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Sub-sector: Banks
Sumitomo Mitsui Financial Group
- Sector: Financial Services
- Sub Sector: Banks
- Region: Japan
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Fundamental View
AS OF 26 Feb 2024SMFG has had a relatively good record of managing risk and returns. It is has the highest headline CET1 ratio amongst the three megabanks, although it has been reduced by acquisitions, which have been used to bulk up its presence in aircraft leasing, capital markets, Southeast Asia, and India.
The profitability of SMFG, just about the second largest Japanese megabank, was affected by poor results from its non-SMBC subsidiaries in FY22. However, the non-SMBC subsidiaries appear to have turned a corner since 3Q22, while SMBC had a better 3Q23 after a more challenging 1H23.
Given its size and systemic importance, SMFG is considered too big to fail, and will be supported by the Japanese government if needed.
Business Description
AS OF 26 Feb 2024- The core unit of SMFG is Sumitomo-Mitsui Banking Corp (SMBC), whose main predecessors were Sumitomo Bank and Mitsui Bank.
- SMFG does not have a large trust business as Sumitomo Trust and Chuo Mitsui Trust chose not to join SMFG, but merged with each other to form the separate Sumitomo Mitsui Trust Holdings.
- SMFG's group companies include the securities firm SMBC Nikko, SMBC Trust Bank, SMBC Card Company, SMBC Consumer Finance, Sumitomo Mitsui Finance and Leasing, SMFG India Credit Company (SMICC) Sumitomo Mitsui DS Asset Management, and SMBC Aviation Capital.
- It has been acquisitive over the years, particularly in higher margin leasing assets. In 2021, the group took a 49% stake in Vietnam's FE Credit, 74.9% of Indian NBFI Fullerton Capital (now called SMICC), 4.99% of Philippines' RCBC, and 4.5% of US investment bank Jefferies. In 2022, it increased its stake in RCBC to 20%. In 2023, it acquired a 15% stake in Vietnam's VP Bank, and announced its intention to increase its stake in Jefferies from 4.5% to 15%.
Risk & Catalysts
AS OF 26 Feb 2024Asset quality has been good in recent years, but COVID-19 caused a big jump in credit costs, particularly in the leasing business and SME segment. Overall credit costs dropped in FY21 and improved in FY22 except at its consumer businesses. In 9M23 bank level credit costs are good but worse at the card and personal unsecured loans units.
SMFG has taken stakes in FE Credit (49%) and VP Bank (15%) in Vietnam, Fullerton in India (74%) and RCBC in the Philippines (20%), which we see as a sensible buildup of exposure to emerging growth areas. It supported SMBC Aviation in its acquisition of Goshawk, and is increasing its 4.5% stake in Jefferies to 15% as an expansion of its strategic alliance with the US firm for M&A/ECM/DCM opportunities. However, FE Credit is not doing well and will probably need a few years to restructure following large losses.
In FY23, international loan growth has been a struggle, and SMFG has been overtaken by MUFG on international margins.
Key Metric
AS OF 26 Feb 2024| ¥ bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| Net Interest Revenue/Average Assets | 0.65% | 0.60% | 0.64% | 0.68% | 0.68% |
| Operating Income/Average Assets | 1.37% | 1.27% | 1.23% | 1.26% | 1.38% |
| Operating Expense/Operating Income | 63% | 62% | 62% | 61% | 60% |
| Pre-Impairment Operating Profit / Average Assets | 0.54% | 0.49% | 0.48% | 0.51% | 0.61% |
| Impairment charge/Average Loans | (0.21%) | (0.43%) | (0.31%) | (0.22%) | (0.18%) |
| ROAA | 0.35% | 0.23% | 0.30% | 0.32% | 0.40% |
| ROAE | 6.5% | 4.5% | 5.9% | 6.5% | 8.0% |
| CET1 excl Unrealised Securities Gains in AOCI | 13.3% | 12.8% | 12.1% | n/m | n/m |
CreditSight View Comment
AS OF 15 Nov 2024SMFG’s banking business had performed well, while its non-bank subsidiaries had underperformed over FY21-22. The group had a better 2H vs a poor 1H23, with improved trading and fee revenues, partially offset by higher credit costs at the non-bank businesses. The group became acquisitive in 2021, taking a 49% stake in a leading Vietnamese NBFI and 15% of its parent (VP Bank), 20% of RCBC of the Philippines, 74.9% of NBFI Fullerton India (now 100%), and 4.5% in US investment bank Jefferies (increasing to 15%), so as to provide the base for the next stage of growth. Its high CET1 ratio has been whittled down by acquisitions. Its 1H24 results have been boosted by share sales and structured investment trusts.
Recommendation Reviewed: November 15, 2024
Recommendation Changed: January 02, 2024
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Search topics about wealth insights and investments.Australia & New Zealand Bank
- Sector: Financial Services
- Sub Sector: Banks
- Region: Australia
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Fundamental View
AS OF 22 Dec 2023- ANZ (Aa3/AA-/A+) has the leading corporate banking franchise in Australia and New Zealand, and is the largest bank in New Zealand. It has a relatively small share of the Australian domestic retail market (and so it is acquiring Suncorp). Its Asia-focused regional business suffered from weak returns post-GFC but, after restructuring, has achieved better results.
