Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

Monthly Newsletter | May 2021
Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.
Both the asset and liability sides of the banks' balance sheets hit a wall in April. Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.
Deleveraging real estate exposures remains a top priority for the regulators. New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  
We expect the central bank to maintain a neutral policy for the remainder of 2021. The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.
We will remain underweight the H-share banks against MSCI China <a href="https://www.smartkarma.com/entities/msci-china-index" target="_blank" data-smartkarma-citation="entities:22895:1" rel="noopener">(MXCN INDEX)</a> until 2Q21 earnings. Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.

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Related Insights
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<a href="https://www.smartkarma.com/insights/icbc-the-prefs-are-junk-and-should-trade-like-it" target="_blank" data-smartkarma-citation="insights:51598" rel="noopener">ICBC: The Prefs Are Junk and Should Trade Like It</a> </li>
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<a href="https://www.smartkarma.com/insights/icbc-the-bond-identity-a-zero-growth-dividend-discount-story" target="_blank" data-smartkarma-citation="insights:51463" rel="noopener">ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story</a> </li>
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</div>

Monthly Newsletter | May 2021
Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.
Both the asset and liability sides of the banks' balance sheets hit a wall in April. Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.
Deleveraging real estate exposures remains a top priority for the regulators. New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  
We expect the central bank to maintain a neutral policy for the remainder of 2021. The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.
We will remain underweight the H-share banks against MSCI China (MXCN INDEX) until 2Q21 earnings. Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.


Related Insights




ICBC: The Prefs Are Junk and Should Trade Like It 

ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 



Glut and Famine: China's Monetary Conditions a Notch Tighter in May

Credit

ICBC <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">(1398 HK</a> | <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-a" target="_blank" data-smartkarma-citation="entities:494:1" rel="noopener">601398 CH)</a> 
The market has been much more generous to ICBC's USD preferred shareholders than to its H-shareholders. ICBCAS 3.58 PERP has had a strong run since it was printed in September 2020, interrupted only momentarily by the Huarong <a href="https://www.smartkarma.com/entities/china-huarong-asset-management" target="_blank" data-smartkarma-citation="entities:968:1" rel="noopener">(2799 HK)</a> scare. The prefs are trading at 103 for a dismal yield of 2.9%. In our view, the AT-1 instrument is overvalued and due for a correction.
ICBCAS 3.58 PERP is rated 'Ba1', but trades like an investment-grade bond. On a yield-to-call basis, the prefs are trading at a 200bp spread to 5-year US treasuries. The pickup over the bank's USD senior unsecured issues is 150bp, which is a very modest premium for a six-notch rating difference from 'A1' to 'Ba1'.  
The yield differential between ICBC-H <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">(1398 HK)</a> and ICBCAS 3.58 PERP has widened to a recent high. The H-share / pref yield gap shows strong mean-reversion tendencies. At 425bp, we believe the spread has the potential to tighten over the coming weeks.
Supply-demand imbalance is the key driver of current price dislocations. We believe the prefs' scarcity value will gradually decline as the next round of AT-1 / senior bail-in instruments issued by the Big Four banks flood the primary market. That said, there is little we can do to change investors' perception of the Chinese G-SIBs as safe havens regardless of subordination.
We are short ICBCAS 3.58 PERP on the expectation that pending new AT-1 issues will dilute its price premium. For the long H-share / short pref trade to be worthwhile, we will probably have to wait till ICBC-H crosses below HKD4.50. Liquidity for the prefs should be plenty to facilitate these trades. The key risk is for the market to turn decidedly bearish on Chinese non-financial credits and default to bank papers for shelter.
Related Insight
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<li>
<a href="https://www.smartkarma.com/insights/icbc-the-bond-identity-a-zero-growth-dividend-discount-story" target="_blank" data-smartkarma-citation="insights:51463" rel="noopener">ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story</a> </li>
</ul>
(Attachment: Financial Summary)

