大型银行业专家会议要点：恶化的企业财务

1、We present below highlights from our recent call with Brad Saegesser, Senior Solutions Specialist at RapidRatings. We have edited the transcript below for clarity. Minor grammatical changes that do not impact the meaning of content have been applied. Changes to content to clarify meaning have been u

2、nderlined. What we consider to be key points have been highlighted in bold. The opinions expressed by Brad Saegesser herein do not necessarily reflect the views and opinions of UBS. UBS accepts no responsibility for the accuracy, reliability or completeness of the information and will not be liable

3、either directly or indirectly for any loss or damage arising out of the use of this information or any part thereof.U.S. Large Cap BanksModerator: Saul Martinez July 8, 20199:00 am CTSaulGood morning. Thanks for joining us. Credit quality has been pristine for US banks and historically low losses ha

4、ve been a major contributor to high profitability levels. And even if concerns have cropped up from time-to-time about the leveraged loan market and corporate leverage levels more broadly, credit quality of commercial loan books of banks remains very good. But are there starting to be cracks?Brock V

5、andervliet, our mid-cap bank analyst and I, recently published a credit loss model developed by UBS Evidence Lab which predicts an uptick in C&I losses for the largest 100 US banks in the second half of the year. We hope this call can shed some light on corporate financial health.Were joined by Brad

6、 Saegesser. Brad is the Senior Solutions Specialist at RapidRatings. Brad has over 25 years of experience helping companies implement credit risk management solutions. In his current role he works with both public and private companies to implement financial health solutions into their risk manageme

7、nt program. Brad has also had roles at Crowe, Moodys Analytics, DiCom Software and Ernst & Young.Importantly, we distributed a slide deck about an hour ago that Brad will be referencing during the Q&A. Email my team member Antonio Chapa or myself and well get it to you if you need it. Ill also ask B

8、rad questions for about say 30/40 minutes and then well open it up for Q&A. If you prefer that we ask the question, again, feel free to email us with those questions and well do our best to get them in.But before we get going, customary disclosure: As a research analyst, I am required to provide cer

9、taindisclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view on this call today. These disclosures are available at HYPERLINK /disclosures /disclosures. Alternatively, please reach out to me and I can provide them to you after the call.So w

10、ith that disclosure, why dont we get started? Thanks for joining us, Brad.BradYes. Good morning, Saul.SaulSo we did distribute a handful of slides that summarizes some analysis that youve done on corporate financial performance and health. If you can just start out with summarizing what you think ar

11、e the primary conclusions of the analysis. Feel free to refer to the slides as well.BradYes. Thanks, Saul. So Id like everybody to take a quick look at slide number 3 in the deck that Saul distributed this morning. Were going to be talking this morning a lot about the RapidRatings financial health m

12、odel and the observations weve been seeing through that model related to corporate financial health performance.So to lead off Id like to give everybody just a quick introduction to the main components of that model. So slide 3 gives a very high level overview of the methodology. On the left-hand si

13、de of this slide you see the first component to our model, a concept we call core financial health or core health score. The financial health rating and core health score model is a purely quantitative statistical model that looks at corporate financial performance, balance sheet, income statement,

14、cash flow ratios on both public and private companies.We start our calculation with this concept we call core health score which looks at 62 fundamental financial ratios primarily focused around operating net profitability, the cost structure, the efficiency of the firm. Our core health score is mea

15、suring a two to three-year time horizon of risk, what I like to call that core fundamental financial performance of a company.How well are they operating their company? How efficiently are they generating cash flows and profits from their balance sheet assets? How well are they managing their debt?W

16、e deliver their core health score on a 0 to 100 scale, 0 being the worst, 100 being the best. We have five color-coded risk categories in there, red being very poor core health and blue being very strong corehealth. We then overlay on top of this core health score 11 additional financial ratios that

17、 we call our resilience indicators. These are more near-term focused financial ratios looking at leverage ratios, liquidity ratios and what we call earnings performance. Those are more cash flow coverage, debt service coverage, interest coverage type ratios. We put those resilience ratios on top of

18、core health to come up with the final answer, the financial health rating.We also deliver that on a 0 to 100 scale, again 0 being the worst, 100 being the best. In this particular example, you can see that the company scored a 55 core health score in our medium health range, but they had strong resi

19、liency and actually got a health rating of a 67. That means that this company probably has strong liquidity ratios. Maybe their leverage ratios are smaller or theyre well in line with their industry. So they actually have some resiliency in this particular company. These two dimensions of our score,

20、 core health score, that two to three-year kind of medium- term time horizon of risk and the financial health rating dimension which is that one year time horizon of risk.So if we move to slide 4 we put these two dimensions together into this quadrant view where quadrant A in the upper right-hand co

21、rner, the green zone, these are really strong companies. These are companies that have strong core health on the vertical axis so they have core health scores above 40. They also have very low near-term default risk. Their financial health rating, that one-year time horizon of risk, is also aboveWe

22、like to see companies in quadrant A. These are strong companies.On the flipside, we do not like to see companies in quadrant C. These are companies with poor core health. Their fundamental financial performance has broken down and they also have high near-term default risk.Quadrants B and D are typi

23、cally transition zones as companies are migrating from stronger to weaker or weaker to stronger. We typically see a lot of companies move through quadrant B. As their fundamental financial performance starts to decline, their core health score comes down but their near- term default risk is still re

24、latively low.Quadrant D is kind of an anomaly zone. We dont see a ton of companies typically in quadrant D because these are companies that still have strong core health. Their fundamental financial performance is still very good, but they have high near-term default risk.Typically somethings happen

25、ed thats kind of shocked that company thats causing that near-term default risk.Now to start pivoting into our real discussion today with an introduction to our model, lets look at slide number 5. Slide number 5 is showing the current distribution of US public companies in our RapidRatings database

26、and where theyre falling inside these four quadrants. We can see today, this is based on our ratings through the end of 2018, 51% of the companies in our US public company coverage, which is about 3,500 or 4,000 companies, 51% of them are sitting in quadrant A today. Thats good. Again, we like quadr

27、ant A companies.Now, the small numbers you see in parenthesis are our long-term average distributions by the quadrants and that long-term average is looking at it from 1991 through 2017. So the long-term average of companies that we see in quadrant A is actually 61%. Right now were seeing 10% less o

28、f companies in quadrant A than weve seen over the long-term average. Its kind of one of those first indicators that were starting to see that corporates financial health seem to decline. Were seeing less really strong companies.Looking at quadrants B and D, the yellow and red zones, were seeing that

29、 right now were seeing a higher percentage of companies in those higher risk zones than the long-term average. So, 26% of the companies today are in quadrant B meaning their core financial health is lower versus long-term average theres been 22%. Whats also kind of troubling is the red zone quadrant

30、 C. Were actually seeing 21% of the companies today as of yearend 2018 sitting in quadrant C versus the long-term average of only 15%.So, Saul, I was just going to stop right there before I go to slide 6 to see if you have any questions/observations so far.SaulNo, I think thats helpful. I actually d

31、o have some questions on slide 6. So you can go ahead and describe slide 6 and then Ill pepper you with some questions, Brad.BradOkay. So slide 6 herethe previous slide I was showing you the percentage breakdowns by the quadrant as of 2000 and of 2018 versus our long-term average. This slide is now

32、showing a trend of those quadrant distributions. Going back to the end of 2005 so leading up into the financial crisis great recession all the way through the end of 2018.So we see the green light at the top; thats the percentage of companies in quadrant A, those really strong companies. We see that

33、 coming into kind of the financial crisis great recession, the percentage of companies in quadrant A started to decline. In 2006 during 2007 coming into the financial crisis and the great recession, the percentage of companies in quadrant A went just under 60% to under 50%. While at that same time,

34、the percentage of companies in quadrants B and C were increasing.Quadrant D again thats the anomaly zone. We dont see a lot of companies in there. That would stay fairly constant over this entire time frame. Then we see certainly coming out of the great recession 2009/2010 even into 2011, quadrant A

35、 percentages started to increase. As we were coming out we were in our recovery. The percentage of companies in quadrants B and C, the riskier zones, started to decline.Now, we start to see some patterns develop. Around into 2011 into 2012 we start to see quadrant A declining again while quadrants B

36、 and C are starting to increase. Really around 2011/12 time frame those things start to look kind of similar to what we saw in the mid-2000s.Until you get to 2015something kind of interesting happened in 2015. Quadrant A started to sneak up just a little big again while percentages in quadrants B an

37、d D started to decline a little bit. A little bit of an anomaly there, but this is our overall US coverage. These are all of the US public companies in our database.We will actually see some different sort of trend lines here when we start to break this down by industry sectors and especially we see

38、 differences when we look at sizes of companies. Typically right now were seeing some of the larger companies are sort of influencing that increase in quadrant A right now versus if I showed you this chart for smaller companies and especially if we started looking at private companies in our databas

39、e, youre going to see that little pickup in quadrant A not happening. That financial health is continuing to decline.SaulSo Brad, if I could chime in, I think you started to answer my question, but if I just look at slide 5 in isolation, it looks somewhat worrisome. Youre ten percentage points below

40、 the long-term average in quadrant A. Youre above in the lower quadrants with lower core health scores and in quadrant D as well as quadrant C.But if I look at slide 6, you really started to see stabilization in quadrant A and then a decline in quadrant B since 2015 and were pushing on four years af

41、ter that. How do we interpret that? I mean why hasnt it translated yet into higher losses or at least continued upticks in quadrants C and D?BradYes. Well talk a little bit more as we get a little deeper into some of the slides. But again, what were seeing in our quadrants is this combination of the

42、 core health score and the financial health rating. Again, the core health score being that two- to three-year time horizon of risk, the financial health rating being the one-year time horizon. These two do work dynamically with each other.So it is kind of interesting that overall weve seen the numb

43、er of companies in quadrant B start to come down a little bit and those are generally migrating up into quadrant A. But if we actually look at slide 5, quadrant A is a pretty big zone. I mean, it covers companies that have core health and financial health ratings above 40 on a 0 to 100 scale.We do a

44、 lot of analysis. Well start to break this down into more granularity. Because if you think about it, just look at quadrant A, the green zone, you could have companies in the upper right-hand corner of quadrant A that are really strong. Their core health is above 80. Their financial health is above

45、80. The best of the best.But then if you look at the lower corner of quadrant A, these are companies that have medium core health so their fundamentals are starting to break down a little and their near-term default risk is also in that medium zone. So theres actually a fairly big difference between

46、 the upper right-hand corner of quadrant A and the lower right-hand corner of quadrant A.SaulGot it.BradSo if you start to break downand well start to doI didnt put this level of detail in the slides, but if you start to break down the long-term distribution and you break quadrant A down more granul

47、arly, theres actually nine boxes within quadrant A itself. Were generally seeing a migration of companies from the upper right-hand corner to the lower left-hand corner of quadrant A. Theyre still in quadrant A, but the risk is still increasing.And what were seeing in the downturn, the long-term dow

48、nturn here in quadrants D and C is those companies that have migrated out of B and Cgenerally into A are just barely getting into quadrantTheyre coming into that lower left-hand corner. Theres a slight improvement maybe on their core health, maybe slightly lower near-term default risk but its really

49、 not significant movement. Whats troubling us right now is the fact that there are only 51% of the overall companies in quadrant A versus the long-term average of 61.If you look back to slide 6, the last time we started to dip below 50% of companies in quadrant A was during 2017 coming into 2018. So

50、 weve seen that same behavior again and the number of companies in quadrant B, they sort of peaked end of 2009 coming up during 2008 and 2009. Were generally back to those same levels today. The little uptick is interesting, but it doesnt really tell me that things are improving significantly. I loo

51、k at this and say were well below the term averages here.SaulSo do you think that migration is maybe a little bit misleading in that it does not capture some deterioration within this broad group thats baked in quadrant A where youre going from very low risk and very strong ratings to sort of medium

52、-ish health and risk?BradAbsolutely, yes. If we look atand again, this chart is our overall US coverage. If we start to break it down just to break down quadrant A down more granularly youll see different behavior. Youre seeing an increasing risk profile. And if you start to do these same analyses b

53、ased on different industry sectors, different sizes of companies, we see very different behaviors in smaller companies even in the smaller public companies, but just below $250 million in assets, even $50 million in assets. Were seeing a lot more deterioration in risk in the smaller companies.SaulSo

54、 if I could go back to the correlations. If I go back to 05 to 07 we start to see the deterioration in quadrant A over a few years, kind of similar to what you saw from 11 to 15 and then you saw a pretty sizable uptick in both quadrant B and C. I think quadrant B is kind of going from 20% to 30% alm

55、ost with companies who have still okay financial health ratings, but weak core health ratings and then quadrant C, the most troublesome, goes fromI dont know20 to 26 or 27. Im just eyeballing it.You havent seen that obviously this time around. Is your expectation now that we are at the tip of seeing

56、 some worsening in quadrant B and C?BradYes. I would say were definitely seeing tipping point kind of behavior especially when we started to look at some individual banks portfolios. We do a lot of analysis with our clients and were looking at their commercial and industrial loan portfolios and this

57、 type of behavior that were seeing in those portfolios.A lot of the work weve been doing has been with what I would call kind of mid-tier financial institutions, probably in that $20 billion to $35 billion, $40 billion size institution where a lot of their C&I loan portfolios are to private companie

58、s. Weve seen some very interesting changes from kind of that 2012/13 time frame to today. Thats a little different than this chart youre seeing here of the overall US corporates.SaulGot it.BradThat little uptick youre seeing in quadrant A we have not seen in any private company loan portfolio that w

59、eve looked at. Were seeing much bigger in continual increases in the quads especially quadrant B today. In a lot of those portfolios quadrant B has continued to grow through 2017 and 18. Again, those are portfolios that have a lot more private companies in them and so there are going to be slightly

60、more smaller companies in there, less than$250 million in assets typically.SaulOkay.BradSo yes, this slide, when I put this one together I was kind of like oh boy that little uptick in quadrant A is somewhat an anomaly just based on theres a lot of the big public companies that are kind of pushing t