Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary:  A flattening US interest rate yield curve changed the dynamics for credit investors for most of the month of April, in complete contrast to how interest rates behaved in March. The narrative changed to one that was Treasury bond supportive, and this supported shorter-duration securities. Meanwhile yield curve flattening pushed credit spreads in the opposite direction longer out the curve.The sweet spot for total return investors moved dramatically. Investors that were positioned in higher duration bonds witnessed underperformance on a total return basis. Meanwhile, investors in lower duration bonds outperformed on a total return basis. However, as the month ended, we began to witness a return of the reflation trade with US interest rates ending the month on an upswing. May could see a repeat of March’s carry-trade performance.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had a mixed performance with one-third of the +100 bonds that we track widening during the month. Vaccine versus virus concerns led to lower economic growth projections by the market than seen in the prior month. Expectations for an unsynchronized global recovery also factored. Taken together, this would delay the much needed catch-up in credit fundamentals to match the monetary accommodation driven spread compression over the last year. As such, bond spread tightening was less ebullient while widening lessened the amount of fundamental performance needed to justify lofty spread levels.

Executive Summary:  A flattening US interest rate yield curve changed the dynamics for credit investors for most of the month of April, in complete contrast to how interest rates behaved in March. The narrative changed to one that was Treasury bond supportive, and this supported shorter-duration securities. Meanwhile yield curve flattening pushed credit spreads in the opposite direction longer out the curve.The sweet spot for total return investors moved dramatically. Investors that were positioned in higher duration bonds witnessed underperformance on a total return basis. Meanwhile, investors in lower duration bonds outperformed on a total return basis. However, as the month ended, we began to witness a return of the reflation trade with US interest rates ending the month on an upswing. May could see a repeat of March’s carry-trade performance.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had a mixed performance with one-third of the +100 bonds that we track widening during the month. Vaccine versus virus concerns led to lower economic growth projections by the market than seen in the prior month. Expectations for an unsynchronized global recovery also factored. Taken together, this would delay the much needed catch-up in credit fundamentals to match the monetary accommodation driven spread compression over the last year. As such, bond spread tightening was less ebullient while widening lessened the amount of fundamental performance needed to justify lofty spread levels.

Bank Credit Compass: Total Return Sweet Spot Moves, but May Rebound

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

China Merchants Bank H / Equity Bottom-Up

*Good 1Q21 Bottom-Line: China Merchants Bank (3968.HK) [CMB] reported 1Q21 results of CNY 32.0 bn, increasing CNY 11.3 bn (54.4%) linked quarter. Results were driven by net interest income improvement; robust fee growth; and an operating expense reduction; and *Credit Wall Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 18.9 bn or 138.5% on an annualized basis, accelerating form the 04.7% growth rate posted in 4Q20. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 184% - suggesting that even the mighty are falling.

*Good 1Q21 Bottom-Line: China Merchants Bank (3968.HK) [CMB] reported 1Q21 results of CNY 32.0 bn, increasing CNY 11.3 bn (54.4%) linked quarter. Results were driven by net interest income improvement; robust fee growth; and an operating expense reduction; and *Credit Wall Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 18.9 bn or 138.5% on an annualized basis, accelerating form the 04.7% growth rate posted in 4Q20. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 184% - suggesting that even the mighty are falling. 

China Merchants Bank – Pig Still In Python

*Many Moving Parts: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, remains challenged. For 1Q21, PAB reported results of CNY 10.1 bn – increasing CNY 3.6 bn (55.2%) on a linked quarter basis. Revenues, however, did increase CNY 4.8 bn (13.0%), much of which, in our view, can likely be attributed to gains while operating expenses contracted CNY 802 mn or 6.2% over the period; and*Credit Seeing Improvement: By our analysis, we find that credit weakness continues to occur as net new NPLs have increased CNY 4.2 bn or 53.6% on an annualized basis. In fairness, however, this is far better than the CNY 20.5 bn or a massive 241% (223% in 3Q20) increase on an annualized basis. Assuming the credit break in the PAB portfolio continues to remain at the current improved level, we find that PAB’s reserves still remain quite light by CNY 19 bn if we assume a 2x NPL ratio. This shortfall represents 6% of stated equity.

*Many Moving Parts: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, remains challenged. For 1Q21, PAB reported results of CNY 10.1 bn – increasing CNY 3.6 bn (55.2%) on a linked quarter basis. Revenues, however, did increase CNY 4.8 bn (13.0%), much of which, in our view, can likely be attributed to gains while operating expenses contracted CNY 802 mn or 6.2% over the period; and*Credit Seeing Improvement: By our analysis, we find that credit weakness continues to occur as net new NPLs have increased CNY 4.2 bn or 53.6% on an annualized basis. In fairness, however, this is far better than the CNY 20.5 bn or a massive 241% (223% in 3Q20) increase on an annualized basis. Assuming the credit break in the PAB portfolio continues to remain at the current improved level, we find that PAB’s reserves still remain quite light by CNY 19 bn if we assume a 2x NPL ratio. This shortfall represents 6% of stated equity.  

