Yi Qian – Comparing a new issue from Standard Chartered with existing bonds.
– The credit quality of Standard Chartered is one that we like and we have been investing in the company for many years. The bank was cautious when reporting its September results by taking $2bn provisions for expected credit losses due to Covid-19 for the first nine months of 2020. This large amount of loan loss provisions is mitigated by the bank’s strong revenue generation capability of $4.5bn pre-provision revenues in those first nine months. On top of this, Standard Chartered reported a solid CET1 ratio at 14.4%, offering an $11bn capital buffer above the 10.0% minimum requirement. This provides a good cushion for any negative surprise in 2021.
While my role entails analysing in detail the fundamentals of a company, one of the other aspects of my job that I enjoy is comparing the relative attractiveness of the different bonds of the same company. Standard Chartered provided a very good example of this with its new bond issued in the first week of 2021. It is a USD AT1 with a 4.75% coupon and the first call or coupon reset date in 10 years. If not called in 10 years, the reset spread would be 380bp above the 5-year US Treasury in 10 years’ time. We can therefore compare the attractiveness of this new issue with other issues such as the existing 6% AT1 callable in 2026 with a reset spread of 566bp, close to 200bp above this new one. While the yields to call are similar for these two bonds, a comparatively higher reset spread of the 2026 bond further increases the likelihood of it being called. So when comparing which we prefer, we find that for the existing 2026 bond we can earn a similar income from the same company for a much lower duration, and hence at a lower risk for the fund should interest rates rise in the next few months or years.