Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p>There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.</p><p>Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.</p><p>The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.</p><p>Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.</p><p>In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.</p><p>In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.</p><p><strong>Market Outlook: </strong>Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.</p>

There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.Market Outlook: Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

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

Postal Savings Bank of China C / Equity Bottom-Up

<p><strong>*Private Placement Coming: </strong>We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   </p><p><strong>*Starting Off From A Better Place Than Peer: </strong>We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.</p>

*Private Placement Coming: We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   *Starting Off From A Better Place Than Peer: We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.

Postal Savings Bank – D-SIB Spurs Placement

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<div>
<p>The H-Share/A-Share monitor is published every weekend for the data ending the last trading day of the previous week. It includes all H-Share/A-Share pairs where the H-Share has a 90-day average daily value-traded of US$1.0mm or more. It shows basic data per H/A spread stock by sector, with...</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>H/A Discount,</li>
<li>movement in H/A Discount over 5 and 20 days,</li>
<li>a 52-week Z-score for the spread,</li>
<li>A chart showing evolution of the H/A spread over the last 20 days,</li>
<li>Southbound shares held (millions of shares), Net Change in Southbound (Shanghai and Shenzhen combined) shares held by millions of shares, and contribution of Net Southbound Volume to HK-traded volume over the past five days and 20 days, </li>
<li>There is also a chart showing the average sector spread and the individual spreads within each sector over the last three years. </li>
</ul>
</div>
<div>
<p>A recent addition is the possible status of H/A-share companies in the monitor which are subject to the Trump Executive Order on Chinese Military Companies. They are separated into three types (Possible Direct Qualifying Entity, Possible Indirect Qualifying Entity, and 20+%-owned by Qualifying Entity). They are color-coded as below.</p>
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<p>For more on the list of names, please see <a href="https://www.smartkarma.com/insights/trump-s-executive-order-on-chinese-military-companies" target="_blank" data-smartkarma-citation="insights:45259" rel="noopener">Trump's Executive Order on Chinese Military Companies</a>. </p>
</div>
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<div class="content-highlight">
<p>This past week saw mixed movement in H/A spreads but on average they were narrower.</p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/829/original/Screenshot%202020-11-28%20at%206.25.16%20PM.png?1606559131" class="editor-image img-responsive" data-smartkarma-image-id="174829"></figure>
<p></p>
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<p>Average performance of the 39 recommendations (long 27, short 12) from last week was for a profit of 0.67% per trade.</p>
<p>There are 43 recommendations for the upcoming week.</p>
</div>
<hr>
<div>
<p>The first sector discussed is <strong>Consumer</strong>, where liquid H/A spreads narrowed on average 0.6% this past week after narrowing 2.7% the week before. Spreads are now tighter by 2.1% on average over a four-week period. Four of six liquid Hs outperformed their As.</p>
<p>Southbound accounts were large-ish net buyers on the week. There were three net buys and three net sells but the net buying ended up being all <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a>, again. <a href="https://www.smartkarma.com/entities/guangzhou-automobile-group-co-ltd" target="_blank" data-smartkarma-citation="entities:11082:1" rel="noopener">Guangzhou Automobile Group (2238 HK)</a> saw significant net selling. </p>
</div>
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<div class="content-highlight">
<p>Last week I recommended staying long the H vs A on <a href="https://www.smartkarma.com/entities/great-wall-motor-co-ltd-cb302af9-398c-4d2d-ba39-023e43287eef" target="_blank" data-smartkarma-citation="entities:128:1" rel="noopener">Great Wall Motor (2333 HK)</a> and that spread gained 1.6% for the week (after gaining 4.7% the week before when it was also recommended). This past week I put out the Weekly late on Monday (after 2pm), when BYD in Hong Kong had gained 3.7% vs the As on the day, and so recommended implementing a short BYD (1211 HK) H vs A share trade and from that point or even from the end of the day or the next, the Hs actually underperformed the As by 0.4%. </p>
<p>See below the fold for this week's recommendations.</p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/809/original/Screenshot%202020-11-28%20at%205.32.56%20PM.png?1606556000" class="editor-image img-responsive" data-smartkarma-image-id="174809"></figure>
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<section class="figure"></section>
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<section class="figure">For Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities, please read on.</section>
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The H-Share/A-Share monitor is published every weekend for the data ending the last trading day of the previous week. It includes all H-Share/A-Share pairs where the H-Share has a 90-day average daily value-traded of US$1.0mm or more. It shows basic data per H/A spread stock by sector, with...



