Sub-sector: Banks
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Fundamental View
AS OF 22 Aug 2024Shinhan FG was the best-managed of the large Korean financial groups over many years. During the Asian Financial Crisis, it took advantage of the opportunity to acquire competitors and other businesses, increasing its scale and expanding its business lines.
Its performance has been more variable in the past few years. After a bumpy 2020, it had a better FY21 and FY22, thanks to rising interest rates. However, operating performance turned weak again in FY23. 1H24 showed some recovery.
Credit costs have increased mainly due to real estate project financing, but are within our expectations. Capital is comfortable.
Business Description
AS OF 22 Aug 2024- Shinhan Financial Group (Shinhan FG) is one of Korea's most diversified financial groups 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.
Risk & Catalysts
AS OF 22 Aug 2024As one of Korea’s “Big Four” financial groups, we believe Shinhan FG would likely receive governmental support if needed.
Asset quality pressure has been rising from domestic real estate project financing and overseas real estate investments, with credit costs rising from very low levels. Management expects credit costs to slightly improve in 2H24, but additional provisions may still be needed due to regulators’ guidance for financial institutions to take a more conservative stance on provisioning.
NIMs fell in 2Q24 with inevitably further downward pressure in 2H, given the potential policy rate cuts and LCR regulation adjustments.
Key Metric
AS OF 22 Aug 2024KRW bn | FY20 | FY21 | FY22 | FY23 | 1H24 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 1.09% | 1.11% | 1.10% | 3.89% | 1.38% |
ROA | 0.60% | 0.66% | 0.72% | 0.66% | 0.79% |
ROE | 8.4% | 9.2% | 10.0% | 8.6% | 10.7% |
Provisions/Average Loans | 0.43% | 0.28% | 0.34% | 0.78% | 0.47% |
NPL Ratio | 0.49% | 0.39% | 0.41% | 0.56% | 0.68% |
CET1 Ratio | 12.90% | 13.10% | 12.79% | 13.17% | 13.05% |
Equity/Assets | 7.3% | 7.3% | 7.6% | 7.8% | 7.5% |
Net Interest Margin | 1.80% | 1.81% | 1.96% | 5.91% | 1.97% |
CreditSight View Comment
AS OF 29 Jul 2024We have a Market perform recommendation on Shinhan FG and the bank. Shinhan FG is one of the four nation-wide commercial banking groups in Korea, with a leading credit card arm. It had over many years the best operating track record, but now we see its operating performance as in line with its peers. FY23 was challenging, as topline revenue growth was more than offset by increasing operating expenses and provisions. 1H24 has been better, helped by solid loan growth, strong fee income and normalizing provisions. The group’s CET 1 ratio at 2Q24 was just above its target 13%, which management views as an appropriate level.
Recommendation Reviewed: July 29, 2024
Recommendation Changed: September 22, 2020
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Fundamental View
AS OF 22 Aug 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, affected by not only the kitchen sinking provisioning exercise but also uniquely amongst the FGs, taking a hit on its other non-interest income. 1H24 results were decent, partially thanks to not having the ELS compensation issue which hit the other three FGs.
Asset quality used to be a strength with the lowest NPL ratios and credit costs among the four FGs but has deteriorated since 2Q23, and we no longer see a gap with the other FGs.
Capital standing is a relative weakness with the CET 1 ratio at 12.0% compared to 12.8-13.6% at peers in 2Q24.
Business Description
AS OF 22 Aug 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 Korea's 'Big Four' commercial banks. 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. Recently the group acquired Korea Foss Securities, with a plan to merge it with Woori Investment to create a new securities entity. The group is in discussions to acquire an insurance company.
Risk & Catalysts
AS OF 22 Aug 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 purchased and cancelled the remaining shares in 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. The group has accelerated its M&A pace, acquiring Korea Foss Securities this year and doing due diligence on an insurance target.
Its CET 1 ratio is ~1% behind the other three FGs. Due to new regulatory guidance on stress buffers, Woori FG has adjusted its CET1 ratio target from 12% to 13%. Given the group’s business expansion plans, the group’s CET 1 ratio is expected to remain behind the peers at least until 2025.
