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

<p><strong><em>*Don’t Be Misled By Better Numbers: </em></strong>Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; and </p><p><strong><em>*Credit Risk Rising: </em></strong>As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 410 bn which amounts to over a year of pre-tax results at ICBC.   </p>

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 410 bn which amounts to over a year of pre-tax results at ICBC.   

Industrial and Commercial Bank of China – Troubling Result

<p><strong><em>*BEA Life Deal: </em></strong>In an effort to reinforce its Greater China franchise, AIA Group (1299.HK) [AIA] has entered into an agreement to purchase Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life, and entered into an exclusive 15-year bancassurance relationship with BEA for HKD 5.07 bn (USD 653 mn) covering Hong Kong and mainland China; and </p><p><strong><em>*Lost Focus: </em></strong>Acquiring a fledgling Hong Kong insurance franchise at a premium when you’re the dominant player and unemployment remains excessive, suggests that AIA is more concerned with growth metrics rather than addressing the risks that AIA is facing in mainland China, Hong Kong, and in its investment portfolio. </p>

*BEA Life Deal: In an effort to reinforce its Greater China franchise, AIA Group (1299.HK) [AIA] has entered into an agreement to purchase Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life, and entered into an exclusive 15-year bancassurance relationship with BEA for HKD 5.07 bn (USD 653 mn) covering Hong Kong and mainland China; and *Lost Focus: Acquiring a fledgling Hong Kong insurance franchise at a premium when you’re the dominant player and unemployment remains excessive, suggests that AIA is more concerned with growth metrics rather than addressing the risks that AIA is facing in mainland China, Hong Kong, and in its investment portfolio. 

AIA Group – Confirming No Organic Growth On Horizon

China Merchants Bank H / Equity Bottom-Up

<p><strong><em>*Weak 4Q20 Bottom-Line:</em></strong> 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 </p><p><strong><em>*Best Retail Franchise Hitting Credit Wall:</em></strong> 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. </p>

*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

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p>It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.</p><p>The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.</p><p>Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.</p><p>The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.</p><p>For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.</p><p>The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.</p><p>In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. </p><p><strong>Market Outlook</strong>: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.</p>

It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. Market Outlook: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.

Bank Credit Weekly: Inflation, the Next Market Challenge or Opportunity?

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>Back on the 15 January, <a href="https://www.smartkarma.com/entities/guoco-group-ltd" target="_blank" data-smartkarma-citation="entities:5290:1" rel="noopener">Guoco Group Ltd (53 HK)</a> made a <a href="https://links.sgx.com/FileOpen/Offer%20Announcement.ashx?App=Announcement&amp;FileID=645181" target="_blank" rel="noopener">voluntary conditional cash Offer</a> for 70.84%-held <a href="https://www.smartkarma.com/entities/gl-ltd" target="_blank" data-smartkarma-citation="entities:2540:1" rel="noopener">GL Ltd (GLL SP)</a>. The Offer Price of S$0.70/share was a 25% premium to last close and 0.73x P/NAV. The Offer carried an acceptance condition of 90%, including Guoco's stake, which could be reduced to 50%. </p>
<p>It was a lacklustre Offer. The IFA agreed in the <a href="https://links.sgx.com/FileOpen/Revised_Offeree_Circular.ashx?App=Announcement&amp;FileID=648639" target="_blank" rel="noopener">Circular</a>, and said the Offer was not fair; but still opined it was reasonable. The Securities Investors Association (Singapore) (SIAS) <a href="https://sias.org.sg/latest-updates/letter-to-guocoleisure-holdings-limited-appeal-on-behalf-of-minority-shareholders-of-gl-limited/" target="_blank" rel="noopener">chimed in</a>, saying it thought the Offer was low-balled.</p>
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<p>Historically, Guoco have had a tendency to be frugal in their privatisation Offers. In its 2005 attempt to take GLL private back in 2005, it <em>did</em> bump its Offer to $1.25/share from S$1.20.</p>
<h3>The New News</h3>
<p>Guoco has now <a href="https://links.sgx.com/FileOpen/Dealings%20Disclosure%20and%20Revision%20of%20Offer%20Price%20Announcement.ashx?App=Announcement&amp;FileID=651983" target="_blank" rel="noopener">bumped the Offer</a> by 14.3% to S$0.80/share. The Offer consideration is final and the Offer declared unconditional in all respects.</p>
<p>Guoco has 83.4% in the bag, including its own 72.96% stake. The revised Offer terms fall outside the fair value range from the IFA, but there's probably enough here to test the 90% acceptance level, and afford Guoco the right to compulsory acquire shares. </p>
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<p>As always, more below the fold.</p>
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Back on the 15 January, Guoco Group Ltd (53 HK) made a voluntary conditional cash Offer for 70.84%-held GL Ltd (GLL SP). The Offer Price of S$0.70/share was a 25% premium to last close and 0.73x P/NAV. The Offer carried an acceptance condition of 90%, including Guoco's stake, which could be reduced to 50%. 
It was a lacklustre Offer. The IFA agreed in the Circular, and said the Offer was not fair; but still opined it was reasonable. The Securities Investors Association (Singapore) (SIAS) chimed in, saying it thought the Offer was low-balled.

Historically, Guoco have had a tendency to be frugal in their privatisation Offers. In its 2005 attempt to take GLL private back in 2005, it did bump its Offer to $1.25/share from S$1.20.
The New News
Guoco has now bumped the Offer by 14.3% to S$0.80/share. The Offer consideration is final and the Offer declared unconditional in all respects.
Guoco has 83.4% in the bag, including its own 72.96% stake. The revised Offer terms fall outside the fair value range from the IFA, but there's probably enough here to test the 90% acceptance level, and afford Guoco the right to compulsory acquire shares. 

As always, more below the fold.














GL Limited: Guoco Bumps & Declares Offer Unconditional

Hong Kong

The Bank of East Asia, Limited and its subsidiaries provide general banking, related financial, business corporate, and investor services.

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Bank of East Asia (23 HK)

Industrial and Commercial Bank of China – Troubling Result

ICBC: ICBC reported a 9.2% QOQ increase in 4Q20 results, which is solely attributed to an unjustified and massive linked quarter reduction in loss...

Thomas J. Monaco

AIA Group – Confirming No Organic Growth On Horizon

AIA GROUP: AIA entered into an agreement to acquire BEA Life, and entered into a bancassurance relationship with BEA. Acquiring a fledgling Hong...

Thomas J. Monaco

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

Bank Credit Weekly: Inflation, the Next Market Challenge or Opportunity?

The recent back-up in US rates may be an opportunity to reload in some Emerging Markets. A US inflation spike is the next hurdle. EM High Yield,...

Hank Calenti, CFA

GL Limited: Guoco Bumps & Declares Offer Unconditional

This will trade tight to, if not to terms. This is a done deal. If this trades a spread or two below terms, get involved. I still like Guoco here,...

David Blennerhassett

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