- Its core institutional business continues to do well, capital levels are comfortable, as are asset quality metrics with good collective provisioning.
Business Description
AS OF 22 Dec 2023- ANZ is a Melbourne-based bank with a history dating back to the early 19th century. Historically, its strength has been in corporate banking. It is the largest bank in New Zealand and was previously active in Asia but cut back, pulling out of India in the 1990s. It subsequently built up minority stakes in Indonesia (Panin, 39%), Malaysia (AMMB 24%) and China (Bank of Tianjin 12%), all of which it is trying to sell. After the crisis it acquired banking operations from RBS in several Asian countries including Hong Kong, Singapore, Taiwan, Philippines and Indonesia, much of which it subsequently sold to DBS.
- Its broader strategy is to shift capital allocations away from institutional towards retail and commercial in Australia where its market share is relatively small. To grow its mortgage marketshare, it announced the acquisition of Suncorp's banking business in Jul-22; final approval for the deal is expected in early 2024.
Risk & Catalysts
AS OF 22 Dec 2023- The limited impact of COVID-19 on the Australian economy has seen ANZ able to reverse provisions with little sign of credit risk deterioration. It is well positioned for a housing market downturn with collective provisions of ~70 bp.
- ANZ has a relatively small share of the Australian domestic retail market, but it aims to increase market share through the acquisition of Suncorp Bank (final authority approval/rejection will come through in early 2024).
- ANZ’s large presence in New Zealand makes it more exposed to that economy, but there has been no negative impact so far, nor is one anticipated.
Key Metric
AS OF 26 Dec 2023| AUD mn | Y19 | Y20 | Y21 | Y22 | Y23 |
|---|---|---|---|---|---|
| Return on Equity | 10.8% | 6.2% | 9.9% | 10.1% | 10.9% |
| Total Revenues Margin | 2.0% | 1.8% | 1.7% | 1.8% | 1.9% |
| Cost/Income | 47.7% | 52.9% | 51.9% | 51.6% | 48.5% |
| CET1 Ratio (APRA) | 11.4% | 11.3% | 12.3% | 12.3% | 13.3% |
| CET1 Ratio (International) | 16.4% | 16.7% | 18.3% | 19.2% | 19.2% |
| APRA Leverage Ratio | 5.6% | 5.4% | 5.5% | 5.4% | 5.4% |
| Liquidity Coverage Ratio | 143% | 139% | 136% | 129% | 132% |
| Gross Impaired Loans/Gross Loans | 0.3% | 0.4% | 0.3% | 0.2% | 0.2% |
CreditSight View Comment
AS OF 08 Jan 2024ANZ has a relatively small share of the Australian domestic retail market, which it has overhauled and aims to improve through the acquisition of Suncorp Bank (approval for the merger is before a tribunal), but it is the largest bank in New Zealand and is the leading corporate bank in both countries; both divisions are performing well, as is a new commercial division. The bank’s recent focus has been on a new retail app, an improved payments business, and sustainable finance. The NIM hit a bottom in 1H22, improved, and is on its way down again. Asset quality is strong, with ~57 bp of collective provisions. Pro-forma for the Suncorp acquisition, its CET1 ratio is ~12.1%. We see better value in its Tier 2 and its sole $ AT1. We do not see call risk with the Australian bank majors.
Recommendation Reviewed: January 08, 2024
Recommendation Changed: October 05, 2016
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Fundamental View
AS OF 12 Dec 2023- Having run off its non-core assets and sold Barclays Africa, Barclays is now focusing on improving profitability.
- It benefits from its wide diversification in UK and US markets, with investment banking performing well in recent periods despite being perceived as volatile and higher risk.
- Barclays’ large consumer finance business might prove to be vulnerable to rising interest rates and the cost of living crisis, but group earnings have been bolstered by good trading income and have, overall, benefited from the higher rates.
- Economic uncertainty clouds the near term outlook, but Barclays has strengthened its balance sheet metrics, with improved capital/leverage ratios, strong liquidity, and good loss-absorbing capacity.
Business Description
AS OF 12 Dec 2023- Barclays is a major global financial services provider, engaged in personal banking, credit cards in the US, UK and Europe (Barclaycard), corporate and investment banking, and wealth and investment management.
- Having had an extensive international presence in Europe, the Americas, Africa and Asia, it has narrowed its focus to the UK & US markets, and has sold its stake in Absa (Barclays Africa).
- Its operations were previously split into Core and Non-Core, with Barclays Non-Core (BNC) containing the Group's non-strategic assets and businesses. Following an accelerated wind-down, Barclays closed BNC on 1 July 2017 with residual RWAs of £23 bn re-absorbed by the bank's business divisions.
