Sector: Financial Services
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Fundamental View
AS OF 07 Mar 2024Shinhan FG was for many years the best managed of the large Korean financial groups, taking the opportunity around the Asian Financial Crisis to acquire competitors and other businesses that increased its scale and expanded its business lines.
It has a good track record, but in the past few years, its performance has had more variability. After a bumpy 2020, it had a better 2021, and FY22 was better still thanks to rising interest rates. However, operating performance has turned weak again in FY23. NIM is well controlled. Credit costs have increased but are within our expectations. Recurring credit costs are expected to decrease in FY24, but additional provisions may still be needed. Capital is comfortable, but the distance vs. KBFG has increased.
Business Description
AS OF 07 Mar 2024- Shinhan Financial Group (Shinhan FG) is one of the most diversified financial groups in Korea and the holding company of the second largest Korean bank - Shinhan Bank. It also has credit cards, securities, asset management and insurance subsidiaries.
- Shinhan Bank was set up in 1982 with seed capital from Korean residents in Japan. It was more professionally managed than the heavily politicised older banks and came through the 1997 Asian Financial Crisis in relatively good shape, taking the opportunity to acquire the larger and much longer-established Chohung Bank in 2003.
- In 2007, it made another timely acquisition, buying LG Card from its creditors after it failed during the 2003 Korean consumer lending crisis. Shinhan Card is the largest card issuer in Korea.
- Shinhan is also looking for overseas opportunities where growth is strong and Korean businesses have a presence, with a focus on Vietnam (where Shinhan Card also bought a consumer finance business in 2019) and Indonesia. ~30% of Shinhan Bank's overseas loan book is in Japan and China.
Risk & Catalysts
AS OF 07 Mar 2024As one of the “Big Four” financial groups in Korea, we believe Shinhan FG would likely receive governmental support if needed.
Asset quality pressure is rising from domestic real estate project financing and overseas real estate investments, with credit costs rising from very low levels. Management expects recurring credit costs to decrease in FY24, but additional provisions may still be needed due to regulators’ guidance for financial institutions to take a more conservative stance on provisioning.
Shinhan FG had some relatively recent missteps, with the mis-selling of asset management products to retail investors, resulting in KRW 63 bn in fines in 1Q21. The Shinhan Securities senior management was replaced as a consequence.
The group is under investigation for mis-selling equity linked products to retail investors in 2021; fines and regulatory actions may ensue.
Key Metrics
AS OF 07 Mar 2024KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 1.19% | 1.09% | 1.11% | 1.10% | 1.23% |
ROA | 0.64% | 0.60% | 0.66% | 0.72% | 0.66% |
ROE | 9.4% | 8.4% | 9.2% | 10.0% | 8.6% |
Provisions/Average Loans | 0.32% | 0.43% | 0.28% | 0.34% | 0.78% |
NPL Ratio | 0.52% | 0.49% | 0.39% | 0.41% | 0.56% |
CET1 Ratio | 11.20% | 12.90% | 13.10% | 12.79% | 13.13% |
Equity/Assets | 7.1% | 7.3% | 7.3% | 7.6% | 7.8% |
Net Interest Margin | 2.00% | 1.80% | 1.81% | 1.96% | 1.97% |
CreditSights View
AS OF 30 Apr 2024Shinhan FG is one of the four nation-wide commercial banking groups in Korea, with credit card and insurance arms. It had over many years the best operating track record, but the gap has narrowed and we now view Shinhan as overtaken by KB and Hana. 2023 has been challenging, as topline revenue growth was more than offset by increasing operating expenses and provisions. Asset quality is under pressure with the high NPL ratio among the four FGs. In the recent quarter, its CET1 ratio has declined but remained slightly above its 13% target.
Recommendation Reviewed: April 30, 2024
Recommendation Changed: September 22, 2020
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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Fundamental View
AS OF 07 Mar 2024Woori FG’s performance record had been less consistent than some of its more commercially focused peers, but improved in FY21-22.
However, its FY23 performance lagged behind its peers, being affected by not only the kitchen sinking provisioning exercise but also uniquely amongst the FGs, taking a hit on its other non-interest income.
