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

*Adding Hubei to the Fold: Until recently AIA Group (1299.HK) [AIA] operated only five mainland Chinese provincial licenses in 30 cities with Beijing being the largest premium contributor for AIA China. With the border between mainland China and Hong Kong completely shutdown from 2020, mainland China became AIA’s largest market, contributing 35% to AIA’s VONB. Hong Kong falling on its face isn’t exactly how anyone envisioned mainland China becoming AIA’s largest business driver. AIA’s latest life insurance license approval from the CBIRC was received for Hubei province, reinforcing mainland China’s strategic importance; and*Suffocating Hong Kong Business: AIA’s core Hong Kong business has been an unmitigated disaster for during COVID-19, as it struggles with mainland Chinese visitors. Further, there is limited clarity on AIA’s legacy agents. It also has to deal with the fledgling Bank of East Asia (23.HK) business that it recently acquired.

*Adding Hubei to the Fold: Until recently AIA Group (1299.HK) [AIA] operated only five mainland Chinese provincial licenses in 30 cities with Beijing being the largest premium contributor for AIA China. With the border between mainland China and Hong Kong completely shutdown from 2020, mainland China became AIA’s largest market, contributing 35% to AIA’s VONB. Hong Kong falling on its face isn’t exactly how anyone envisioned mainland China becoming AIA’s largest business driver. AIA’s latest life insurance license approval from the CBIRC was received for Hubei province, reinforcing mainland China’s strategic importance; and*Suffocating Hong Kong Business: AIA’s core Hong Kong business has been an unmitigated disaster for during COVID-19, as it struggles with mainland Chinese visitors. Further, there is limited clarity on AIA’s legacy agents. It also has to deal with the fledgling Bank of East Asia (23.HK) business that it recently acquired.

AIA Group – Hong Kong In Rearview Mirror

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.   

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

HSBC Holdings Plc – Head Still Buried In The Sand

China and US Equity Analyst

Roger Xie

Thematic (Sector/Industry)

<ul>
<li>Hong Kong de facto central bank, HKMA (Hong Kong Monetary Authority), issued a strategic paper exploring the feasibility of issuing a retail-focused CBDC (central bank digital currency), an e-HKD, within 12 months. One of the major use cases of e-HKD is to link with e-CNY and facilitate cross-border payment or transfer. This has underscored China's ambition to take further step rolling out its most advanced digital currency among major economies.</li>
<li>Based on the latest quarterly statistics on mobile app usage, digital currency app has become a dominant factor in user engagement. Stock trading and crypto trading apps show much higher daily user visits and viewing time, compared with other financial management apps. The proliferation of CBDC (central bank digital currency), such as e-HKD and e-CNY, will likely accelerate user growth and engagement. The major crypto exchange <a href="https://www.smartkarma.com/entities/coinbase-global-inc" target="_blank" data-smartkarma-citation="entities:32227:1" rel="noopener">Coinbase (COIN US)</a> has shown its registered users jumping 65% year-over-year in 21Q1 during the wider acceptancy of bitcoin. </li>
<li>We expect the majority of Hong Kong-based retail banks will likely roll out their own mobile apps with capability to transact on e-HKD and e-CNY in near term. The successful integration of this feature might likely impact user engagement, which might become a key KPI for banks' mobile app in our view. MAU/DAU (Month/Daily Active User) might become the differentiators for Hong Kong based retail banks such as  <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc" target="_blank" data-smartkarma-citation="entities:516:1" rel="noopener">HSBC Holdings (5 HK)</a> , <a href="https://www.smartkarma.com/entities/hang-seng-bank-ltd" target="_blank" data-smartkarma-citation="entities:24:1" rel="noopener">Hang Seng Bank (11 HK)</a> , <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 (23 HK)</a> , <a href="https://www.smartkarma.com/entities/boc-hong-kong-holdings-ltd" target="_blank" data-smartkarma-citation="entities:343:1" rel="noopener">BOC Hong Kong (BOC HK) (2388 HK)</a> , <a href="https://www.smartkarma.com/entities/dah-sing-financial-holdings" target="_blank" data-smartkarma-citation="entities:589:1" rel="noopener">Dah Sing Financial (440 HK). </a>
</li>
</ul>