- Barclays has implemented its ring-fencing split under which the newly established Barclays Bank UK PLC has become its UK ring-fenced bank (from 1 April 2018) and Barclays Bank PLC continues as the non-ring-fenced bank (accounting for around 80% of group assets).
Risk & Catalysts
AS OF 12 Dec 2023- With the UK and US economies beset by high inflation and high interest rates, asset quality is likely to come under pressure, and credit losses look set to rise, although so far there are no material signs of stress.
- Barclays has substantial credit card businesses in the UK and US, which could be vulnerable to the economic weakness.
- There is an ongoing debate about the weight of investment banking in the group as peers scale back or exit certain activities.
- A rescission offer to bondholders after the over-issuance of structured securities in the US resulted in large losses in 2021 and 1H22, partially offset by hedges, but that appears to have been an isolated case.
Key Metric
AS OF 12 Dec 2023| £ mn | 3Q23 | Y22 | Y21 | Y20 | Y19 |
|---|---|---|---|---|---|
| Return On Equity | 7.4% | 8.7% | 10.5% | 3.8% | 5.3% |
| Total Revenues Margin | 1.6% | 1.7% | 1.6% | 1.7% | 1.9% |
| Cost/Income | 63.1% | 67.0% | 66.8% | 63.8% | 71.3% |
| CET1 Ratio (Transitional) | 14.0% | 13.9% | 15.1% | 15.1% | 13.8% |
| CET1 Ratio (Fully-Loaded) | 14.0% | 13.7% | 14.7% | 14.3% | 13.5% |
| Leverage Ratio (Fully-Loaded) | 5.0% | 5.3% | 5.2% | 5.3% | 4.5% |
| Liquidity Coverage Ratio | 159% | 165% | 168% | 162% | 160% |
| Impaired Loans (Gross)/Total Loans | 2.1% | 2.0% | 2.2% | 2.6% | 2.3% |
CreditSight View Comment
AS OF 22 Jan 2024We have a Market perform recommendation on the senior debt of Barclays PLC (holding company) and an Outperform on Barclays Bank (operating bank). We also see its Tier 2 as Cheap. Barclays has benefited from the diversification of its balance sheet and earnings, both geographically, with a large part of its business in the US, and by business, encompassing personal and business banking in the UK, consumer finance in the UK and US, and investment banking. While some of these businesses carry higher credit risk (e.g. credit cards) or market risk, recent performance has been solid, and asset quality remains benign. Capital ratios have improved, and it looks well protected against economic headwinds. Liquidity and funding metrics are strong.
Recommendation Reviewed: January 22, 2024
Recommendation Changed: January 13, 2020
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Search topics about wealth insights and investments.Société Générale
- Sector: Financial Services
- Sub Sector: BanksInsuranceSpecialty Finance
- Region: EuropeFrance
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Fundamental View
AS OF 04 Dec 2023- SocGen’s business is not geared to benefit significantly from the higher rate environment, given the quirks of the French market. Its investment banking business is doing well and looks less risky these days.
- The sale of its Russian businesses entailed a large write-down in 1H22, but it had a minimal capital impact and has benefited SocGen’s credit profile.
- Capital ratios have improved sizeably in recent years, making its MDA cushion comfortable.
- Asset quality also looks good, with a relatively low cost of risk and decreasing non-performing loans.
Business Description
AS OF 04 Dec 2023- SocGen is one of the leading retail and commercial banks in France and is also active in corporate and investment banking internationally. It has strong franchises in equipment financing, car leasing and fleet management.
- Its operations are split into French Retail Banking, Private Banking & Insurance, International Retail Banking, Mobility & Leasing Services, Global Banking & Investor Solutions, and a Corporate Centre.
- Retail banking in France includes the Société Générale, Crédit du Nord and Boursorama brands. In December 2020, it announced the merger of the Société Générale & Crédit du Nord networks, largely in order to reduce the number of branches.
- International Retail Banking includes operations in Western Europe, Czech Republic, Romania, Africa/Asia & Other Mediterranean regions.
- The acquisition of LeasePlan, and Boursorama’s agreement to take over ING’s French retail business, highlight SocGen’s determination to extend its franchise.
Risk & Catalysts
AS OF 04 Dec 2023- Exposure to Russia has been managed down significantly. While not completely gone, it now makes up only a small percentage of the bank’s balance sheet.
- It has substantial investment banking and capital markets operations that are somewhat less diversified than those of peers, but the business’s risk profile has improved.
- Trends in retail banking remain subdued, not helped by low rates and a changing operating environment, although management has already implemented changes in its French business.
- Our central scenario is that earnings will be lumpy for a little while. We expect SocGen to reshape the perimeter of its business operations several times over the next 12-24 months.