Asset quality was a strength with the lowest NPL ratios and credit costs among the four FGs but has deteriorated since 2Q23. Capital standing is a relative weakness with the CET 1 ratio at 11.9% compared to 13.1-13.6% at peers.
The company signed an agreement with KDIC to purchase all of Woori FG’s shares owned by KDIC (current ownership ~1.2%) by 2024. Government support continues to be assured if required.
Business Description
AS OF 07 Mar 2024- Woori's predecessor banks were rescued by the Korea Deposit Insurance Corporation (KDIC) following the 1997 Asian Financial Crisis.
- Woori Bank is one of the 'Big Four' commercial banks in Korea. It previously owned two regional banks, Kwangju and Kyongnam, but these were spun off in 2014. Woori also sold its stake in Woori Investment Securities and its savings bank and life insurance arms to NH Financial Group.
- Woori set up a HoldCo (Woori FG) in January 2019 to expand into more diversified business lines, particularly investment banking. It used to have a HoldCo, but it was dissolved in 2014 when it was merged with Woori Bank.
- Its main subsidiaries are 100%-owned Woori Card, Woori Financial Capital (auto leasing), Woori Investment Bank and 72.3%-owned Woori Asset Trust. The group wants to acquire more non-bank financial businesses, particularly in the securities and insurance segments.
Risk & Catalysts
AS OF 07 Mar 2024Woori FG was for many years majority-owned by the Korean government via the Deposit Insurance Corporation (KDIC), but KDIC has steadily been selling down its shareholding, and Woori will purchase all the remaining shares by 2024. That said, Woori FG remains a large, systemically important bank with strong potential government backing if needed.
Woori FG is less diversified than its peers, with most of its earnings coming from the bank and small contributions from the card and leasing businesses. It has been looking for acquisitions, but it has to be particularly mindful of its CET1 ratio, which is still the lowest among the four FGs.
Due to new regulatory guidance on stress buffers, Woori FG has adjusted its mid-to-long-term CET1 ratio target from 12% to 13% in 4Q23.
The group is under investigation for mis-selling equity linked products to retail investors in 2021; fines and regulatory actions may ensue.
Key Metrics
AS OF 07 Mar 2024KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 0.90% | 0.75% | 0.99% | 1.15% | 1.10% |
ROA | 0.58% | 0.47% | 0.72% | 0.76% | 0.68% |
ROE | 9.4% | 7.1% | 11.5% | 12.7% | 10.5% |
Provisions/Loans | 0.14% | 0.28% | 0.17% | 0.26% | 0.53% |
NPL Ratio | 0.45% | 0.42% | 0.30% | 0.31% | 0.35% |
Woori Bank CET1 Ratio | 11.0% | 13.1% | 13.0% | 12.7% | 13.2% |
Equity/Assets | 7.05% | 6.70% | 6.45% | 6.58% | 6.71% |
Net Interest Margin Bank + Card | 1.70% | 1.57% | 1.62% | 1.84% | 1.82% |
CreditSights View
AS OF 30 Apr 2024Woori FG was for some years the weakest of Korea’s Big 4 Financial Groups with a less consistent track record of managing risk and returns. Operating performance had shown an improvement for the past few years but disappointed in FY23, with net income down 19.9% YoY due to weaker non-interest income and higher provisions. Woori FG has a lower CET 1 ratio target of 13%. Its rapidly growing corporate loan book may lead to higher RWA growth and make it less likely for its CET1 ratio to catch up with its peers in the near future. The group is assessing opportunities to bolster its non-bank competitiveness and is considering an entry into new sectors, such as insurance.
Recommendation Reviewed: April 30, 2024
Recommendation Changed: April 24, 2017
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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Fundamental View
AS OF 07 Mar 2024Hana Financial Group (Hana FG) had struggled for several years to make a success of its acquisition of the former Korea Exchange Bank, but from 2015, results improved dramatically as revenues grew and cost efficiencies improved.
It has produced particularly strong results since 2020 and is the most improved of the financial groups; we see improved capital adequacy and comfortable provisioning in the latest quarter, although reduced NIMs, one-off costs and increased provisions led to a 50.5% QoQ fall in 4Q23 net income.
The group is looking for inorganic growth in its non-bank businesses as it has fallen behind Shinhan FG and KBFG in this area, but has so far shied away from a large acquisition.