Hong Kong de facto central bank, HKMA (Hong Kong Monetary Authority), issued a strategic paper exploring the feasibility of issuing a retail-focused CBDC (central bank digital currency), an e-HKD, within 12 months. One of the major use cases of e-HKD is to link with e-CNY and facilitate cross-border payment or transfer. This has underscored China's ambition to take further step rolling out its most advanced digital currency among major economies.
Based on the latest quarterly statistics on mobile app usage, digital currency app has become a dominant factor in user engagement. Stock trading and crypto trading apps show much higher daily user visits and viewing time, compared with other financial management apps. The proliferation of CBDC (central bank digital currency), such as e-HKD and e-CNY, will likely accelerate user growth and engagement. The major crypto exchange Coinbase (COIN US) has shown its registered users jumping 65% year-over-year in 21Q1 during the wider acceptancy of bitcoin. 
We expect the majority of Hong Kong-based retail banks will likely roll out their own mobile apps with capability to transact on e-HKD and e-CNY in near term. The successful integration of this feature might likely impact user engagement, which might become a key KPI for banks' mobile app in our view. MAU/DAU (Month/Daily Active User) might become the differentiators for Hong Kong based retail banks such as  HSBC Holdings (5 HK) , Hang Seng Bank (11 HK) , Bank of East Asia (23 HK) , BOC Hong Kong (BOC HK) (2388 HK) , Dah Sing Financial (440 HK). 



Hong Kong to Embrace Digital Currency E-HKD, Boosting Fintech Investment and Connectivity With E-CNY

*Recent USA Branch Disposal: As announced on February 22, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]  announced that is set to withdraw from U.S. retail banking, seeking to dispose of a business that has long underperformed. On May 26, 2021 HSBC and Cathay General Bancorp (CATY.US) [Cathay] in Los Angeles announced that Cathay will acquire 10 retail branches in California from HSBC. Cathay also acquired USD 0.8 bn in loans - residential mortgage, retail business banking, and personal loans, along with USD 1.0 bn in deposits;  and*HSBCNA Still A Chronic Headache: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. HSBCNA’s operating costs exceed recurring revenues. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis.

*Recent USA Branch Disposal: As announced on February 22, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]  announced that is set to withdraw from U.S. retail banking, seeking to dispose of a business that has long underperformed. On May 26, 2021 HSBC and Cathay General Bancorp (CATY.US) [Cathay] in Los Angeles announced that Cathay will acquire 10 retail branches in California from HSBC. Cathay also acquired USD 0.8 bn in loans - residential mortgage, retail business banking, and personal loans, along with USD 1.0 bn in deposits;  and*HSBCNA Still A Chronic Headache: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. HSBCNA’s operating costs exceed recurring revenues. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis.

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)

AIA Group – Hong Kong In Rearview Mirror

AIA GROUP: In 2020, mainland China became AIA’s largest market. AIA’s received life insurance license approval for Hubei province, reinforcing...

Thomas J. Monaco

HSBC Holdings Plc – Banana Peal

HSBC HOLDINGS: HSBC announced the disposal of French retail bank at a loss of USD 2.3 bn. The HSBC France sale suggests HSBC US disposal could...

Thomas J. Monaco

HSBC Holdings Plc – Head Still Buried In The Sand

HSBC HOLDINGS: A competitor call with management centered on benign Hong Kong/Asia. The Group aim is a CET1 of 14-14.5%. No mention HSBC North...

Thomas J. Monaco

Hong Kong to Embrace Digital Currency E-HKD, Boosting Fintech Investment and Connectivity With E-CNY

Hong Kong Monetary Authority issued a strategic paper exploring the feasibility of issuing e-HKD within 12 months. Banking app MAU/DAU might become...

Roger Xie

HSBC Holdings Plc – And So It Begins

HSBC HOLDINGS: HSBC is withdrawing from U.S. retail banking, and recently announced that it will sell 10 branches to Cathay General Bancorp in Los...

Thomas J. Monaco

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