Key Metric
AS OF 22 Aug 2024KRW bn | FY20 | FY21 | FY22 | FY23 | 1H24 |
---|---|---|---|---|---|
Pre-Provision Profit ROA | 0.75% | 0.99% | 1.15% | 1.10% | 1.26% |
ROA | 0.40% | 0.66% | 0.70% | 0.54% | 0.71% |
ROE | 5.9% | 10.6% | 11.5% | 8.3% | 10.8% |
Provisions/Loans | 0.28% | 0.17% | 0.26% | 0.53% | 0.42% |
NPL Ratio | 0.42% | 0.30% | 0.31% | 0.35% | 0.56% |
Woori Bank CET1 Ratio | 13.1% | 13.0% | 12.7% | 13.2% | 13.2% |
Equity/Assets | 6.70% | 6.45% | 6.58% | 6.71% | 6.91% |
Net Interest Margin Bank + Card | 1.57% | 1.62% | 1.84% | 1.82% | 1.74% |
CreditSight View Comment
AS OF 29 Aug 2024We have an M/P recommendation on Woori FG and the bank. Woori 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. 1H24 results have showed some improvement, mainly supported by non-interest income. The group has been seeking opportunities to expand its non-bank businesses. Its new securities entity is set to launch in August and the group is finalizing a deal to acquire Tongyang and ABL. The capital impact of the two transactions is small. Both the group and the bank CET1 ratios are behind peers. KDIC’s stake in the group has been completely sold.
Recommendation Reviewed: August 29, 2024
Recommendation Changed: April 24, 2017
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Fundamental View
AS OF 19 Aug 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 19 Aug 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 merged CS’s domestic Swiss bank (Credit Suisse Schweiz AG) 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, and the operating subsidiaries, including UBS AG and Credit Suisse AG, were merged on 31 May 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 19 Aug 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 ($1.2 bn) so far.
Key Metric
AS OF 19 Aug 2024$ mn | 2Q24 | Y23 | Y22 | Y21 | Y20 |
---|---|---|---|---|---|
Return On Equity | 5.4% | 40.3% | 13.0% | 12.4% | 11.6% |
Total Revenues Margin | 3.0% | 2.9% | 3.1% | 3.2% | 3.2% |
Cost/Income | 86.9% | 95.0% | 72.1% | 73.6% | 73.0% |
CET1 Ratio (Transitional) | 14.9% | 14.3% | 14.2% | 15.0% | 13.8% |
CET1 Ratio (Fully-Loaded) | 14.9% | 14.4% | 14.2% | 15.0% | 13.8% |
Leverage Ratio (Fully-Loaded) | 5.9% | 5.4% | 5.7% | 5.7% | 5.4% |
Liquidity Coverage Ratio | 212% | 216% | 164% | 155% | 152% |
Impaired Loans (Gross)/Total Loans | 0.5% | 0.4% | 0.4% | 0.4% | 0.6% |
CreditSight View Comment
AS OF 05 Sep 2024We have Market perform recommendations on UBS AG (operating bank) and UBS Group (holding company) having revised the HoldCo recommendation from Underperform on 14 August 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 was a seminal event and carries significant execution and integration risk, but UBS has substantial downside protection, and we expect its financials to remain sound.
Recommendation Reviewed: September 05, 2024
Recommendation Changed: August 14, 2024
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Fundamental View
AS OF 19 Aug 2024Standard Chartered has been making good progress in the past few years, improving its asset quality and profitability and dealing with legacy litigation issues. Capital, funding and liquidity look solid.
However, the Russia/Ukraine conflict and global economic headwinds continue to cloud the near term outlook.
Its unusual business mix – headquartered and regulated in the UK but operating primarily in Asia, Africa and the Middle East – means it is well diversified but sensitive to geopolitical developments and emerging market volatility.
Business Description
AS OF 19 Aug 2024- Standard Chartered PLC is the holding company and listed entity of the group, in which Standard Chartered Bank is the main operating company.