Key Metric
AS OF 04 Dec 2023| € mn | 3Q23 | Y22 | Y21 | Y20 | Y19 |
|---|---|---|---|---|---|
| Return On Equity | 1.7% | 2.8% | 8.9% | (0.4%) | 5.2% |
| Total Revenues Margin | 1.6% | 1.8% | 1.8% | 1.6% | 1.9% |
| Cost/Income | 70.4% | 66.3% | 68.2% | 75.6% | 71.9% |
| CET1 Ratio (Transitional) | 13.3% | 13.5% | 13.7% | 13.4% | 12.7% |
| CET1 Ratio (Fully-Loaded) | 13.2% | 13.5% | 13.6% | 13.2% | 12.7% |
| Leverage Ratio (Fully-Loaded) | 4.2% | 4.3% | 4.8% | 4.7% | 4.3% |
| Liquidity Coverage Ratio | 147% | 145% | 129% | 153% | 124% |
| Impaired Loans (Gross)/Total Loans | 3.3% | 3.1% | 8.6% | 3.7% | 3.5% |
CreditSight View Comment
AS OF 10 Jan 2024SocGen’s main business divisions have seen good growth post-COVID 19 and improving profitability, helped by rising interest rates. Global Markets earnings have been volatile over the years, but trading income has been strong in recent periods. Asset quality ratios are good, all things considering. Its financial services business – mainly auto leasing, helped by the acquisition of LeasePlan, has been making an increased contribution. The outlook for French Retail is quite weak until 2024. Capital and leverage ratios look much better than they did in the past. We moved its Tier 2 to Cheap from Fair, and its AT1 from Cheap to Fair, on 10 January 2024.
Recommendation Reviewed: January 10, 2024
Recommendation Changed: May 12, 2023
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Fundamental View
AS OF 27 Nov 2023- Citigroup is a solid global money center bank that has done a decent job cleaning up legacy issues and fortifying the risk profile in the wake of the GFC, though it still lags peers on several fronts including profitability.
- Citi has more geographic diversification than peers owing to its international presences, though the retail side is shrinking considerably as Citi exits most of Asia and Mexico, refocusing around a global wealth management/private bank strategy.
- Citi lags on the domestic deposit front, with less than half of the deposit base of money center peers and a much smaller physical footprint, though it has been focused on driving deposit flows the past couple of years.
Business Description
AS OF 27 Nov 2023- Citigroup ranks as the 3rd largest U.S. bank by total assets ($2.37 tn) at 3Q23 and 3rd largest by Total Equity ($210 bn).
- Citi is 4th in terms of U.S. deposits with approximately $757 bn as of 3Q23 across 665 branches (S&P Capital IQ). Given the significantly smaller branch footprint, Citi does not generally possess leading market shares in most states besides South Dakota (#1).
- Citi's major business lines include U.S. consumer (mortgages and credit cards) and retail banking, global consumer, global corporate & investment banking, and global payments. The company is in the process of exiting 13 international consumer markets, refocusing the non-US footprint around four regional hubs and combining wealth management and the private bank to drive synergies out of the hubs.
Risk & Catalysts
AS OF 27 Nov 2023- Citi is still lagging peers on profitability (both ROA and ROTCE); new CEO Fraser seems to have adopted the profitability gap as a key focus point as well, and we see Fraser’s strategic moves (e.g. int’l consumer exits) as aimed at capital optimization to improve ROE.
- While not as severe as a Wells-type situation, Citi’s regulatory mishaps introduces risks should the bank fail to show improvement in internal controls, or if another major risk management failure crops up. Our base case: Citi will be able to satisfy regulators and end up with improved infrastructure, though it will likely be a multi-year process with resultant upward cost pressures.
- Citi’s global footprint makes it more exposed to emerging markets and non-domestic economies, though pending exits of ‘riskier’ consumer loan books in Asia and Mexico should help the EM risk profile; Citi has also demonstrated an ability to unwind other riskier exposures (e.g. Russia).
Key Metric
AS OF 27 Nov 2023| $ mn | FY19 | FY20 | FY21 | FY22 | LTM 3Q23 |
|---|---|---|---|---|---|
| ROAE (annual) | 9.9% | 5.7% | 10.9% | 7.5% | 6.6% |
| ROAA (annual) | 0.97% | 0.48% | 0.92% | 0.61% | 0.56% |
| PPNR / Avg. Assets | 1.61% | 1.28% | 1.02% | 0.97% | 4.05% |
| Efficiency Ratio | 58% | 61% | 68% | 67% | 267% |
| Net Interest Margin (Annual) | 2.59% | 2.14% | 1.94% | 2.20% | 2.36% |
| Net charge-offs (LTM) / Loans | 1.12% | 1.08% | 0.70% | 0.55% | 0.83% |
| Common Dividend Payout | 23% | 39% | 19% | 27% | 113% |
| CET1 Ratio | 11.8% | 11.5% | 12.3% | 13.0% | 13.6% |
| Supplementary Leverage Ratio (SLR) | 6.2% | 7.0% | 5.7% | 5.8% | 6.0% |
| Liquidity Coverage Ratio (LCR) | 115% | 118% | 115% | 118% | 117% |
CreditSight View Comment
AS OF 16 Jan 2024We are comfortable with Citi and like it for the spread value over mid-A banks and compelling carry against IG corporates. We see technical support over the next 2-3 years as Citi exits int’l consumer and reduces RWAs, in turn lowering regulatory debt needs; Banamex retail is the big remaining piece, but a 2025 event at the earliest. Citi’s lagging profitability to peers is a real differentiator, but we are constructive on CEO Fraser’s overhaul and expect (and need) to see more momentum in 2024. Citi showed no ill effects from the SVB collapse, and the largely non-US commercial deposit base is inextricably tied into the bank’s broader product/service offerings with extensive and long-dated customer relationships exemplified by stable (if more costly) deposit bases and solid NIM expansion.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: January 12, 2017
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BMO Financial
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Fundamental View
AS OF 27 Nov 2023- Bank of America is a strong and steady credit, having dramatically improved its risk profile over the last decade and significantly closed the gap with industry bellwether(s); effective expense management has also been a demonstrated core competency.
