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

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.

*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.

Bank of America – Not Exactly A Shining Result

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

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

Cross Asset Strategy

Across our active Global fund universe, Value managers have seen $41bn in outflows over the past 5-years, compared to $65bn of inflows in to Growth funds.With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the 63 active Value funds in our analysis.Overweights in EMEA persist against underweights in Asia and the Americas.  Financials, Materials and Industrials are the key overweights versus underweights in Information Technology.US Financials are the standout overweight, with <a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a> and <a href="https://www.smartkarma.com/entities/american-express-co" target="_blank" data-smartkarma-citation="entities:916:1" rel="noopener">American Express Co (AXP US)</a> the key positions.  The FAAMG group of stocks remain key underweight holdings, though <a href="https://www.smartkarma.com/entities/microsoft-corp" target="_blank" data-smartkarma-citation="entities:15273:1" rel="noopener">Microsoft Corp (MSFT US)</a> is the most widely held of the group. <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> is almost totally avoided and in Asia, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> , <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a> and <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> screen as 'Unloved' by global active Value managers.

Across our active Global fund universe, Value managers have seen $41bn in outflows over the past 5-years, compared to $65bn of inflows in to Growth funds.With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the 63 active Value funds in our analysis.Overweights in EMEA persist against underweights in Asia and the Americas.  Financials, Materials and Industrials are the key overweights versus underweights in Information Technology.US Financials are the standout overweight, with Citigroup Inc (C US) and American Express Co (AXP US) the key positions.  The FAAMG group of stocks remain key underweight holdings, though Microsoft Corp (MSFT US) is the most widely held of the group. Tesla Motors (TSLA US) is almost totally avoided and in Asia, Meituan (3690 HK) , JD.com Inc (ADR) (JD US) and Pinduoduo (PDD US) screen as 'Unloved' by global active Value managers.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/jpmorgan-chase-co" target="_blank" data-smartkarma-citation="entities:277:1" rel="noopener">JPMorgan Chase &amp; Co's (JPM US)</a> fortress foundation needs repair. Rather than a rock-solid balance sheet, JPM’s capital foundation needs to be strengthened to handle the leverage load. It has the lowest Supplementary Leverage Ratio (SLR) amongst the largest US banks and its Tier 1 securities suffer, in part, due to this. It is time to lighten the leverage exposure and add a layer of capital. This creates an investment opportunity.As the pandemic-induced economic crisis unfolded last year, we noted that JPM Tier 1 securities were over-bought relative to the leverage exposure risk at the institution. Please see: <a href="https://www.smartkarma.com/compose/insight/49670/Bank%20Credit%20Weekly:%20US%20Capital%20Buffer%20Risk%20&amp;%20Q1%20Earnings%20Reports-%20JPMorgan%20Looks%20Slightly%20Overbought.%20Read%20more:%20https:/skr.ma/uQHaQ" target="_blank" rel="noopener">Bank Credit Weekly: US Capital Buffer Risk &amp; Q1 Earnings Reports- JPMorgan Looks Slightly Overbought.</a>The Fed exemption of Treasury securities and deposits with the central bank from the SLR bought JPM time. Fast forward one year later to the expiration of these exemptions and, despite ample opportunity, JPMorgan did not issue Tier 1 securities until only two weeks ago when it brought a $25 par security. In additional to raising needed capital, the firm recently threatened to stop taking deposits. It may price itself out of the deposit market, temporarily, but this is not a long-term strategy. The SLR is the binding capital constrain on the firm’s asset growth. JPM needs to obtain or retain more Tier 1 capital. We quantify this within.We believe that JPM could easily bring a 10-year Tier 1 bond to the market and find between US$2 to US$3bn in demand, thereby taking the total Tier 1 financing needs, or balance sheet optimization equivalent, down materially for the remainder of the year. Based on its recently issued Preferred, we believe JPM could achieve a price of Treasuries plus circa 300bps in a 10-year Tier 1 note.Aside from its SLR level, JPMorgan’s credit metrics are on-par with, if not superior to, most other large systemically important financial institutions. And yet, as we present within, JPM’s Tier 1 bonds trade at a discount to materially weaker banks located outside the US. Furthermore, we find that JPMorgan’s 2025 callable Tier 1 bond is at least 40bps oversold as, in our view, its call option is overvalued by the same amount.JPM faces an inflection point with respect to its capital adequacy. Concurrently, the Fed may re-adjust the SLR requirements before year-end; however, we believe it would be foolish of JPM not to take the opportunity to increase its SLR in an improving economic environment. It should re-enforce the foundation of its fortress balance sheet. We believe investors should pre-position for this eventuality. We recommend overweighting JPMorgan’s Tier 1 securities.