- Although Standard Chartered is headquartered in London and therefore subject to UK banking regulation, its operations are mainly in Asia (Hong Kong is its biggest single market, as part of its Greater China & North Asia region), Africa and the Middle East. It is present in over 60 markets.
- It has the usual variety of businesses across these regions, including corporate and institutional banking, retail banking, commercial banking and private banking. It specialises in trade finance and cross-border cash management.
- The group announced a revised strategy in 2019 aimed at improving profitability after several years of de-risking, with a targeted return on tangible equity of 10%.
- It is classified as a G-SIB, with a regulatory capital buffer of 1%.
Risk & Catalysts
AS OF 19 Aug 2024Anti-government protests in Hong Kong, a slowing economy in China and a weak commercial real estate sector, and US/China trade tensions have threatened the growth and stability of some of Standard Chartered’s key markets.
A number of Standard Chartered’s markets have underperformed in the past and have therefore been seen as turnaround stories, including India, Korea, Indonesia and the UAE.
The group has had to improve its AML and sanctions controls. In April 2019, it paid a $947 mn fine to US authorities over breaches of US sanctions and a £102 mn fine to the UK FCA for AML weaknesses.
Key Metric
AS OF 19 Aug 2024$ mn | 2Q24 | Y23 | Y22 | Y21 | Y20 |
---|---|---|---|---|---|
Return on Equity | 7.8% | 7.0% | 5.7% | 4.5% | 1.4% |
Total Revenues Margin | 2.3% | 2.2% | 2.0% | 1.8% | 2.0% |
Cost/Income | 65.6% | 64.1% | 66.9% | 74.3% | 70.4% |
CET1 Ratio (Transitional) | 14.6% | 14.1% | 14.0% | 14.1% | 14.4% |
CET1 Ratio (Fully-Loaded) | 14.6% | 14.1% | 13.9% | 14.1% | 14.3% |
Leverage Ratio (Fully-Loaded) | 4.8% | 4.7% | 4.8% | 4.9% | 5.2% |
Loan Impairment Charge | 0.1% | 0.2% | 0.3% | 0.1% | 0.8% |
Impaired Loans (Gross)/Total Loans | 2.4% | 2.5% | 2.5% | 2.7% | 3.2% |
CreditSight View Comment
AS OF 27 Aug 2024We revised our recommendation on Standard Chartered HoldCo senior from Underperform to Market perform on 26 April 2023, but we changed our recommendations on Tier 2 and AT1 from Fair to Rich on 10 January 2024. The changes reflect StanChart’s recent resilient performance, with no impact on its deposit base from recent stresses in the banking system, while taking into account that the Chinese real estate market, a source of credit impairments in recent periods, remains weak. Capital and liquidity ratios are robust, and profitability has improved significantly, but the bank continues to face geopolitical tensions inherent in its extensive operations in Hong Kong, China and the rest of Asia.
Recommendation Reviewed: August 27, 2024
Recommendation Changed: April 26, 2023
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Fundamental View
AS OF 16 Aug 2024UnionBank of the Philippines (UBP) is rated Baa2 (neg) by Moody’s. Moody’s affirmed the negative outlook in April 2024 due to uncertainty over the bank’s asset quality and profitability following their deterioration in 2023.
The bank has historically generated higher returns than peers, but it geared its focus significantly towards the retail segment by acquiring Citi’s Philippine retail portfolio in 2022 and through organic growth, which brought retail loans to more than half the total book.
Returns have suffered despite the good boost to core revenues, as asset quality has been poorly managed resulting in high credit costs which we have forewarned. Continued rounds of capital infusions from shareholders have thus been required. The reserve cover is maintained relatively thin.
Business Description
AS OF 16 Aug 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 15% commercial loans, 26% corporate loans, and the remaining 59% retail loans (comprising 32% credit cards, 22% mortgages, 34% salary loans and 9% others including teachers loans, salary loans and motorcycle loans by the thrift bank subsidiary, City Savings Bank, and 3% UnionDigital) at 2Q24.