- The company remains well diversified across business lines in lending, markets, and asset/wealth management and has shown little appetite for excessive risk-taking, exemplified in part by strong stress test performance versus peers.
Business Description
AS OF 27 Nov 2023- Bank of America ranks as the 2nd largest U.S. bank by total assets ($3.15 tn) and by total deposits ($1.88 tn) as of 3Q23.
- Bank of America ranked 2nd in terms of U.S. deposits at YE22 with approximately $1.88 tn in deposits and 3,796 branches (S&P Capital IQ) with a coast-to-coast branch presence including leading market shares in California (#1), North Carolina (#1), Texas (#2), Florida (#1), and New York (#3).
- Bank of America's major business lines include U.S. retail banking, credit cards, global corporate & investment banking, and global wealth & investment management.
Risk & Catalysts
AS OF 27 Nov 2023- Bank of America has made excellent progress generating operating efficiencies and improving profitability as the crisis-era overhangs fade further into the background; it still lags peer JPM on some measures, including capital markets, but is well positioned to capture any rebounding loan growth.
- The company is relatively more sensitive to interest rates than peers, estimating that a +100 bp parallel shift in the interest rate yield curve would increase net interest income by $3.1 bn over the next 12 months (as of 3Q23).
- Also a sector-wide concern, Bank of America is exposed to cyber threats, although it has been deploying significant resources into tech spend the past few years.
Key Metric
AS OF 27 Nov 2023| $ mn | FY19 | FY20 | FY21 | FY22 | 3Q23 |
|---|---|---|---|---|---|
| ROAE (annual) | 10.2% | 6.7% | 11.7% | 10.2% | 10.9% |
| ROAA (annual) | 1.1% | 0.6% | 1.0% | 0.9% | 1.0% |
| PPNR / Avg. Assets | 1.48% | 1.06% | 0.94% | 1.02% | 1.20% |
| Efficiency Ratio | 60% | 66% | 67% | 65% | 63% |
| Net Interest Margin (Annual) | 2.43% | 1.90% | 1.66% | 1.83% | 2.14% |
| Net charge-offs (LTM) / Loans | 0.37% | 0.40% | 0.23% | 0.18% | 0.30% |
| Common Dividend Payout | 22% | 35% | 21% | 25% | 24% |
| CET1 Ratio | 11.2% | 11.9% | 10.6% | 11.2% | 11.9% |
| Supplementary Leverage Ratio (SLR) | 6.4% | 7.2% | 5.5% | 5.9% | 6.2% |
| Liquidity Coverage Ratio (LCR) | 118% | 116% | 122% | 115% | 116% |
CreditSight View Comment
AS OF 16 Jan 2024Our Outperform recommendation on BAC is based on a combination of fundamental strength (consistent peer-leading stress test loss rates), spread pickup over high-quality peer banks, and attractive valuations against broader corporates. Technical support is not as strong as we see all the banks returning to more normalized issuance in 2024; positively, we think BAC is less exposed than money center peers to net new issue needs from Basel III endgame implementation. The company’s missteps on the HTM portfolio is an earnings and margin opportunity cost issue, not a fundamental one, and justified ex post by the large and stable retail deposit base demonstrated through the post-SVB failure fallout; and profitability is still healthy with solidly mid-teens ROTCE, despite the securities drag.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: November 04, 2013
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Fundamental View
AS OF 26 Oct 2023Bank Rakyat Indonesia (BRI) is rated Baa2 (sta)/ BBB- (sta)/ BBB (sta). As the second largest bank in Indonesia that is majority-owned (53.19%) by the Indonesian government, and key role in servicing the ultra-micro and micro segments, we expect a very high likelihood of government support in times of need.
BRI’s credit strength has been its very high margins (>7%; rose after consolidating Pegadaian and PNM) and consequently, ROE, as well as capital buffers (>20% CET 1 ratio), which are ahead of its country peers and among the highest in APAC.
The bank has a leading franchise in the country’s micro and small commercial segments with a long operating track record. Well managed credit costs have in turn helped to support its high margins.