ICBC (1398 HK | 601398 CH) 
The market has been much more generous to ICBC's USD preferred shareholders than to its H-shareholders. ICBCAS 3.58 PERP has had a strong run since it was printed in September 2020, interrupted only momentarily by the Huarong (2799 HK) scare. The prefs are trading at 103 for a dismal yield of 2.9%. In our view, the AT-1 instrument is overvalued and due for a correction.
ICBCAS 3.58 PERP is rated 'Ba1', but trades like an investment-grade bond. On a yield-to-call basis, the prefs are trading at a 200bp spread to 5-year US treasuries. The pickup over the bank's USD senior unsecured issues is 150bp, which is a very modest premium for a six-notch rating difference from 'A1' to 'Ba1'.  
The yield differential between ICBC-H (1398 HK) and ICBCAS 3.58 PERP has widened to a recent high. The H-share / pref yield gap shows strong mean-reversion tendencies. At 425bp, we believe the spread has the potential to tighten over the coming weeks.
Supply-demand imbalance is the key driver of current price dislocations. We believe the prefs' scarcity value will gradually decline as the next round of AT-1 / senior bail-in instruments issued by the Big Four banks flood the primary market. That said, there is little we can do to change investors' perception of the Chinese G-SIBs as safe havens regardless of subordination.
We are short ICBCAS 3.58 PERP on the expectation that pending new AT-1 issues will dilute its price premium. For the long H-share / short pref trade to be worthwhile, we will probably have to wait till ICBC-H crosses below HKD4.50. Liquidity for the prefs should be plenty to facilitate these trades. The key risk is for the market to turn decidedly bearish on Chinese non-financial credits and default to bank papers for shelter.
Related Insight


ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 

(Attachment: Financial Summary)

ICBC: The Prefs Are Junk and Should Trade Like It

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

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%.

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%. 

China Everbright Bank – Credit Remains Troublesome

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

We are beginning to see rotations back into risk-on areas of the market, a bullish sign for global equities. This only adds to our constructive outlook; we are bullish and we expect higher prices in the weeks and months ahead.

We are beginning to see rotations back into risk-on areas of the market, a bullish sign for global equities. This only adds to our constructive outlook; we are bullish and we expect higher prices in the weeks and months ahead. 

Global Equity Strategy: Buy Energy & Financials; EM Improving

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Thematic (Sector/Industry)

Allocations in the Financials sector have broken below the decade long range.  In their place are increased exposures in Technology and Consumer Discretionary companies.  At the moment, allocations within the sector are consolidating, with Asia Ex-Japan funds actively increasing weights, but still remaining a long way below previous levels. In this analysis, we look at the mechanics of the downturn, identifying the countries and stocks hardest hit.  We then look at the extent to which Financials stocks have consolidated and moved towards the early stages of a recovery.

Allocations in the Financials sector have broken below the decade long range.  In their place are increased exposures in Technology and Consumer Discretionary companies.  At the moment, allocations within the sector are consolidating, with Asia Ex-Japan funds actively increasing weights, but still remaining a long way below previous levels. In this analysis, we look at the mechanics of the downturn, identifying the countries and stocks hardest hit.  We then look at the extent to which Financials stocks have consolidated and moved towards the early stages of a recovery.

Asia Ex-Japan Financials.  Slowly Regaining the Faith.

China

Bank of China Limited provides banking services. The Company offers deposits, loans, foreign currency transaction, fund settlement, and other services. Bank of China provides its services to individuals, enterprises, and other clients.

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Bank of China (601988 CH)

Glut and Famine: China's Monetary Conditions a Notch Tighter in May

Monetary data in May point to a tighter environment for both lending and funding. Mortgage rates have edged up, but the deposit drain is worrying....

Stanley Tsai, CFA

ICBC: The Prefs Are Junk and Should Trade Like It

The prefs have had a strong run and are trading at 103 for a yield-to-call of only 2.9%. The AT-1 is significantly overvalued relative to 5-year US...

Stanley Tsai, CFA

China Everbright Bank – Credit Remains Troublesome

CHINA EVERBRIGHT BANK: Operating results grew 27.4% QOQ, driven by positive operating jaws. Credit continues to weaken and the loss reserve...

Thomas J. Monaco

Global Equity Strategy: Buy Energy & Financials; EM Improving

We are seeing rotations back into risk-on areas of the market (Energy & Financials), a bullish sign for global equities. We are bullish and we...

Vermilion Research

Asia Ex-Japan Financials. Slowly Regaining the Faith.

Active Asia Ex-Japan managers move back in to the Financials sector after a period of heavy rotation, however allocations remain well below...

Steven Holden

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