Risk & Catalysts
AS OF 16 Aug 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’s aggressive retail expansion to boost the NIM has strengthened topline revenues, but negatively impacted overall profitability because of high credit costs (particularly since 2H23) which we have forewarned. Credit costs will likely decline in 2H24 but remain high, and we continue to disfavor its focus on riskier retail given the brisk growth pace and current macro backdrop. It is now focusing on lower risk, shorter term loans at UnionDigital, as well as payroll and credit card loans.
The bank however benefits from good shareholder support; it successfully completed a third stock rights offering of PHP 10 bn in 2Q24 (2023: PHP 12 bn; 2022: PHP 40 bn) to shore up capital. Lower opex from 2Q24 onwards will also aid the bottomline.
Key Metric
AS OF 16 Aug 2024PHP mn | FY20 | FY21 | FY22 | FY23 | 2Q24 |
---|---|---|---|---|---|
PPP ROA | 2.68% | 2.59% | 2.17% | 2.31% | 2.97% |
Reported ROA (Cumulative) | 1.5% | 1.6% | 1.3% | 0.8% | 0.9% |
Reported ROE (Cumulative) | 11.5% | 11.5% | 9.7% | 5.6% | 5.5% |
Total Equity/Total Assets | 13.6% | 13.5% | 13.6% | 15.3% | 16.5% |
CET1 Ratio | 15.0% | 16.3% | 11.3% | 13.9% | 15.1% |
Gross NPL Ratio | 5.10% | 5.00% | 4.80% | 6.27% | 7.40% |
Net LDR | 64.3% | 63.1% | 67.4% | 73.8% | 77.3% |
Net Interest Margin | 4.50% | 4.60% | 4.80% | 5.50% | 5.73% |
Liquidity Coverage Ratio | 207% | 272% | 148% | 163% | 191% |
Net Stable Funding Ratio | 133% | 149% | 124% | 124% | 127% |
CreditSight View Comment
AS OF 16 Aug 2024UBP’s NIM and core revenue generation have remained strong despite the challenging funding environment thanks to its pivot towards higher yielding retail via organic growth and acquiring Citi’s local retail portfolio. However, the asset quality repercussions which we have forewarned from its aggressive growth pace and riskier retail focus amid the current macro backdrop have come through, with elevated credit costs since 2H23 taking a toll on profitability. The reserve cover is maintained relatively thin. Continued shareholder support with yet another stock rights offering in 2Q24 has ensured sufficient capital for now, and AQ should see a slight improvement in 2H24. Still, we maintain U/P as it trades tight for its size and risk, given its asset quality issues and weak fundamentals.
Recommendation Reviewed: August 16, 2024
Recommendation Changed: April 17, 2020
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Fundamental View
AS OF 14 Aug 2024KEXIM is a pure policy bank that is directly and indirectly wholly owned by the government of the Republic of Korea, which is obliged under Article 37 of the Export-Import Bank of Korea Act to fund any losses that cannot be covered by the bank’s reserves.
While this is a solvency guarantee and does not explicitly guarantee the timely repayment of debt, we view it as inconceivable that the Korean authorities would fail to provide KEXIM with support in a timely manner, should this be needed, given its crucial policy role and close government links.
Business Description
AS OF 14 Aug 2024- KEXIM was set up in 1976 to support Korean companies in their overseas business through export credit guarantee programs, as well as providing finance for imports and for overseas investment. It provides funding for both short term trade and long term investment, and manages two government-entrusted funds: the Economic Development Cooperation Fund (EDCF), a Korean official development assistance program, and the Inter-Korean Cooperation Fund (IKCF), an economic cooperation program to promote exchanges with North Korea. It is also a conduit through which the government doled out COVID-19 assistance to affected companies.
- Till 2030, KEXIM aims to preferentially focus on seven sectors (hydrogen energy, wind and solar power, rechargeable battery and energy storage systems (ESS), future mobility, 5G and next-generation semiconductors, pharmaceutical and healthcare, and digital technology and cultural content) which are considered new growth drivers of the Korean economy. It has historically focused on the shipbuilding and engineering & construction industries.
