ESG Case Study: Wells Fargo & QBE Insurance Group
1. Credit analysis:
Wells Fargo is rated A2. The ongoing retail accounts scandal is likely to adversely impact near term revenue and underlying costs. Whilst Moody’s remain sanguine on the outlook for Wells Fargo, prolonged political and regulatory scrutiny of the executive supervision of practices during this time is likely to weigh on the rating outlook.
QBE Insurance Group
QBE is rated A3. Improving profitability, strong capitalisation and solid asset quality underpin the credit outlook.
2. ESG analysis:
Within the cohort of US dollar denominated, A2 rated banks, we held the Wells Fargo 2023 maturity. The bond appears fair value against a CaTo interpolated curve (as shown).
Wells Fargo has had a low MSCI ESG rating of CCC since 2016, reflecting protracted problems with corporate governance, financial product safety and labour management.
Given the extent of the underlying governance problems within Wells Fargo we decided to investigate a switch into a peer financial institution.
3. ESG due diligence:
CaTo quantitative tools were used to identify an appropriate alternative to Wells Fargo. Broadening our CaTo search across A-rated financials we identified QBE Insurance Group as an alternative issuer.
With an MSCI ESG rating of A, QBE is 4 notches higher than Wells Fargo (at CCC). QBE scores highly for corporate governance and responsible investing. We note the 2023 maturity bond trades +55bps cheap to the fair value fitted curve within the Insurance peer group (as shown).
4. Market Analysis:
Overall, QBE scores highly in its peer group for ESG criteria. QBE 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 insurers in their portfolios.
Although Moody’s rate QBE 1 notch below Wells Fargo, we are comfortable with the underlying credit metrics of the company and the liquidity that the 2023 bond demonstrates. The QBE 2023 maturity bond trades at an additional spread of +40bp to Wells Fargo 2023 bond. We are thus comfortable switching from Wells Fargo 2023 to the QBE Insurance Group 2023 bond, improving the ESG rating by 4 notches.
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