Business Description
AS OF 07 Mar 2024- Hana FG is the third-largest financial group in South Korea. From small origins as a finance company in the 1970s, after the 1997 Asian crisis, Hana grew by acquiring three other banks, including the much older Seoul Bank, which had a banking and trust management business.
- Hana FG bought Korea Exchange Bank (KEB) from Lone Star in 2012 after overcoming many hurdles, but could not merge it with Hana Bank until 2015 due to staff union opposition.
- Hana FG's overseas business is smaller than peers and is complemented by KEB's extensive international operations. KEB was started in 1967 as a government-owned bank specialising in foreign exchange. It has a leading share in FX transactions and trade finance among Korean banks.
- Hana FG has shown good growth in its credit card and securities non-bank businesses, but is less diversified than its larger peers KB and Shinhan, which have also acquired insurance companies. Its latest acquisition (in 2019) was a 15% stake in Vietnam's state-owned Bank for Investment & Development (BIDV). Hana FG has recently decided not to proceed with the acquisition of KDB Life Insurance after two months of due diligence.
Risk & Catalysts
AS OF 07 Mar 2024Similar to peers, Hana FG’s credit costs crept up to 39 bp in FY23 (FY22: 31 bp) but below our expectations; kitchen sinking has taken place to avoid more costs related to domestic PF and international CRE exposure.
The group’s NIM performance has been weaker than peers this year and is expected to continue to fall without any meaningful improvement expected in the foreseeable future.
The group NPL coverage ratio was lower than peers at 162% vs 180% at peers (still comfortable, though).
Hana FG took provisions in 4Q19 for a JV investment with China Minsheng Investment and for potentially mis-selling high-risk investment funds to retail investors, and in 2Q20 for private equity exposure, with limited further details. Some fines/regulatory action is expected due to the mis-selling of equity linked securities to retail investors in 2021.
Key Metrics
AS OF 07 Mar 2024KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 0.99% | 1.07% | 1.07% | 1.10% | 1.11% |
ROA | 0.60% | 0.61% | 0.74% | 0.66% | 0.59% |
ROE | 8.8% | 9.0% | 10.9% | 10.1% | 9.0% |
Provisions/Loans | 0.27% | 0.30% | 0.16% | 0.34% | 0.45% |
NPL Ratio | 0.48% | 0.40% | 0.32% | 0.34% | 0.49% |
CET1 Ratio | 12.0% | 12.0% | 13.8% | 13.2% | 13.2% |
Equity/Assets | 6.7% | 6.7% | 6.8% | 6.4% | 6.6% |
Net Interest Margin | 1.75% | 1.60% | 1.66% | 1.83% | 1.82% |
CreditSights View
AS OF 30 Apr 2024Hana FG grew through acquisitions but only in 2015 was it able to merge its two main bank units to form KEB-Hana Bank. Hana’s management has a good record but for some years struggled to extract value from its acquisitions. The group reported a decline in credit cost to 25 bp in 1Q24, benefiting from the base eff ect of last year’shigh provisioning and some loss recovery at Hana Bank. Nonetheless, As the group anticipates restructuring in Q2 and Q3, starting with bridge loans, it is preparing for more aggressive provisioning. In 1Q24, the group’s CET1 ratio declined by 34 bp to 12.88% QoQ due to the FX impact of KRW depreciation and ELS provisioning, but remained well above regulatory requirements.
Recommendation Reviewed: April 30, 2024
Recommendation Changed: April 24, 2017
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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Fundamental View
AS OF 07 Mar 2024Mizuho (A1/A-/A-) undertook large restructuring charges in FY18 to improve its weak returns. Its performance improved in FY20 and FY21, though a series of Japan IT system failures was a distraction. FY22 was a mixed year due to challenging revenue growth, but 3Q23 has been better.
Mizuho’s CET1 ratio buffer has improved but is somewhat low at 1.6%, but is acceptable given comfortable asset quality metrics.
As one of the three megabanks, Mizuho’s credit standing benefits from a strong expectation of government support, if needed.
Business Description
AS OF 07 Mar 2024- Mizuho is just about the third largest by asset size among Japan's three megabanks. It was formed in 2000 through the merger of the former "City" banks, Fuji and Dai-Ichi Kangyo, and the Industrial Bank of Japan, a provider of long-term industrial credit financed by bond issues.