- KEXIM is 100% owned by the Korean government: 73% directly and the remainder through stakes held by the Bank of Korea (8%) and Korea Development Bank (19%). In contrast to peer policy banks IBK and KDB, KEXIM has remained more consistently a policy bank but its role has been adjusted to ensure it complements rather than competes with the Korean commercial banks.
Risk & Catalysts
AS OF 14 Aug 2024Previous Korean governments have made moves to privatise the other policy banks, but KEXIM has retained its policy bank role and government ownership, which are not likely to change.
Korea’s shipbuilders have long been the largest users of KEXIM’s services. Losses on exposure to the sector, in particular Daewoo Shipbuilding (DSME), pushed KEXIM into the red in 2016 but the government injected capital and its condition has recovered.
Together with KDB, KEXIM has played a key role in helping corporate Korea survive the COVID-19 induced crisis.
KEXIM’s ratings are the same as the Korea’s sovereign ratings, which are now all in the AA range.
Key Metric
AS OF 14 Aug 2024KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Pre-Impairment Operating Profit / Average Assets | 1.3% | 1.2% | 1.1% | 1.1% | 1.1% |
ROAA | 0.5% | 0.1% | 0.5% | 0.4% | 0.6% |
ROAE | 3.2% | 0.7% | 3.2% | 2.7% | 4.7% |
Provisions/Average Loans | 0.5% | 1.2% | 0.5% | 0.8% | 0.3% |
Nonperforming Loans/Total Loans | 2.4% | 1.8% | 1.9% | 1.2% | 0.7% |
CET1 Ratio | 12.9% | 13.4% | 13.3% | 11.8% | 13.0% |
Total Equity/Total Assets | 14.9% | 14.8% | 15.1% | 12.6% | 14.3% |
Net Interest Margin (NIR/Ave Assets) | 1.0% | 0.9% | 0.9% | 0.9% | 0.7% |
CreditSight View Comment
AS OF 09 Oct 2024KEXIM is a wholly government owned policy bank benefiting from a Korean government solvency guarantee. It plays a key role in financing large-ticket exports in particular ships and large-scale overseas engineering projects. Its credit exposures include some industry and borrower concentrations especially to Korea’s shipbuilders and its financial performance has at times suffered. But the Korean government has always acted in a timely manner to endure its solvency, and with this strong backing we view it as a sound credit. We view its secondary levels as in line with where we would expect it to trade, and so continue with our Market perform recommendation.
Recommendation Reviewed: October 09, 2024
Recommendation Changed: September 22, 2020
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Fundamental View
AS OF 13 Aug 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 13 Aug 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 January 2024, it completed the acquisition of the Gokongwei conglomerate's Robinsons Bank.
- The bank is predominantly a corporate bank with 73% of its loan book outstanding to corporates, 1% to MSMEs and 26% to retail as of 2Q24. The longer term target is to grow the retail and SME segment to a 30% share of loans.
Risk & Catalysts
AS OF 14 Aug 2024Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would have a negative impact on BPI’s credit ratings.
Sustaining or further improving returns in 2024 is a challenge without the rates tailwind, so BPI has focused on unsecured retail growth, which has put pressure on asset quality, and paring down provision reserves. We see further AQ risks given prolonged high interest rates and inflation, but BPI’s large corporates-focused book (73% of total loans) provide comfort and its provisioning capacity has improved meaningfully versus during or pre-pandemic.
The acquisition of Robinsons Bank was completed on 1 January 2024 has weakened BPI’s NPL cover and overall asset quality metrics but to a manageable extent. It opens BPI up to new customer segments such as teachers and motorcycle loans. The current footprint is small but we are wary of the brisk intended growth.