Business Description
AS OF 26 Oct 2023- The history of Bank Rakyat Indonesia can be traced back to 1895; it is now the second largest bank in Indonesia by assets.
- BRI was listed on the Jakarta Stock Exchange in 1992, now the Indonesia Stock Exchange in 2003. The Indonesian government held a 53.2% stake in the bank as of end-September 2023. Foreign investors hold 36.6% of the bank's shares and domestic investors 10.1%.
- Its core business focus is on the ultra-micro, micro and small commercial segments, which now account for just over two-thirds of its total loan book.
Risk & Catalysts
AS OF 26 Oct 2023BRI’s high exposure to ultra-micro and micro (~47% of loans) and small commercial loans (18%) leads to higher credit costs compared to its peers. Asset quality within the COVID restructured book (mainly small and micro loans) has not trended as well as the bank’s earlier guidance, but the higher margins generated continue to provide more than sufficient room for credit costs to be absorbed. We are comfortable with the credit given its very high capital buffers.
BRI’s interest margins have been resilient thanks to its increased focus on the higher yielding micro segment so its returns have continued to be strong. It is on track to exceed its FY23 NIM guidance.
The Indonesian economy continues to be on good recovery momentum and is set to receive a boost from election related spending in 2H23, which should help to keep general asset quality and credit costs in check, as well as aid loan growth, which has been impacted by tight liquidity conditions in the first half.
Key Metric
AS OF 26 Oct 2023| IDR bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| PPP ROA | 4.8% | 4.2% | 4.7% | 5.2% | 5.7% |
| ROA | 2.5% | 1.2% | 1.9% | 2.9% | 3.2% |
| ROE | 17.7% | 8.6% | 12.0% | 17.4% | 19.4% |
| Equity/Assets | 14.6% | 14.1% | 17.2% | 16.0% | 16.6% |
| CET1 Ratio | 21.7% | 20.1% | 26.2% | 24.5% | 26.3% |
| NPL Ratio | 2.80% | 2.88% | 3.00% | 2.67% | 3.07% |
| Provisions/Loans | 2.47% | 3.43% | 3.47% | 2.51% | 2.59% |
| LDR | 88% | 91% | 92% | 87% | 97% |
CreditSight View Comment
AS OF 26 Oct 2023BRI has become the 2nd largest bank in Indonesia by assets, having been overtaken by Bank Mandiri after the latter’s sharia business consolidation. About 47% of its consolidated loan book consists of micro loans and another 18% of small commercial loans, leading to its higher credit costs than peers. Asset quality within the COVID restructured book has not trended as well as management had earlier hoped for, but the higher margins that BRI generates continue to provide more than sufficient room for credit costs to be comfortably absorbed. BRI and its country banking peers also have the highest capital ratios in the region (26.3% CET1 ratio for BRI) and are therefore in the position to absorb losses. We like BRI because of its very strong profitability and capital. We maintain our M/P reco.
Recommendation Reviewed: October 26, 2023
Recommendation Changed: July 08, 2022
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Fundamental View
AS OF 12 Oct 2023Macquarie was tested during the global financial crisis, but managed to steer through the crisis without reporting net losses; in fact it hasn’t reported a loss in its 50+ years of existence. A strong balance sheet mitigated liquidity problems, but its banking unit had to turn to Australia’s central bank at that time for support.
The group has an impressive track record of managing risks and achieving good returns, and has built capabilities in a number of areas. Divestments are controlled based on the market environment. More recently, it has been a beneficiary of market volatility in the commodity space. Its Australian mortgage book has also shown strong but sensible growth.
Business Description
AS OF 12 Oct 2023- Macquarie grew out of the Australian business of Hill Samuel Australia, commencing operations in 1969. Macquarie Group Ltd (MGL) is the holding company and listed entity, under which there is the banking group Macquarie Bank Ltd (MBL) which consists of the Banking & Financial Services (BFS) and Commodities & Global Markets (CGM) businesses, and a non-banking group which consists of the Macquarie Asset Management (MAM) and Macquarie Capital (MC) businesses.
- From the 1990s, the group has been associated with the "Macquarie Model" which focused on identifying cash-generating infrastructure assets & packaging them into funds that could be sold, with Macquarie taking fees as banker, arranger and asset manager.
- The global financial crisis prompted it to diversify its operations which it did through acquisitions of asset managers including Delaware Investments in the US and Blackmont Capital in Canada, boutique investment bank Fox-Pitt Kelton and specialists such as Tristone Energy (Canada). More recently, it acquired US asset manager, Waddell & Reed in April 2021, which added around US$76 bn of assets under management.
- MAM has AUM of ~A$796 bn, mostly in "traditional" funds management but also including its specialist infrastructure and real assets funds.
Risk & Catalysts
AS OF 12 Oct 2023Macquarie has sizable exposures to credit and equity risk, and so could be adversely impacted by falls in asset prices. In addition, volatile/weak markets could impede its ability to exit some of its investments. Its earnings profile partially depends on exits and therefore is lumpy in nature. So far it has managed this risk well.