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>
<a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> is restructuring its business holdings, with at its core the setting up of a financial holding company</li>
<li>In addition, Ant will return to its roots in the payments division, it will set up a personal credit reporting company as well as establishing a consumer finance company</li>
<li>The official press release does not mention the investmentech arm that includes Ant’s in-house asset manager, but there is financial press speculation that it may be required to shrink its asset base</li>
<li>In essence, the new structure and more intrusive regulation will limit Ant’s ability to extract synergies from its – previously – tight knit financial eco-system, which can only hurt its potential develop further economies of scale and deliver premium revenue and earnings growth</li>
<li>It is also likely that in its consumer credit business it will need to retain a higher proportion of loans originated, thereby necessitating higher capital levels; the personal credit reporting company will also provide PBoC with access to Ant’s “big data” on payments, credit and other financial products</li>
<li>Despite the need for further clarity on the regulatory structure going forward, as well as the lack of any updated Ant financials to December 2020, we have arrived at a revised valuation range for Ant, based on our pre-money SOTP, of USD122-144bn</li>
<li>The regulator’s focus on big FinTech in China and especially Ant is constructive for the prospects of other less dominant non-bank financial companies (NBFCs) in China, such as <a href="https://www.smartkarma.com/entities/lexinfintech-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26036:1" rel="noopener">Lexinfintech Holdings (LX US)</a> and <a href="https://www.smartkarma.com/entities/lufax-holdings" target="_blank" data-smartkarma-citation="entities:29690:1" rel="noopener">Lufax Holdings (LU US)</a>, as well as retail focused banks like <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a> </li>
<li>Risks to our cautious view on Ant include an ability for management to navigate the climate of tighter regulatory constraints and to deliver better than expected premium growth and returns from its digital financial platform</li>
</ul>



Ant Financial Services Group (6688 HK) is restructuring its business holdings, with at its core the setting up of a financial holding company
In addition, Ant will return to its roots in the payments division, it will set up a personal credit reporting company as well as establishing a consumer finance company
The official press release does not mention the investmentech arm that includes Ant’s in-house asset manager, but there is financial press speculation that it may be required to shrink its asset base
In essence, the new structure and more intrusive regulation will limit Ant’s ability to extract synergies from its – previously – tight knit financial eco-system, which can only hurt its potential develop further economies of scale and deliver premium revenue and earnings growth
It is also likely that in its consumer credit business it will need to retain a higher proportion of loans originated, thereby necessitating higher capital levels; the personal credit reporting company will also provide PBoC with access to Ant’s “big data” on payments, credit and other financial products
Despite the need for further clarity on the regulatory structure going forward, as well as the lack of any updated Ant financials to December 2020, we have arrived at a revised valuation range for Ant, based on our pre-money SOTP, of USD122-144bn
The regulator’s focus on big FinTech in China and especially Ant is constructive for the prospects of other less dominant non-bank financial companies (NBFCs) in China, such as Lexinfintech Holdings (LX US) and Lufax Holdings (LU US), as well as retail focused banks like Postal Savings Bank of China (1658 HK) 
Risks to our cautious view on Ant include an ability for management to navigate the climate of tighter regulatory constraints and to deliver better than expected premium growth and returns from its digital financial platform


Bank Of Ningbo Co Ltd A / Equity Bottom-Up

*Despite Cost Growth, Bank of Ningbo Pulls One Out: Bank of Ningbo (002142.CH) [Ningbo] reported 4Q20 bottom-line results of CNY 3.8 bn, increasing CNY 304 mn or 8.8% linked quarter. The linked quarter results improvement at Ningbo was driven by several factors: a) revenue improvement of CNY 571 mn (5.6%) and likely driven by loan growth of CNY 32.4 bn (5.0%); b) a CNY 752 mn (31.5%) reduction in loss provisioning; and c) a 6.3% reduction in Ningbo’s tax rate to 7.3%; and*Credit On Solid Footing: Despite the continued accelerated level of net new NPL growth at 83.4% on an annualized, Ninbo has a low base of NPLs.  It’s a good thing that Ningbo remains well-reserved and that credit risk appears quite manageable because capital levels remain somewhat challenged with a CET1 of just 9.5%.

*Despite Cost Growth, Bank of Ningbo Pulls One Out: Bank of Ningbo (002142.CH) [Ningbo] reported 4Q20 bottom-line results of CNY 3.8 bn, increasing CNY 304 mn or 8.8% linked quarter. The linked quarter results improvement at Ningbo was driven by several factors: a) revenue improvement of CNY 571 mn (5.6%) and likely driven by loan growth of CNY 32.4 bn (5.0%); b) a CNY 752 mn (31.5%) reduction in loss provisioning; and c) a 6.3% reduction in Ningbo’s tax rate to 7.3%; and*Credit On Solid Footing: Despite the continued accelerated level of net new NPL growth at 83.4% on an annualized, Ninbo has a low base of NPLs.  It’s a good thing that Ningbo remains well-reserved and that credit risk appears quite manageable because capital levels remain somewhat challenged with a CET1 of just 9.5%.  

China

Postal Savings Bank of China Co., Ltd. provides banking services. The Company offers deposits, loans, fund settlement, and other services. Postal Savings Bank of China provides its services to individuals, enterprises, and other clients.

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Postal Savings Bank of China C (1658 HK)

Bank Credit Compass: Total Return Sweet Spot Moves, but May Rebound

The sweet spot for total return investors moved dramatically in April. However, as the month ended, the reflation trade returned. May could see a...

Hank Calenti, CFA

China Merchants Bank – Pig Still In Python

CHINA MERCHANTS BANK: CMB reported a 1Q21 QOQ results increase of 54.4% driven by net interest income; fee growth; and lower expenses. Net new...

Thomas J. Monaco

Ping An Insurance – Sea Change At Bank

PING AN INSURANCE: PAB reported a 55.2% QOQ improvement in results. Net new NPLs have increased 53.6% on an annualized basis - far better than the...

Thomas J. Monaco

Ant Group: Nearing Regulatory Closure

Ant Group is restructuring its operations, under PBoC pressure which will limit Ant’s ability to extract synergies from its entire financial...

Victor Galliano

Bank of Ningbo – A Good Result

BANK OF NINGBO: 4Q20 bottom-line increased 8.8% linked quarter driven by revenue improvement, a drop in loss provisioning, and a lower tax rate....

Thomas J. Monaco

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