JPMorgan Chase &amp; Co's (JPM US) fortress foundation needs repair. Rather than a rock-solid balance sheet, JPM’s capital foundation needs to be strengthened to handle the leverage load. It has the lowest Supplementary Leverage Ratio (SLR) amongst the largest US banks and its Tier 1 securities suffer, in part, due to this. It is time to lighten the leverage exposure and add a layer of capital. This creates an investment opportunity.As the pandemic-induced economic crisis unfolded last year, we noted that JPM Tier 1 securities were over-bought relative to the leverage exposure risk at the institution. Please see: Bank Credit Weekly: US Capital Buffer Risk &amp; Q1 Earnings Reports- JPMorgan Looks Slightly Overbought.The Fed exemption of Treasury securities and deposits with the central bank from the SLR bought JPM time. Fast forward one year later to the expiration of these exemptions and, despite ample opportunity, JPMorgan did not issue Tier 1 securities until only two weeks ago when it brought a $25 par security. In additional to raising needed capital, the firm recently threatened to stop taking deposits. It may price itself out of the deposit market, temporarily, but this is not a long-term strategy. The SLR is the binding capital constrain on the firm’s asset growth. JPM needs to obtain or retain more Tier 1 capital. We quantify this within.We believe that JPM could easily bring a 10-year Tier 1 bond to the market and find between US$2 to US$3bn in demand, thereby taking the total Tier 1 financing needs, or balance sheet optimization equivalent, down materially for the remainder of the year. Based on its recently issued Preferred, we believe JPM could achieve a price of Treasuries plus circa 300bps in a 10-year Tier 1 note.Aside from its SLR level, JPMorgan’s credit metrics are on-par with, if not superior to, most other large systemically important financial institutions. And yet, as we present within, JPM’s Tier 1 bonds trade at a discount to materially weaker banks located outside the US. Furthermore, we find that JPMorgan’s 2025 callable Tier 1 bond is at least 40bps oversold as, in our view, its call option is overvalued by the same amount.JPM faces an inflection point with respect to its capital adequacy. Concurrently, the Fed may re-adjust the SLR requirements before year-end; however, we believe it would be foolish of JPM not to take the opportunity to increase its SLR in an improving economic environment. It should re-enforce the foundation of its fortress balance sheet. We believe investors should pre-position for this eventuality. We recommend overweighting JPMorgan’s Tier 1 securities.

US Banks and the SLR Situation: Overweight JPM Tier 1 Securities

United States

Citigroup Inc. is a diversified financial services holding company that provides a broad range of financial services to consumer and corporate customers. The Company services include investment banking, retail brokerage, corporate banking, and cash management products and services. Citigroup serves customers globally.

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Citigroup Inc (C US)

Citigroup – Shifting Winds

CITIGROUP: Citi reported a QOQ 1Q21 bottom-line result increase of 89.0% due to provision reversals and principal transactions. Net new NPLs...

Thomas J. Monaco

Bank of America – Not Exactly A Shining Result

BANK OF AMERICA: BAC's QOQ 1Q21 bottom-line increased 45.2% driven by reserve releases and trading (not sustainable). Net new NPLs reversed course...

Thomas J. Monaco

J.P Morgan Chase & Co. – Well On Track

JP MORGAN CHASE: JPM 1Q21 bottom-line results increased 18.4% linked quarter due to principal transactions and provision reversals. This should...

Thomas J. Monaco

Where Are Global Value Funds Positioned?

With Value funds capturing some long awaited outperformance this year, we analyse the current holdings set up among the active Global Value funds...

Steven Holden

US Banks and the SLR Situation: Overweight JPM Tier 1 Securities

JPM’s fortress foundation needs repair. It has the lowest SLR buffer, and its Tier 1 suffers from this. Leverage slimming and a deeper capital...

Hank Calenti, CFA

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