- Its main units are Mizuho Bank and Mizuho Trust & Banking (focusing on asset management and related services). The group's other main business is Mizuho Securities, a leading player in debt capital markets in Japan and the US.
- It expanded in North America in 2015 by acquiring assets and staff from RBS and has successfully captured more markets and commercial banking business in conjunction with its securities arm. It also acquired Greenhill, a boutique M&A firm, in 2023.
- Mizuho is less diversified than its peers by product segment and has historically been more corporate focused.
Risk & Catalysts
AS OF 07 Mar 2024Asset quality has been benign and not much affected by COVID-19 up to and throughout FY21; credit costs in FY22 decreased to a low 8 bp of loans and down to a further 1 bp in 9M23.
The CET1 ratio (fully Basel III compliant and ex-security gains) is 1.6% above the 8% regulatory minimum, which is fairly low level but acceptable for now given benign asset quality.
FY22 was a mixed year for Mizuho as the bottomline was propped up by reduced credit costs, while revenue growth continued to be anemic as was the case over the previous few years. 9M23 has been helped by a large trading beat.
Mizuho has correctly started to make investments in building its capabilities (Greenhill/Rakuten), which it had shied away from for a 7-8yr period due to low capital levels and a focus on reducing expenses.
Key Metrics
AS OF 07 Mar 2024¥ bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
---|---|---|---|---|---|
Net Interest Revenue/Ave Assets | 0.36% | 0.42% | 0.44% | 0.41% | 0.35% |
Operating Income/Average Assets | 1.02% | 1.03% | 1.01% | 0.96% | 1.05% |
Operating Expense/Operating Income | 67% | 64% | 62% | 63% | 59% |
Pre-Impairment Operating Profit / Average Assets | 0.33% | 0.37% | 0.38% | 0.34% | 0.43% |
Loan impairment (charge) or reversal/ave. loans | (0.21%) | (0.25%) | (0.28%) | (0.10%) | (0.02%) |
ROAA | 0.22% | 0.22% | 0.24% | 0.23% | 0.34% |
ROAE | 5.2% | 5.3% | 5.8% | 6.1% | 9.0% |
CET1 Ratio excl. unrealised securities gains in AOCI | 11.0% | 10.5% | 11.5% | 11.3% | n/m |
CreditSights View
AS OF 20 Feb 2024Mizuho has historically trailed its peers on profitability and capital, as the merger that formed it included the former IBJ, a large wholesale bank with thin profit margins. Low profitability and capital prevented investments in new opportunities. FY20-21 saw good improvements in net interest income and mostly lower credit costs vs. peers. Credit costs related to Russia in 4Q21 and Japan corps in 1Q22 affected results but were better subsequently. Previous issues with its Japan IT system have not resurfaced recently. CET1 capital has a ~1.7% buffer which is low but acceptable. Mizuho was the improved megabank over FY20-21. FY22 net income declined, but 9M23 has seen a jump due to better trading revenues and low credit costs. It has finally restarted investments in new product/M&A.
Recommendation Reviewed: February 20, 2024
Recommendation Changed: December 05, 2022
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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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 Metrics
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 |
CreditSights View
AS OF 08 Apr 2024MUFG is the largest of the megabanks with more diversified business lines. Digitalisation and operational efficiency improvements are underway and efficiency has improved over the past 2-3 years, particularly with the sale of Union Bank in the US. Acquisitions have become more targeted. Capital levels are adequate, $ liquidity is the best amongst the megabanks, and government support is assured. Lending discipline is helping lift international margins, which are now well higher than the other two. Divisional performance was reasonable in 9M23. Its ~20% shareholding in Morgan Stanley has been a boon. We have a Market perform recommendation on MUFG.
Recommendation Reviewed: April 08, 2024
Recommendation Changed: January 02, 2024
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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Fundamental View
AS OF 04 Mar 2024Bank of the Philippine Islands (BPI), the 3rd largest bank in the Philippines by assets, is rated Baa2(stable)/BBB+(stable)/ BBB-(stable).
We view the bank as too big to fail given its systemic importance in the country. There is also a strong probability of support from the government in addition to its main shareholder, the Ayala Corporation if needed.