Key Metric
AS OF 13 Aug 2024PHP mn | FY20 | FY21 | FY22 | FY23 | 1H24 |
---|---|---|---|---|---|
PPP ROA | 2.42% | 2.01% | 2.41% | 2.52% | 2.86% |
Reported ROA (Cumulative) | 0.98% | 1.10% | 1.59% | 1.93% | 2.00% |
Reported ROE (Cumulative) | 7.7% | 8.4% | 13.1% | 15.4% | 15.5% |
Net Interest Margin | 3.49% | 3.30% | 3.59% | 4.09% | 4.26% |
CET1 Ratio | 16.2% | 15.8% | 15.1% | 15.3% | 14.2% |
Total Equity/Total Assets | 12.5% | 12.1% | 12.2% | 12.4% | 13.1% |
NPL Ratio | 2.68% | 2.49% | 1.76% | 1.84% | 2.20% |
Provisions/Loans | 1.94% | 0.91% | 0.58% | 0.22% | 0.31% |
Liquidity Coverage Ratio | 232% | 221% | 195% | 207% | n/m |
Net Stable Funding Ratio | 154% | 155% | 149% | 154% | n/m |
CreditSight View Comment
AS OF 14 Aug 2024BPI is a fundamentally sound bank. Its traditionally conservative approach has led to a loss of loan market share in the past, as well as a lower NIM than BDO and MBT. It took a well-balanced approach towards growth during the pandemic, but is now growing briskly in higher yielding retail and MSME loans and paring down provision reserves to sustain returns in absence of rate tailwinds. Asset quality slipped in 1H24, and we see further risks from high rates and inflation. Still, we remain comfortable with BPI given the large corporate book (73% of loans) and underwriting record, and strongly improved profitability. The target CET1 ratio level has been lowered but to a still acceptable 14% level. Its ongoing digital investments have driven growth and efficiency.
Recommendation Reviewed: August 14, 2024
Recommendation Changed: August 19, 2022
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BNP Paribas
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Fundamental View
AS OF 12 Aug 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 12 Aug 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 51% large corporates, 25% middle market, and 24% consumer at 2Q24. 45% of the consumer book comprises mortgages, 25% are credit cards, 13% are auto loans and the remaining are personal loans (13%) and others (4%).
Risk & Catalysts
AS OF 14 Aug 2024Sustaining or further improving returns will be a challenge without the rates tailwind in 2024, and volume growth in loans as well as CASA have not gained strong traction thus far. Management is thus focusing on maintaining a stable NIM via growth in higher yielding segments, and reducing credit costs by paring down provision reserves, similar to its first tier peers (BPI and MBT).
We view this as acceptable for BDO given its relatively higher NPL cover (169% at 2Q24) than peers. We would prefer a higher CET1 ratio, but BDO’s large corporates-focused book (52% of total loans) and underwriting track record give comfort around potential asset quality deterioration as a result prolonged high interest rates and inflation. Internal capital generation ability has also improved meaningfully with profitability at much stronger levels now than during the pandemic.
Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would negatively impact BDO’s credit ratings.
Key Metric
AS OF 12 Aug 2024PHP mn | FY20 | FY21 | FY22 | FY23 | 1H24 |
---|---|---|---|---|---|
NIM | 4.36% | 4.05% | 4.14% | 4.65% | 4.64% |
Reported ROA (Cumulative) | 0.9% | 1.2% | 1.5% | 1.7% | 1.7% |
Reported ROE (Cumulative) | 7.6% | 10.4% | 13.0% | 15.2% | 15.1% |
Equity/Assets | 11.6% | 11.7% | 11.3% | 11.5% | 11.6% |
CET1 Ratio | 13.2% | 13.6% | 13.4% | 13.8% | 13.7% |
NPL ratio | 2.7% | 2.8% | 2.0% | 1.9% | 2.1% |
Provisions/Loans | 1.34% | 0.72% | 0.64% | 0.59% | 0.43% |
PPP ROA | 2.3% | 2.1% | 2.3% | 2.7% | 2.5% |
Liquidity Coverage Ratio | 127% | 145% | 141% | 123% | 125% |
Net Stable Funding Ratio | 122% | 124% | 124% | 124% | n/m |
CreditSight View Comment
AS OF 14 Aug 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 business lines. 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 aims to further improve returns, which is being supported by growth in higher yielding loans and paring down provision reserves. A slip in AQ in 2Q24 bears monitoring. Still, we remain comfortable with BDO given the large corporate book and high NPL cover, as well as underwriting track record, which provide comfort around weaker AQ from high rates and inflation. Capital could be higher but remains acceptable with the CET1 ratio at 13.7%.