H/A Discount,
movement in H/A Discount over 5 and 20 days,
a 52-week Z-score for the spread,
A chart showing evolution of the H/A spread over the last 20 days,
Southbound shares held (millions of shares), Net Change in Southbound (Shanghai and Shenzhen combined) shares held by millions of shares, and contribution of Net Southbound Volume to HK-traded volume over the past five days and 20 days, 
There is also a chart showing the average sector spread and the individual spreads within each sector over the last three years. 



A recent addition is the possible status of H/A-share companies in the monitor which are subject to the Trump Executive Order on Chinese Military Companies. They are separated into three types (Possible Direct Qualifying Entity, Possible Indirect Qualifying Entity, and 20+%-owned by Qualifying Entity). They are color-coded as below.





For more on the list of names, please see Trump's Executive Order on Chinese Military Companies. 



This past week saw mixed movement in H/A spreads but on average they were narrower.




Average performance of the 39 recommendations (long 27, short 12) from last week was for a profit of 0.67% per trade.
There are 43 recommendations for the upcoming week.



The first sector discussed is Consumer, where liquid H/A spreads narrowed on average 0.6% this past week after narrowing 2.7% the week before. Spreads are now tighter by 2.1% on average over a four-week period. Four of six liquid Hs outperformed their As.
Southbound accounts were large-ish net buyers on the week. There were three net buys and three net sells but the net buying ended up being all BYD (1211 HK), again. Guangzhou Automobile Group (2238 HK) saw significant net selling. 




Last week I recommended staying long the H vs A on Great Wall Motor (2333 HK) and that spread gained 1.6% for the week (after gaining 4.7% the week before when it was also recommended). This past week I put out the Weekly late on Monday (after 2pm), when BYD in Hong Kong had gained 3.7% vs the As on the day, and so recommended implementing a short BYD (1211 HK) H vs A share trade and from that point or even from the end of the day or the next, the Hs actually underperformed the As by 0.4%. 
See below the fold for this week's recommendations.











For Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities, please read on.


Quiddity Weekly H/​​A: Share Spread Monitor as of 27 Nov 2020

<p style="text-align: justify;">We move to Overweight <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (BNKEA)</a> capital inefficient securities, from Buy, as these securities have outperformed their peers since our recommendation. Investors have been well rewarded but remaining upside is less compelling.</p><p style="text-align: justify;">Bank of East Asia announced the retirement of it 5.5% coupon December first call US$- Additional Tier 1 (AT1) bond last week. This bond was not capital efficient. We first recommended that investors overweight this security in mid-February within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-overweight-short-call-at1-on-refinancing-ability" target="_blank" data-smartkarma-citation="insights:36787" rel="noopener">Overweight Short-Call AT1 on Refinancing Ability</a> and recently re-iterated this call within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Buy the Inefficient Capital Securities</a><em>.</em> In retrospect, this was the most volatile AT1 security amongst those issued by Asian-headquartered banks and subject to first call in 2020, as we anticipated at the time of our first recommendation. Nonetheless, the courage of one’s convictions is what makes or breaks investment returns. We were fortunate to make the right call on this one. In fact, we have been told that we were the only research house making this recommendation based on the capital efficiency of the securities. </p><p style="text-align: justify;">Going forward, we see less upside in the AT1 capital curve of BNKEA as it trades more in-line with securities of other Hong Kong issuing banks. As such, we move to Overweight, from Buy, on BNKEA’s 5.625% coupon 2022 callable AT1.</p>

We move to Overweight Bank of East Asia's (BNKEA) capital inefficient securities, from Buy, as these securities have outperformed their peers since our recommendation. Investors have been well rewarded but remaining upside is less compelling.Bank of East Asia announced the retirement of it 5.5% coupon December first call US$- Additional Tier 1 (AT1) bond last week. This bond was not capital efficient. We first recommended that investors overweight this security in mid-February within Overweight Short-Call AT1 on Refinancing Ability and recently re-iterated this call within Buy the Inefficient Capital Securities. In retrospect, this was the most volatile AT1 security amongst those issued by Asian-headquartered banks and subject to first call in 2020, as we anticipated at the time of our first recommendation. Nonetheless, the courage of one’s convictions is what makes or breaks investment returns. We were fortunate to make the right call on this one. In fact, we have been told that we were the only research house making this recommendation based on the capital efficiency of the securities. Going forward, we see less upside in the AT1 capital curve of BNKEA as it trades more in-line with securities of other Hong Kong issuing banks. As such, we move to Overweight, from Buy, on BNKEA’s 5.625% coupon 2022 callable AT1.