As a relatively small group operating mainly in wholesale markets, it is vulnerable to a liquidity freeze, but it mitigates this through running a well-matched and liquid balance sheet.
It is a global leader in infrastructure investments and is well positioned for the green transition. It has been a strong beneficiary of volatility in commodity markets, a testament to its risk management capabilities.
Its banking unit, MBL, has been subject to enforcement action in Apr-21 by APRA over the incorrect treatment of some intra-group funding arrangements resulting in a A$500 mn operational risk overlay being applied as well as LCR and NSFR add-ons.
Key Metric
AS OF 04 Mar 2024| AUD mn | 2H23 | 1H23 | 2H22 | 1H22 | 2H21 |
|---|---|---|---|---|---|
| Operating Income | 10,649 | 8,927 | 9,799 | 8,034 | 7,332 |
| Operating Expense/Operating Income | 61.2% | 62.9% | 58.3% | 63.1% | 62.8% |
| Net Profit | 2,877 | 2,305 | 2,663 | 2,043 | 2,030 |
| ROAE | 18.1% | 15.6% | 19.6% | 17.8% | 9.5% |
| Total Impairments/Op Profit | 4.1% | 8.6% | 6.8% | 7.8% | 2.8% |
| Annuity Business Profit Contribution | 27.0% | 43.3% | 44.7% | 39.6% | 38.3% |
| MBL CET1 Ratio (APRA) | 13.7% | 12.8% | 11.5% | 11.7% | 12.6% |
| MBL Liquidity Coverage Ratio | 214% | 172% | 175% | 179% | 174% |
| MBL Net Stable Funding Ratio | 124% | 116% | 121% | 122% | 115% |
CreditSight View Comment
AS OF 05 Nov 2024Macquarie has a strong record of profitability since its inception. Its asset mgmt business focused on infrastructure, and more recently green assets, is a global leader. It manages risks and returns effectively, and in FY22+23 was a large beneficiary of O&G and power price volatility. The Australian banking business has gained mortgage marketshare and is looking to grow business banking. Large investment disposals from asset mgmt and Macquarie Capital led to a record year in FY22; strong commodities outperformance led to another record in FY23. FY24 and 1H25 income was lower on lower a) asset realisations and b) gas and power inventory management and trading income. Capital is adequate, ALM is conservative, and being APRA regulated is a huge plus. We see its bonds trading fair.
Recommendation Reviewed: November 05, 2024
Recommendation Changed: July 25, 2024
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Fundamental View
AS OF 29 Feb 2024Crédit Agricole’s business model enjoys benefits of scale, with a strategy of organic growth and bolt-on acquisitions.
Italy is an important part of its operations, accounting for around 7% of the loan book, and while asset quality there is weaker than at the group level, its performance has been improving.
Group asset quality and capital ratios are robust, reflecting a largely low-risk balance sheet – retail and related banking accounts for around 80% of group net profits.
Business Description
AS OF 07 Jun 2023- Crédit Agricole (CA Group) includes 38 regional banks (Caisses Régionales or CRs) owned by 2,401 local credit co-operatives themselves, owned by 11.5 million mutual shareholders.
- The scope of consolidation used by regulators (e.g. for stress tests) is the CA Group level. The listed entity is Crédit Agricole SA (CASA), owned 57.1% by the CRs (via a holding company); the remaining 42.9% is free float.
- CASA has four business lines in its own operations and through subsidiaries: Retail Banking (LCL, Italy operations), Asset Gathering (Amundi, Indosuez Wealth Management, and insurance business via Crédit Agricole Assurances), Large Customers (Corporate & Investment Bank and Caceis Investor Services), and Specialised Financial Services (Leasing & Factoring and Consumer Finance).
- It mainly operates in banking and insurance in France. Its second largest market is Italy, where CA Italia offers consumer, private and corporate banking, asset management and insurance. It acquired Cariparma in 2007, and since then has added a number of other small banks, most recently Credito Valtellinese in 2021.
Risk & Catalysts
AS OF 29 Feb 2024Crédit Agricole regards Italy as its second domestic market. Asset quality is still weaker than in the rest of the group but has been improving for some time now.
The group aims to strengthen its already strong positions in specialist finance and asset management via organic growth, partnerships, and bolt-on acquisitions. The group regularly looks for opportunities and it builds stakes in various businesses, which remain areas to monitor. The group tends to only pursue opportunities which generate specific return on investments, return on normalised equity, and the capacity to integrate without any difficulty.
Retail Banking in France remains under pressure due to higher (deposit) funding costs.
Group capital ratios remain of comfort for bondholders, with CASA run more tightly, although capital ratios improved there on the first time adoption of IFRS 17.