Recommendation Reviewed: August 14, 2024
Recommendation Changed: November 28, 2023
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ING Groep
Reliance Industries
BNP Paribas
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Fundamental View
AS OF 12 Aug 2024ICICI Bank is one of the leading private banks in India and has a good diversified business model, with well regarded life and general insurance subsidiaries.
Under its previous CEO, the bank suffered setbacks from sizeable bad debt problems in FY17/18, but the situation has since stabilised following a leadership change and the bank has done well ever since.
The bank’s Baa3(sta)/BBB-(sta)/ BB+(sta) ratings make it a cross-over credit but we assess fallen angel risk to be low. ICICI Bank performed very well in FY22 and Moody’s upgraded its standalone rating to baa3 in June 2022. It has since continued the good performance.
Business Description
AS OF 12 Aug 2024- The original Industrial Credit and Investment Corporation of India (ICICI) was established in 1955 by the World Bank, the Government of India and representatives of Indian industry as a financial institution to provide Indian businesses with medium and long-term project financing.
- In 1994, ICICI established a commercial banking subsidiary, ICICI Bank as India's financial sector opened up, and in 2002 ICICI merged with ICICI Bank, keeping the latter's name.
- Retail now accounts for 55% of its loan book, corporates are at 21%, while rural, business banking and SMEs are at 8%, 8% and 5% respectively, and overseas (which is being de-emphasised) consists of just 3% at 1QFY25.
- The bank has well regarded life insurance (ICICI Prudential) and general insurance (ICICI Lombard) businesses.
Risk & Catalysts
AS OF 12 Aug 2024We are cautious about ICICI’s strong growth in riskier segments including business banking, personal unsecured loans and credit cards. The RBI’s increased risk weights on retail unsecured loans however has applied some brakes on that growth which is a credit positive, and India’s resilient growth momentum should keep credit costs relatively contained.
ICICI Bank has a strong franchise and its profitability has surpassed that of HDFC Bank to lead the peers we cover. Margins are under pressure from tight system liquidity, but the bank’s LDR is less tight than peers. We see ICICI’s credit costs normalizing upwards slightly in FY25 as the recoveries tailwind tapers off.
Leadership and governance issues under the previous CEO Ms. Chanda Kochhar have been dealt with well, since her replacement in Oct-18.
Key Metric
AS OF 12 Aug 2024INR bn | FY21 | FY22 | FY23 | FY24 | 1Q25 |
---|---|---|---|---|---|
NIM | 3.69% | 3.96% | 4.48% | 4.53% | 4.36% |
ROAA | 1.39% | 1.77% | 2.13% | 2.37% | 2.35% |
ROAE | 12.3% | 14.7% | 17.2% | 18.7% | 18.1% |
Equity/Assets | 12.0% | 12.1% | 12.6% | 12.7% | 13.3% |
CET1 Ratio | 16.7% | 17.3% | 16.9% | 15.4% | 15.1% |
Gross NPA Ratio | 4.96% | 3.60% | 2.81% | 2.16% | 2.15% |
Provisions/Loans | 2.05% | 0.97% | 0.65% | 0.30% | 0.41% |
PPP ROA | 3.13% | 2.97% | 3.28% | 3.36% | 3.41% |
CreditSight View Comment
AS OF 12 Aug 2024ICICI Bank is a preferred name among the Indian FIs we cover. We like the bank’s robust capital and loan loss buffers, high margins, strong profitability and more comfortable liquidity position than peers. Under its previous CEO, the bank suffered setbacks from sizable bad debt problems in FY17/18 but the situation has since stabilised following a leadership change. The bank has emerged stronger from a capital, asset quality and earnings perspective, as it de-risked its book, and took pro-active actions to protect its capital by raising equity and selling small stakes in its well-regarded insurance subsidiaries to raise funds and set aside more general provisions. We are slightly cautious about its brisk expansion in riskier segments of late. ICICI last issued a $ bond in 2017.
