US Banks: 1Q2017 results of US investment banks JP Morgan (JPM) and Citigroup (CT) beat analyst expectations by 9-10% due to better trading revenue following bond market volatility and buoyant equity markets, as well as strong capital markets performance across the board. Besides strong 1Q non-interest income, asset quality improved, and balance sheet strengthened with both banks adding 20 bps to CET1 capital. We estimate that JPM and CT have about 3% and 3.3% of excess capital respectively, compared to an average of 2.3% for large US banks.
In line with our 2Q 2017 strategy, we pick a longer duration CT USD bond as a possible tactical play. Overall, we are positive on the US banking sector as expect better NIMs, stronger US growth, possible lower tax rates and decreased regulation. We note that C 4.75% 2046 trades wide compared to its peers at a spread of 230 bps despite being relatively well capitalized.
CIMIC: CIMIC’s 1Q2017 result delivered sustainable cash-backed profits after a period of deleveraging. Sector outlook remain positive with strong pipeline of infrastructure and mining projects relevant to CIMIC of nearly A$80bn of tenders to be bid and awarded during the rest of 2017, and a further A$250bn in 2018 and beyond. Even though CIMIC’s standalone credit metric remain strong, we note that the weaker credit quality of the parent is a constraint to the overall credit profile of CIMIC. In terms of valuation, CIMIC 5.95% 2022 AUD notes is trading at z-spread of 150 bps above USD Industrial BBB +/BBB/BBB- bonds. However, we believe current valuation is fair given that it is now trading 20bps below its historical average of 285bps.
The information and opinions in this report were prepared by AmInvestment Bank Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmInvestment Bank Bhd. Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmBank Group Bhd and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice.