ESG Case Study: Citigroup & Standard Chartered

1. Credit analysis:

Citigroup
Citigroup (Citi) is rated Baa1. The low Moody’s investment grade rating reflects Citi’s post-crisis legacy challenges with bad loans and low profitability. The improving outlook for global investment banks profitability recently has seen Citi’s outlook changed to positive.

Standard Chartered
Standard Chartered Bank is rated A2. A one notch downgrade from Moody’s in 2017 reflected the likelihood of structurally lower profitability following management intentions to de-risk the balance sheet. These actions from management are positive for bank bond holders.

Citigroup and Standard Chartered are both non-domestic issuers of euro-denominated bonds in the banking sector.

2. ESG analysis:

Within the cohort of euro-denominated, Baa1 (credit) rated banks, we hold the Citi 2026 maturity. At +40bp spread the bond appears rich against an interpolated curve (as shown).

Citi has an MSCI ESG score of BBB, reflecting acute concerns around financial system instability and product safety.

More broadly, Citi scores poorly in its Governance criteria: MSCI believe Citi’s chances of being targeted by regulators are 68 times higher than an average peer.

Given Citi’s lack of progress in addressing these ESG concerns we decided to investigate switching out of the issuer entirely.

A key for the below graph

3. ESG due diligence:

CaTo quantitative tools are now used further to identify an appropriate alternative to Citi. As above, there is no maturity-matched alternative to the Citi 2026 bond within the Baa1 credit-rated cohort. Iterating up the credit scale, CaTo identifies the A2-rated Standard Chartered Bank 2026 bond as a possible alternative (as shown).

With an MSCI ESG score of AA, Standard Chartered is rated two notches higher than Citi. Like Citi, Standard Chartered Bank scores poorly on financial system stability as it is designated a globally systemic important bank. However, Moody’s have acknowledged management’s desire to de-risk the bank’s balance sheet which we believe may in time improve the ESG score.

4. Market Analysis:

Overall, Standard Chartered scores in the top ESG quartile of its industry peer group. Having conducted our credit and ESG analysis we identify no issues in our market analysis of Standard Chartered Bank bonds. The bank’s bonds trade cheap to the peer group (as shown), which we account for due to a lower weighting in global indices and investor ‘home bias’. That is, US-based investors favour US-domiciled banks in their client’s portfolios. Neither of these issues give cause for concern.

To conclude, the 2026 maturity bond trades at a spread of +67bp and appears some 30bp cheap relative to an interpolated curve. By switching from Citi 2026 to Standard Chartered 2026 issues we improve the credit rating and the ESG score, both by two notches.

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