Wages of Sin

Date: Tue, 28 Jun 2011 14:02:21 +0800
Subject: Wages of sin

Earl of Sandwich: “You shall either die of the pox or on the gallows!”

John Wilkes: “That sir depends on whether I embrace your mistress or your politics.”

The scourge of kings and dictators,” “the great pox” or “the wages of sin,” if you prefer, syphilis is making a comeback. In the UK (a known hotbed of the disease) diagnoses of syphilis have shot up by more than 1,000% in the last 10 years, according to that authority on British dysfunctionalism, The Daily Mail. Known to cause madness, paralysis and even death, reportedly Henry VIII, Napoleon, Van Gogh, Hitler, Mussolini and even Al Capone all suffered from its corporal ravages. Now we can add HSBC and JP Morgan (the bank) to that ignoble list.


Created by the Dodd-Frank laws, the “SIFI-list” is a roster of the too big to fail crowd and the beginning of ironies. Basel has barked; the eight most globally inter-connected banks, which includes HSBC (5 HK, Buy), will face a 2.5% capital surcharge to be implemented from 2016, less than market fears of a 5% charge or higher.

The irony of the GFC is that banks now are bigger than ever having greedily swallowed smaller competitors and getting money for old rope from the Fed to boot. Having a list of financial institutions that will be bailed out at all costs because, after all, they are too big to fail, may mean lower borrowing costs for these guys but it also means greater risk to the system and brings the next day of infection closer.

Being on the list is particularly good for HSBC, John Wadle writes today, as it levels the playing field because they have “real capital” while other banks will have to deleverage. HSBC can easily adjust to the new requirements as it is already one of the best capitalized banks in the world with a 10.7% core Tier-1 ratio. John expects HSBC to be highly capital generative as provisions drop below US$10 bn a year and he forecasts the bank’s core Tier-1 ratio to rise to nearly 12% in 2014, leading to an excess capital dilemma for the bank. Trading at 1.3X tangible book and 9.5X 2012 PE, despite the potentially communicable disease, HSBC looks to be in the strongest position to pay more dividends and consider share buybacks in the future. Note attached.



As I wrote last week, analyst Sokje Lee is a major bull on the long term secular story of global shipping consolidation courtesy of higher oil prices leading to the demand for more fuel efficient ships. Demand for LNG as a cleaner and sometimes cheaper substitute for oil is the second leg driving demand for new ships. Yesterday, Hanjin Heavy (097230 KS, Buy) reached agreement with its labor union to end their SIX MONTH STRIKE (only in Korea). Thanks to the strike, Hanjin has a pretty open order book and with rising demand that is a good thing.

Hanjin will be able to deliver ships one year earlier than its fully booked peers. Current orders are for only 6 vessels vs. its annual capacity of 16-17 ships. Although not a pure shipbuilding play with its exposure to construction, HH has been a real laggard and is trading below book. HH’s core competence is for LNG carriers and mid-size container ships. Sokje expects orders will come and the shares will rally. Trading at 0.8X P/B, 8.4X PE and estimated 40% earnings growth, Hanjin Heavy is a buy. Note attached.



Standard Chartered (2888 HK, Buy) just released their pre-close statement. John Wadle’s first take is that revenues are below expectations but expenses are being better managed. They also have the same issues with their union as Hanjin Heavy. Provisions though, are below our forecasts which makes John think he will still be comfortable with his earnings forecasts of US$4.87 bn 2011. However, STAN trades at 12X PE while JPM trades at 7X. More after the analyst call tonight.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

Mirae Asset Securities: Risk is to the Upside

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