Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Equity Bottom-Up

The China SOE banks are often considered identical, but there are differences. The level of special mention loans (SML) for ICBC is incredibly high vs. BOC. Ironically, this can be a positive for ICBC in FY21.

The China SOE banks are often considered identical, but there are differences. The level of special mention loans (SML) for ICBC is incredibly high vs. BOC. Ironically, this can be a positive for ICBC in FY21.

ICBC Vs BOC – Special Mention Loans Vastly Different

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Bank Of Communications Co H / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/bank-of-communications-co-ltd" target="_blank" data-smartkarma-citation="entities:24562:1" rel="noopener">Bank Of Communications (601328 CH)</a> <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a> BoCom dedicates itself to mainly corporate credit (63% of Loan book) but also consumer segments, with mortgages commanding a high weighting, backed by a balance of time deposits and transaction accounts.As at China Merchants Bank and Ping An Bank, FY20/19 results show subpar fundamental momentum and trends. However, results can be characterized by light deterioration in general as changes in key variables were not so pronounced. Asset Quality is where the greatest erosion took place with impaired Loans, net of Reserves and the “substandard loan” bucket in particular showing outsized growth. Elsewhere, there was a modest reduction in Profitability and in Liquidity. There was also lightweight erosion in Efficiency, in NIM (Spread was stable) and in Equity/Assets (and in CET1) though other Capitalization ratios were marginally better while Provisioning was softer. “Core Income” showed middling growth YoY, supported by flat Expenses incurred on Deposits and a moderate credit expansion, while a non-extreme increase in LLPs still exerted a negative impact on Comprehensive Income which eased by 12.6% YoY.<div class="content-highlight">A FV of 5%, a PBV of 0.4x, a Dividend Yield of 7.4%, an Earnings Yield of 24.2% and a Total Return Ratio of 3.5x are far from unappealing. The bank commands a subpar PH Score™ (3.5) which captures value-quality trends, including a supportive valuation variable. This Score may be harsh to the bank given the modest nature of erosion across variables, reflecting at best a flattish picture, though the underlying Balance Sheet dynamics of Asset Quality deterioration, limited LLP and charge-off growth, and weaker Provisioning are not ideal.</div>

Bank Of Communications (601328 CH) Bank Of Communications Co H (3328 HK) BoCom dedicates itself to mainly corporate credit (63% of Loan book) but also consumer segments, with mortgages commanding a high weighting, backed by a balance of time deposits and transaction accounts.As at China Merchants Bank and Ping An Bank, FY20/19 results show subpar fundamental momentum and trends. However, results can be characterized by light deterioration in general as changes in key variables were not so pronounced. Asset Quality is where the greatest erosion took place with impaired Loans, net of Reserves and the “substandard loan” bucket in particular showing outsized growth. Elsewhere, there was a modest reduction in Profitability and in Liquidity. There was also lightweight erosion in Efficiency, in NIM (Spread was stable) and in Equity/Assets (and in CET1) though other Capitalization ratios were marginally better while Provisioning was softer. “Core Income” showed middling growth YoY, supported by flat Expenses incurred on Deposits and a moderate credit expansion, while a non-extreme increase in LLPs still exerted a negative impact on Comprehensive Income which eased by 12.6% YoY.A FV of 5%, a PBV of 0.4x, a Dividend Yield of 7.4%, an Earnings Yield of 24.2% and a Total Return Ratio of 3.5x are far from unappealing. The bank commands a subpar PH Score™ (3.5) which captures value-quality trends, including a supportive valuation variable. This Score may be harsh to the bank given the modest nature of erosion across variables, reflecting at best a flattish picture, though the underlying Balance Sheet dynamics of Asset Quality deterioration, limited LLP and charge-off growth, and weaker Provisioning are not ideal.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Slower near-term growth may be risk asset positive. A slower growth trajectory may engender reduced inflation expectations which could translate into lower Treasury yields and a lower dollar value. This could produce a longer, more sustainable, recovery rather than the current soufflé economy track. That would be Emerging Market positive. Germany announced, then retracted, plans to institute a tougher lock-down over the Easter weekend. This raised fears that a third wave of Coronavirus cases could impact demand globally. This may have contributed to a flight to safety and increased bearish pressure across risk assets as investors re-assessed near term GDP expectations.Risk assets have been discounting an inflationary surge in growth ahead. However, as US Covid-19 cases rise and European vaccination programs lag, prospects for US Q1 and Q2 GDP are deteriorating by the day. Ironically, various supply-chain disruptions, which could negatively impact production in coming month, may slow growth more than it boosts inflation. This could also be Emerging Market positive.US Treasuries continued their sawtooth upwards pattern of declining then rising. Transitory and more permanent factors impacted US Treasury and risk-asset returns this week. Notably, real rates remained steady.Transitory effects included supply plus month-end and quarter-end rebalancing which put pressure on yields. More permanent factors likely included less draconian SLR exemption interpretations and possibly the economic demand impact of vaccine distribution difficulties as Covid-19 infections rise. Amongst Asia EM banks, India bank equity continued its underperformance while Thai banks remained relatively unchanged following notable banking-related announcements in each country.The decline in India’s bank shares exceeded others in Asia. The interest-on-interest accrual decision, and the valuation of Additional Tier 1 bond guidance by the Supreme Court and the Securities &amp; Exchange Board of India (SEBI), respectively, are particularly onerous and damaging to bank valuations.In Asia, short duration bank bonds outperformed although most bank notes generated total positive returns on Treasury price strength.  Liquidity in Turkish bank bonds dried-up as the fall-out from the unexpected firing of the Central Bank Governor last week.Market Outlook: The question for next week is how much portfolio re-balancing out of stocks and into bonds has already occurred. This normally would take place during the last week of the quarter. However, with month-end just before Easter market holidays, trading conditions may be relatively thin next week. As such, portfolio adjustments may have been pulled forward. From a risk asset perspective, it may be wise to jump back into the market before the quarter-end to get ahead of the pack. From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat.