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

Thematic (Sector/Industry)

<p><strong><em>*Yongcheng Coal Default: </em></strong>According to Shanghai Clearing House, Yongcheng Coal and Electricity (YCE) in Henan Province failed to repay a CNY 1 bn (USD 151 mn) short-term bond despite being given the highest rating by one of mainland China’s awful domestic credit ratings agencies; and</p><p><strong><em>*Watch Your Banks: </em></strong>The yield on benchmark five-year “AAA” rated mainland Chinese corporates was 3.99% - up over 100 bp from their April 2020 low. Investor flight is pushing financing costs higher and squeezing local corporate funding in a market which is just barely recovering from the COVID-19 pandemic. Concerns remain over higher problem loans as debt service risk is heightened over higher rates, unreliable financial statements and ratings agency reports, and now an inability to refinance public debt with a number of bond sales being canceled. Further, the degradation of corporate bond values is limiting their usage as collateral.</p>

*Yongcheng Coal Default: According to Shanghai Clearing House, Yongcheng Coal and Electricity (YCE) in Henan Province failed to repay a CNY 1 bn (USD 151 mn) short-term bond despite being given the highest rating by one of mainland China’s awful domestic credit ratings agencies; and*Watch Your Banks: The yield on benchmark five-year “AAA” rated mainland Chinese corporates was 3.99% - up over 100 bp from their April 2020 low. Investor flight is pushing financing costs higher and squeezing local corporate funding in a market which is just barely recovering from the COVID-19 pandemic. Concerns remain over higher problem loans as debt service risk is heightened over higher rates, unreliable financial statements and ratings agency reports, and now an inability to refinance public debt with a number of bond sales being canceled. Further, the degradation of corporate bond values is limiting their usage as collateral.

China

China CITIC Bank Corporation Limited provides banking services. The Company offers deposits, loans, domestic settlement,  currency trading, bank guarantee, and other services. China CITIC Bank provides its services to individuals, enterprises, and other clients.

Price Gauge
52-week Range	0.00 - 0.00
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China CITIC Bank (601998 CH)

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

The Fed spikes while the ECB sweetens the seasonal punch bowl. US stimulus may add the moonshine. This could be a festive week for bank securities....

Hank Calenti, CFA

Postal Savings Bank – D-SIB Spurs Placement

POSTAL SAVINGS BANK OF CHINA: D-SIB Status Spurs Private Placement And Likely A Lower ROE Both From Dilution And Challenged Fundamentals In 2021.

Thomas J. Monaco

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

We move to Overweight Bank of East Asia’s capital inefficient securities as these securities have outperformed their peers since our Buy...

Hank Calenti, CFA

Another Day, Another Default

MAINLAND CHINA DEFAULT: Yongcheng Coal Defaulted On Its Debt, Leading To Concerns About The Credibility Of AAA Rated Corporates In Mainland China...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

The Fed spikes while the ECB sweetens the seasonal punch bowl. US stimulus may add the moonshine. This could be a festive week for bank securities....

Hank Calenti, CFA

Postal Savings Bank – D-SIB Spurs Placement

POSTAL SAVINGS BANK OF CHINA: D-SIB Status Spurs Private Placement And Likely A Lower ROE Both From Dilution And Challenged Fundamentals In 2021.

Thomas J. Monaco

Quiddity Weekly H/​​A: Share Spread Monitor as of 27 Nov 2020

The weekly H/A Share Monitor and Trade Recommendations. Spreads narrower on the week. Last week's 39 trade recommendations gained 0.67% on average....

Travis Lundy

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

We move to Overweight Bank of East Asia’s capital inefficient securities as these securities have outperformed their peers since our Buy...

Hank Calenti, CFA

Another Day, Another Default

MAINLAND CHINA DEFAULT: Yongcheng Coal Defaulted On Its Debt, Leading To Concerns About The Credibility Of AAA Rated Corporates In Mainland China...

Thomas J. Monaco

Quiddity Weekly H/A: Share Spread Monitor as of 27 Nov 2020