BPI has a long history, and we view it as a fundamentally sound bank with prudent capitalization, well-managed asset quality, stable profitability, and comfortable liquidity.
Business Description
AS OF 04 Mar 2024- The history of the Bank of the Philippine Islands traces back to 1851. It is the oldest bank in the Philippines and South East Asia. It was first listed on the Philippine Stock Exchange in 1971, and became a universal bank in 1982.
- Ayala Corporation, one of the biggest conglomerates in the country, became BPI's dominant shareholder in 1969. Ayala Corp still holds a 49% stake in the bank.
- BPI has been acquisitive across the years. It merged with Far East Bank and Trust Company and acquired Ayala Insurance Holdings Corp in 2000. It acquired DBS Bank Philippines in 2001 and Prudential Bank Philippines in 2005. DBS was a shareholder of BPI but exited its position in 2013. More recently in 2022, it announced the acquisition of the Gokongwei conglomerate's Robinsons Bank.
- The bank is predominantly a corporate bank with 77% of its loan book outstanding to corporates, 1% to SMEs and 22% to retail as of YE23. The longer term target is to grow the retail and SME segment to a 30% share of loans.
Risk & Catalysts
AS OF 04 Mar 2024Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would have a negative impact on BPI’s credit ratings.
BPI’s asset quality has remained fairly resilient from risks posed by high interest rates. The recent focus on unsecured retail growth in order to gain market share and support the NIM when the interest rate cycle turns has put pressure on asset quality, but within acceptable levels thus far. Loss absorption buffers as well as provisioning capacity are strong, and the predominantly large corporate-focused loan book (~77% of total loans) is a key credit strength.
Loan growth appears to be gaining momentum after a sluggish 9M23, particularly in the corporate capex space. The acquisition of Robinsons Bank opens BPI up to new customer segments such as teachers and motorcycle loans, although the current footprint is small.
The rate cutting cycle is likely to commence in 2H24 which will have a net negative impact on the NIM, but the effect is likely to come through only in 2025.
Key Metrics
AS OF 18 Mar 2024PHP mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
PPP ROA | 2.05% | 2.42% | 2.01% | 2.41% | 2.52% |
Reported ROA (Cumulative) | 1.38% | 0.98% | 1.10% | 1.59% | 1.93% |
Reported ROE (Cumulative) | 11.0% | 7.7% | 8.4% | 13.1% | 15.4% |
Net Interest Margin | 3.30% | 3.49% | 3.30% | 3.59% | 4.09% |
CET1 Ratio | 15.2% | 16.2% | 15.8% | 15.1% | 15.3% |
Total Equity/Total Assets | 12.2% | 12.5% | 12.1% | 12.2% | 12.4% |
NPL Ratio | 1.66% | 2.68% | 2.49% | 1.76% | 1.84% |
Provisions/Loans | 0.39% | 1.94% | 0.91% | 0.58% | 0.22% |
Liquidity Coverage Ratio | 167% | 232% | 221% | 195% | 207% |
Net Stable Funding Ratio | 131% | 154% | 155% | 149% | 154% |
CreditSights View
AS OF 19 Mar 2024BPI is a fundamentally sound bank. Its traditionally more conservative approach has led to a loss of market share in loans and deposits in the past, as well as a lower NIM than BDO and MBT. However, it has taken a well-balanced approach towards growth during and post-pandemic, and improved its NIM and profitability well partly by shifting the loan mix towards retail. It is continuing with digital investments which have driven growth and efficiency. High interest rates and brisk growth in unsecured retail present asset quality risks, but levels are currently well-controlled. Loan growth was sluggish but has started to show signs of improved momentum. We like BPI’s large corporate-focused book, comfortable capital and loss absorption buffers, and provisioning capacity.
Recommendation Reviewed: March 19, 2024
Recommendation Changed: August 19, 2022
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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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 Metrics
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 |
CreditSights View
AS OF 02 Feb 2024SMFG’s banking business had performed well, while its non-bank subsidiaries had underperformed over FY21-22. The bank has had a better 3Q vs a poor 1H23, with improved trading and fee revenues, partially offset by higher credit costs at the non-bank businesse. 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, 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 spreads are now ~30 bp behind the Korean banks which we see as slightly wide, but not sufficient to change the recommendation; we see the differential as ~20 bp,
Recommendation Reviewed: February 02, 2024
Recommendation Changed: January 02, 2024
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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Fundamental View
AS OF 14 Feb 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 14 Feb 2024- BMO Financial Group is the fourth largest depository institution in Canada with C$1,293 bn in assets as of F4Q23, with a market capitalization of C$70 bn. Total deposits were C$910 bn at F4Q23.