Slower near-term growth may be risk asset positive. A slower growth trajectory may engender reduced inflation expectations which could translate into lower Treasury yields and a lower dollar value. This could produce a longer, more sustainable, recovery rather than the current soufflé economy track. That would be Emerging Market positive. Germany announced, then retracted, plans to institute a tougher lock-down over the Easter weekend. This raised fears that a third wave of Coronavirus cases could impact demand globally. This may have contributed to a flight to safety and increased bearish pressure across risk assets as investors re-assessed near term GDP expectations.Risk assets have been discounting an inflationary surge in growth ahead. However, as US Covid-19 cases rise and European vaccination programs lag, prospects for US Q1 and Q2 GDP are deteriorating by the day. Ironically, various supply-chain disruptions, which could negatively impact production in coming month, may slow growth more than it boosts inflation. This could also be Emerging Market positive.US Treasuries continued their sawtooth upwards pattern of declining then rising. Transitory and more permanent factors impacted US Treasury and risk-asset returns this week. Notably, real rates remained steady.Transitory effects included supply plus month-end and quarter-end rebalancing which put pressure on yields. More permanent factors likely included less draconian SLR exemption interpretations and possibly the economic demand impact of vaccine distribution difficulties as Covid-19 infections rise. Amongst Asia EM banks, India bank equity continued its underperformance while Thai banks remained relatively unchanged following notable banking-related announcements in each country.The decline in India’s bank shares exceeded others in Asia. The interest-on-interest accrual decision, and the valuation of Additional Tier 1 bond guidance by the Supreme Court and the Securities &amp; Exchange Board of India (SEBI), respectively, are particularly onerous and damaging to bank valuations.In Asia, short duration bank bonds outperformed although most bank notes generated total positive returns on Treasury price strength.  Liquidity in Turkish bank bonds dried-up as the fall-out from the unexpected firing of the Central Bank Governor last week.Market Outlook: The question for next week is how much portfolio re-balancing out of stocks and into bonds has already occurred. This normally would take place during the last week of the quarter. However, with month-end just before Easter market holidays, trading conditions may be relatively thin next week. As such, portfolio adjustments may have been pulled forward. From a risk asset perspective, it may be wise to jump back into the market before the quarter-end to get ahead of the pack. From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat.

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a>, <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a> and <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> announcing results (and dividends) today, and <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>, <a href="https://www.smartkarma.com/entities/agricultural-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1120:1" rel="noopener">Agricultural Bank Of China (1288 HK)</a> and <a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank Of China Ltd (H) (3988 HK)</a> announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.With <a href="https://www.smartkarma.com/entities/baidu-inc-a55ca720-5968-48f0-8194-ac94390d065c" target="_blank" data-smartkarma-citation="entities:32212:1" rel="noopener">Baidu (9888 HK)</a> included in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a>. <a href="https://www.smartkarma.com/entities/bilibili-inc-83a27302-cd7d-4e6a-a1de-bcf93eb022c3" target="_blank" data-smartkarma-citation="entities:32215:1" rel="noopener">Bilibili Inc (9626 HK)</a> lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> has already filed papers to list in Hong Kong. Then there are companies like <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (1284375D CH)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a> and <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> that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.

The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With Bank Of Communications Co H (3328 HK), ICBC (H) (1398 HK) and China Construction Bank H (939 HK) announcing results (and dividends) today, and Postal Savings Bank of China (1658 HK), Agricultural Bank Of China (1288 HK) and Bank Of China Ltd (H) (3988 HK) announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.With Baidu (9888 HK) included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the HKEX (388 HK). Bilibili Inc (9626 HK) lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. JD Logistics (JDL HK) has already filed papers to list in Hong Kong. Then there are companies like DiDi Chuxing (1284375D CH), ByteDance (1460967D CH) and Ant Financial Services Group (6688 HK) that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.

HSCEI Dividend Futures: June Index Review, Bank Divs, HFCAA - Sell the 2021/22 Steepener

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

China Merchants Bank H / Equity Bottom-Up

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and *Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling.

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and *Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling. 

China Merchants Bank – Pulling On All Levers

China

Bank of Communications Co. Ltd. provides a full range of commercial banking services including RMB and foreign currency deposit, loan, international and domestic settlement, discount, currency trading, letter of credit, bank guarantee, and other related services.

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Bank Of Communications Co H (3328 HK)

ICBC Vs BOC – Special Mention Loans Vastly Different

China SOE banks are considered identical, but there are differences. The level of special mention loans (SML) for ICBC is incredibly high vs. BOC....

Daniel Tabbush

BoCom: Subpar Trends but Inexpensive

BoCom: while key variables showed erosion, fundamental changes were not so pronounced or dramatic with the exception of Asset Quality. Shares are...

Paul Hollingworth

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

A slower growth trajectory may reduce inflation expectations which could translate into lower yields and $ value. This could produce a longer...

Hank Calenti, CFA

HSCEI Dividend Futures: June Index Review, Bank Divs, HFCAA - Sell the 2021/22 Steepener

While the HSCEI 2021 dividend futures are trading near our estimated fair, the HSCEI 2021/22 div steepener is not. We recommend selling the...

Brian Freitas

China Merchants Bank – Pulling On All Levers

CHINA MERCHANTS BANK: CMB's core operating results came in at just CNY 13.9 bn – declining 40.0% linked quarter. Negative operating jaws, and net...

Thomas J. Monaco

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