Key Metric
AS OF 29 Feb 2024| € mn | 4Q23 | Y23 | Y22 | Y21 | Y20 |
|---|---|---|---|---|---|
| Return On Equity | n/m | 6.3% | 6.3% | 7.4% | 4.0% |
| Total Revenues Margin | 1.4% | 1.5% | 1.5% | 1.6% | 1.6% |
| Cost/Income | 64.8% | 60.5% | 60.6% | 62.7% | 65.0% |
| CET1 Ratio (Transitional) | 17.5% | 17.5% | 17.6% | 17.5% | 17.2% |
| CET1 Ratio (Fully-Loaded) | 0.0% | 0.0% | 17.2% | 17.2% | 16.9% |
| Leverage Ratio (Fully-Loaded) | n/m | n/m | 5.3% | 6.0% | 6.0% |
| Liquidity Coverage Ratio | 144% | 144% | 167% | 171% | 149% |
| Impaired Loans (Gross)/Total Loans | 2.1% | 2.1% | 2.1% | 2.0% | 2.4% |
CreditSight View Comment
AS OF 20 Dec 2024Crédit Agricole remains a core holding amongst European banks, with the benefits of several large business franchises. The largest retail banking group in France has reduced the complexity in its mutual structure, with stakes in all the regional banks formerly held by the quoted entity Crédit Agricole S.A. now transferred to a new group entity. Retail banking has been under pressure but there are signs this is now reducing. Asset quality and capital are sound. This strong starting position helped protect the group’s financial ratios during the COVID-19 pandemic, and the latest set of results were resilient in the face of a challenging macro-economic backdrop globally.
Recommendation Reviewed: December 20, 2024
Recommendation Changed: August 10, 2017
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Export-Import Bank of India
BMO Financial
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Fundamental View
AS OF 11 May 2023CDB’s credit standing is based on its role as a quasi-sovereign policy bank that provides financial support for implementation of the government’s socio-economic policy priorities both domestically and externally.
It is the largest issuer in the Chinese domestic bond market (accounting for near one-tenth of the whole China bond market) after the government itself.
CDB is wholly owned by the Chinese government and can lean on the central bank for liquidity and capital needs. In 2015, the government injected $32 bn in FX reserves into the bank to facilitate financing for Belt and Road Initiative (BRI) projects.
Business Description
AS OF 11 May 2023- CDB was established in 1994 to alleviate the problem of insufficient funds for China's economic growth and to take over the long-term financial agency function and policy loan function of CCB.
- From 1998-2013, under the leadership of Chen Yuan, CDB started its commercialization journey with its management attempting to demonstrate that a policy bank can be run along relatively commercial lines. But the commercialization raised the issue of higher bond financing costs for CDB. Unlike commercial banks, bond financing is the major source of funding for CDB. Since 2013, after a new CEO took over, CDB gradually returned to its original position of a policy bank.
- CDB is owned by the Chinese government via the MOF (37%), Huijin (35%), Buttonwood (27%) - an investment company held by SAFE - and the National Council for Social Security Funds (2%). CDB's main subsidiaries are CDB Capital Co (private equity), CDB Securities Co (underwriting & brokerage) and CDB Leasing, which is listed in Hong Kong.
Risk & Catalysts
AS OF 11 May 2023As its credit standing is strongly linked to the government, CDB is rated in line with the China sovereign (A1/A+/A+). Any downgrade of China’s sovereign rating would affect its own ratings.
Any reduction in the government’s willingness to support CDB would weaken its credit standing. Some uncertainty did arise as the bank moved towards commercialisation pre-2013, but CDB’s policy bank status has since been reaffirmed.
CDB’s policy role may involve it taking on exposure that lead to financial losses, in which case we would expect proactive state support to ensure that the bank remains financially sound.
Key Metric
AS OF 11 May 2023| Key Metrics | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Operating Income/Average Assets | 1.53% | 1.33% | 0.98% | 1.09% | 1.31% |
| Pre-Impairment Operating Profit / Average Assets | 1.43% | 1.22% | 0.88% | 0.99% | 1.22% |
| ROA | 0.7% | 0.7% | 0.7% | 0.5% | 0.5% |
| ROE | 8.7% | 8.7% | 8.2% | 5.2% | 5.3% |
| CET1 Ratio | 9.7% | 9.9% | 9.9% | 9.9% | 9.3% |
| Credit Costs | 0.86% | 0.45% | 0.05% | 0.59% | 0.85% |
| NPL Ratio | 0.92% | 0.95% | 0.79% | 0.84% | 0.78% |
| Total Equity/Total Assets | 7.90% | 8.30% | 8.51% | 8.82% | 8.66% |
CreditSight View Comment
AS OF 03 Jul 2023CDB is China’s largest policy bank. It is owned by the government and plays a key role in implementing the Chinese government’s economic plans both inside China and overseas. It is a quasi-sovereign entity that is rated in line with China’s sovereign rating. We therefore view its debt as attractive for additional spread pick-up over the $-denominated sovereign curve given that its ultimate risk is that of the Chinese government.
Recommendation Reviewed: July 03, 2023
Recommendation Changed: July 16, 2021
Who We Recommend
Starbucks
Export-Import Bank of India
BMO Financial