Recommendation Reviewed: August 12, 2024
Recommendation Changed: December 07, 2020
Who We Recommend
ING Groep
Reliance Industries
BNP Paribas
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Fundamental View
AS OF 18 Jun 2024Siam Commercial Bank (SCBTB; Baa1(stb)/BBB(stb)/BBB(stb)) is seen as a sound and profitable bank. It has a slight focus on the retail segment and targets to increase margins by growing personal unsecured lending. Recent credit costs have been elevated due to the retail exposure.
The capital buffer is strong with a CET1 ratio of 17.4% at the Holdco (SCB X) level and 17.2% at the Bank level at Mar-24. It announced a major business overhaul in September 2021 to establish a new parent company called SCB X to segregate the group’s core banking services from its new fintech and digital businesses and to enable greater flexibility and independence.
Business Description
AS OF 18 Jun 2024- Siam Commercial Bank was founded as the "Book Club" in 1904. In 1907, it started operating as a commercial bank and was renamed as "The Siam Commercial Bank". It completed its IPO on the Stock Exchange of Thailand in 1976.
- The bank is 23.58% owned by the King of Thailand, and a further 23.32% is owned by the Vayupak Fund 1, which is controlled by the government.
- SCB is the fourth largest Thai bank by assets and is known for its robust retail franchise.
- Its loan profile was 36% corporate, 17% SME, and 48% retail as of end-March 2024.
Risk & Catalysts
AS OF 18 Jun 2024The bank’s new strategic direction is sensible given limited domestic growth opportunities, but it comes with execution risk since the fintech and platform space are new to SCB, as well as higher credit costs. However, we take comfort in the ringfencing of the bank unit (SCB) from the Group’s riskier business units, and capital support to the Gen 2/3 businesses is subject to a minimum 16% CET1 ratio being maintained at the bank.
High household debt and challenged SMEs remain as longstanding issues in Thailand, but SCB X’s higher NIM and low-to-mid 40%s cost-income ratio provide comfortable room to absorb its higher credit costs and maintain a similar level of returns as peers.
SCB X has given a stronger FY24 NIM guidance than peers, supported by a strong deposit franchise and a growth focus on higher yielding retail loans. Recent guidance from authorities to reduce borrowing rates for vulnerable pockets of SME and retail customers and improve their lending access however present some headwind.
Key Metric
AS OF 18 Jun 2024THB mn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
PPP ROA | 2.58% | 2.63% | 2.50% | 2.88% | 2.91% |
ROA | 0.9% | 1.1% | 1.1% | 1.3% | 1.3% |
ROE | 6.7% | 8.4% | 8.3% | 9.3% | 9.3% |
Equity/Assets | 12.6% | 13.4% | 13.5% | 14.1% | 14.5% |
CET1 Ratio | 17.2% | 17.6% | 17.7% | 17.6% | 17.4% |
Reported NPL ratio | 3.68% | 3.79% | 3.34% | 3.44% | 3.52% |
Provisions/Loans | 2.14% | 1.84% | 1.45% | 1.82% | 1.67% |
Gross LDR | 93% | 93% | 93% | 99% | 102% |
Liquidity Coverage Ratio | 188% | 202% | 216% | n/m | n/m |
CreditSight View Comment
AS OF 22 Jul 2024SCB is the 4th largest bank in Thailand and has a leading retail franchise. Asset quality during COVID was poor. It created a new HoldCo structure (SCBX) in 2022 to shift digital units and unsecured retail loans outside the bank, and pledged a >16% CET1 ratio at SCB. The BOT has also ringfenced SCB which further reduces the risk for the SCBTB bonds. The NIM has been strong versus peers in 1H24, in line with our expectations. The COVID Blue scheme book though still sits within SCB and is the highest % of loans among peers (12% at 4Q23), and we are cautious about the weakening asset quality here and the general retail book. We thus see upside risk to FY24 credit cost guidance, but they can be comfortably absorbed albeit at the expense of profitability.
Recommendation Reviewed: July 22, 2024
Recommendation Changed: January 25, 2023