on Singapore and Southeast Asia than on Greater China; its traditional strengths are the SMEs and retail sectors, although its corporate book is now ~52% of loans.
UOB has been conservatively managed with a sound risk profile, a strong focus on liquidity and a long track record of relatively good performance.
Business Description
AS OF 08 Mar 2024- UOB was established in 1935 as a Chinese family-owned bank catering to the Hokkien (Fujian) community, Singapore's largest Chinese ethnic sub-group. The Wee family owns about 18% of the shares. A further 5.18% is held by the Lien family which previously controlled Overseas Union Bank, which UOB merged within 2001. The Wee family has significant real estate and hospitality interests in Singapore and regionally.
- UOB's main markets are Singapore and Malaysia where its presence dates back to before Singapore's independence. It expanded through acquisitions in Thailand (Bank Radanasin and Bank of Asia) and Indonesia (Bank Buana), and more recently bought over Citi's consumer franchise in Malaysia, Thailand, Indonesia and Vietnam.
- Franchise strengths are in SME and consumer lending. Building & construction accounts for 27% of loans, followed by housing at 24% and general commerce at 11%.
- Loans by geography comprise Singapore at 49% of loans, Greater China at 16%, Malaysia at 10%, Thailand at 7%, and Indonesia at 3% at end-December 2023.
Risk & Catalysts
AS OF 08 Mar 2024UOB has a greater focus on Southeast Asia than its Singapore bank peers, which leaves it open to more AQ risk in a downturn / higher-for-longer interest rate environment. However, both collateral and UOB’s ~SGD 3 bn in general provisions will be more than sufficient.
Management had said that the bank was on track for an SGD 1 bn revenue uplift in 2023 as a result of the acquisition of Citi’s consumer franchise in four ASEAN markets (Thailand, Vietnam, Indonesia and Malaysia). However, more detail was not provided at 4Q23 results.
Similar to DBS and OCBC, loan growth has been anemic, and in the absence of the Citi consumer franchise would have been well down. The bank is targeting some loan growth at the cost of margin in 1H24; it hopes the latter will improve in 2H24 on lower funding costs.
Key Metrics
AS OF 08 Mar 2024SGD mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
PPP ROA | 1.40% | 1.19% | 1.23% | 1.31% | 1.52% |
ROA | 1.08% | 0.69% | 0.92% | 0.99% | 1.19% |
ROE | 11.6% | 7.4% | 10.2% | 11.9% | 14.2% |
Equity to Assets | 9.8% | 9.5% | 9.3% | 8.6% | 8.8% |
CET1 Ratio | 14.3% | 14.7% | 13.5% | 13.3% | 13.4% |
NPL Ratio | 1.54% | 1.61% | 1.62% | 1.58% | 1.52% |
Provisions / Loans | 0.18% | 0.57% | 0.20% | 0.20% | 0.25% |
Liquidity Coverage Ratio | 146% | 135% | 133% | 147% | 157% |
Net Stable Funding Ratio | 111% | 125% | 116% | 116% | 120% |
CreditSights View
AS OF 23 Feb 2024We are comfortable with the UOB credit – it is conservatively run with a large family ownership and a sound balance sheet. 55% of its loan book is to large corporates and its SME book has reduced as more of its clients grow from the medium to the large corporate segments. Outside Singapore, its main operations are in Thailand, Malaysia and Indonesia which collectively make up ~20% of its loan book. It acquired Citi’s consumer operations in Thailand, Malaysia, Indonesia and Vietnam, has been good for the franchise. FY23 net income growth has been strong thanks to higher NIMs, better trading income, and contributions from the Citi acquisitions. Spreads seem wide for senior (due to illiquidity) and fair for Tier 2.
Recommendation Reviewed: February 23, 2024
Recommendation Changed: July 04, 2017