Founder of Antler Capital

Stanley Tsai, CFA

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
<ul>
<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

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.  

China Huarong Asset Management / Equity Bottom-Up

*Another Potential Default:  Again in mainland China, there have been rumblings of another credit default over the past several days. The CBIRC disclosed that China Huarong Asset Management (2799.HK) [Huarong] is actively working with its auditor to complete its annual report. The issue appears to be Huarong’s legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed post-removal in 2018; and *Ratings Agencies Are More Than Culpable: Wouldn’t you know it, the sleepy, fee hungry ratings agencies (Standard &amp; Poors, Moody’s, and Fitch Ratings) finally put Huarong on review for a potential downgrade. C’mon guys, where have you been?

*Another Potential Default:  Again in mainland China, there have been rumblings of another credit default over the past several days. The CBIRC disclosed that China Huarong Asset Management (2799.HK) [Huarong] is actively working with its auditor to complete its annual report. The issue appears to be Huarong’s legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed post-removal in 2018; and *Ratings Agencies Are More Than Culpable: Wouldn’t you know it, the sleepy, fee hungry ratings agencies (Standard &amp; Poors, Moody’s, and Fitch Ratings) finally put Huarong on review for a potential downgrade. C’mon guys, where have you been?

China Huarong Asset Management  - Ratings Agencies Fail Us Again

China

Agricultural Bank of China Limited provides a full range of commercial banking services. The Banks services includes RMB and foreign currency deposit, loan, international and domestic settlement, bill discount, currency trading, bank guarantee, and treasury bill underwriting.

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Agricultural Bank of China (601288 CH)

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

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

China Huarong Asset Management - Ratings Agencies Fail Us Again

CHINA HUARONG ASSET MANAGEMENT: There have been rumblings of another credit default over Huarong's unresolved legacy risks. The ratings agencies...

Thomas J. Monaco

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