- BMO operates 1,892 branches in Canada and the United States as of fiscal 4Q23.
- As of F4Q23, BMO had 1,022 branches within the United States, mostly in the Midwest. BMO ranked 11th in deposit market share in the U.S. (SNL), with a top-2 share in Illinois.
Risk & Catalysts
AS OF 14 Feb 2024BMO has a strong core deposit base in Canada and in the U.S., which mitigates the potential for a liquidity event.
BMO closed the acquisition of Bank of the West from BNP Paribas in February 2023, significantly expanding its footprint in the U.S. We don’t expect deal integration to have much impact on the credit profile. Capital remains well above requirements following deal closing, with CET1 at 12.5% at F4Q23.
We view real estate-related risk in Canada as manageable for BMO given low LTV of exposures in vulnerable markets and conservative underwriting. Commercial real estate accounts for ~10% of total loans, and office is quite manageable at ~1% of total.
Key Metrics
AS OF 14 Feb 2024$ mn | FY19 | FY20 | FY21 | FY22 | LTM 4Q23 |
---|---|---|---|---|---|
Revenue | 17,137 | 17,461 | 20,509 | 26,727 | 21,694 |
Net Income | 4,333 | 3,790 | 6,167 | 10,519 | 3,246 |
ROAE | 1.18% | 0.94% | 0.59% | 0.59% | 0.59% |
NIM | 1.65% | 1.58% | 1.59% | 1.59% | 1.59% |
Net Charge-offs / Loans | 0.14% | 0.25% | 0.14% | 0.08% | 0.14% |
Total Assets | 647,624 | 713,376 | 797,018 | 835,374 | 931,165 |
Unsecured LT Funding | 62,002 | 51,916 | 51,915 | 64,886 | 63,418 |
CET1 Ratio (Fully-Phased-In) | 11.4% | 11.9% | 13.7% | 16.7% | 12.5% |
CreditSights View
AS OF 29 Feb 2024We maintain our Market perform for BMO, with our view largely unchanged by the announcement of the deal for Bank of the West, now closed. Results in F1Q24 remained noisy for another quarter and core results were somewhat weaker than expected as Capital Markets revenues were slow and provisions continued to reflect credit normalization and impacts from higher rates. BMO has successfully integrated U.S. acquisitions over the past decade. 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: February 29, 2024
Recommendation Changed: August 26, 2020
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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Fundamental View
AS OF 07 Feb 2024State Bank of India (SBI) is the largest state-owned bank in India and is in some respects the country’s flagship bank. Given the bank’s ~57% government ownership and systemic importance, government support for SBI is very strong.
It is rated Baa3(sta)/BBB-(sta)/BBB-(sta), the same as India’s sovereign ratings. Fitch revised its outlook to stable from negative while affirming its BBB- rating in June 2022. A sovereign downgrade to HY would be the greatest credit risk, but we assess that risk as low.
The bank’s capital buffers are relatively low, but we take comfort in the strong government support.
Business Description
AS OF 07 Feb 2024- State Bank of India is the largest commercial bank in India. Its predecessor banks date back to the 19th century. In the early 20th century, they merged to form the Imperial Bank of India, which became the State Bank of India after India gained independence in 1947.
- The Government of India remains the largest shareholder with a 56.92% stake. Per the SBI Act, the government's shareholding cannot fall below 55%.
- SBI's merged with its 5 associate banks and Bharatiya Mahila Bank in 2018. The merger catapulted SBI into one of the world's 50 largest banks.
- The bank has 85% of its loans in the domestic market, and has steadily increased its international business too over the past few years with offices across all international business centres. The domestic book is split 43% retail, 34% corporates, 14% SMEs and 10% to the agri segment.
- It has diversified its operations with well regarded subsidiaries in the areas of fund management, credit cards, insurance, and capital markets.
Risk & Catalysts
AS OF 07 Feb 2024SBI does not have a strong buffer vs. the regulatory minimum of 8%, but its size, systemic importance and majority government shareholding confer particularly strong government support. But consequentially, any deterioration in the sovereign ratings will also affect the bank’s credit.
Increasing consolidation in the country’s financial space may narrow the gap between SBI’s market leading position vs its peers, particularly HDFC Bank.
Asset quality is trending well but net slippages should normalize. Similar to the other PSBs, SBI has a large SME and mid-corporate book which could be impacted disproportionately by higher rates. However, SBI’s asset quality is better than the other PSBs and it is also better run due to the high caliber of its management team.
Key Metrics
AS OF 07 Feb 2024INR mn | FY20 | FY21 | FY22 | FY23 | 9M24 |
---|---|---|---|---|---|
NIM | 2.97% | 3.04% | 3.12% | 3.37% | 3.28% |
ROAA | 0.38% | 0.48% | 0.67% | 0.96% | 0.94% |
ROAE | 6.4% | 8.4% | 11.9% | 16.5% | 15.5% |
Equity to Assets | 5.9% | 5.6% | 5.6% | 5.9% | 6.2% |
CET1 Ratio | 10.1% | 10.3% | 10.3% | 10.6% | 9.4% |
Gross NPA Ratio | 6.15% | 4.98% | 3.97% | 2.78% | 2.42% |
Provisions/Loans | 1.83% | 1.77% | 0.91% | 0.54% | 0.13% |
PPP ROA | 1.79% | 1.65% | 1.58% | 1.59% | 1.51% |
CreditSights View
AS OF 05 Feb 2024SBI is India’s largest bank and a well-run franchise. Government support underpins SBI’s relative positioning, while fundamentally, it has the lowest net NPA, a good CASA ratio, a sufficient (though could be higher) CET1 ratio, good operating metrics and business plans, and the best management among the public sector banks. We like the SBI name for what it offers. FY23 performance was solid with good NIM expansion, loan growth, and asset quality. Profitability has not improved as well as peers in FY24 due to one-off salary and pension-related charges, but benign credit costs and robust loan growth on the back of India’s macro resiliency have sustained return levels. Better liquidity buffers than private sector peers should also limit NIM downside from the tight liquidity environment.
Recommendation Reviewed: February 05, 2024
Recommendation Changed: December 07, 2020
Who We Recommend
Korea Gas Corp.
BDO Unibank
Reliance Industries
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Fundamental View
AS OF 05 Feb 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 05 Feb 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 05 Feb 2024ING has determinedly managed down its Russian exposure although we may expect a slower pace of reduction from now on.
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. This is lower than its current level of above 14%, but its target implies a management buffer (including P2G) of around 150 bp over its fully-loaded CET1 requirement.
Customer deposits fund 64% of ING’s balance sheet. 85% of deposits are insured.
Commercial Real Estate exposure is €48 bn or 6% of total loans, of which US office exposure stands at €1.3 bn. The NPL ratio of the book is 2.0%.
Key Metrics
AS OF 05 Feb 2024€ mn | 4Q23 | Y23 | Y22 | Y21 | Y20 |
---|---|---|---|---|---|
Return On Equity | 12.1% | 14.4% | 7.1% | 8.8% | 4.6% |
Total Revenues Margin | 2.2% | 2.3% | 1.9% | 2.0% | 1.9% |
Cost/Income | 56.9% | 51.2% | 60.3% | 60.5% | 63.2% |
CET1 Ratio (Transitional) | 14.7% | 14.7% | 14.5% | 15.9% | 15.5% |
CET1 Ratio (Fully-Loaded) | 14.7% | 14.7% | 14.5% | 15.9% | 15.5% |
Leverage Ratio (Fully-Loaded) | 5.0% | 5.0% | 5.1% | 5.9% | 4.8% |
Liquidity Coverage Ratio | 143% | 143% | 134% | 139% | 137% |
Impaired Loans (Gross)/Total Loans | 1.8% | 1.8% | 1.8% | 1.8% | 2.1% |
CreditSights View
AS OF 20 Mar 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.
Recommendation Reviewed: March 20, 2024
Recommendation Changed: October 15, 2015