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

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

HSBC Holdings Plc – Chronic Underperformer

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.0%-11.5%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund restructuring  - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.0%-11.5%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund restructuring  - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.  

Bank of East Asia – Caixa Shake-Out Very Likely

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; 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 419 bn which amounts to over a year of pre-tax results at ICBC.

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; 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 419 bn which amounts to over a year of pre-tax results at ICBC.      

ICBC – Be Very Wary Of Worsening Credit

Thematic (Sector/Industry)

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious activity reports (SARs), which were filed with the US Treasury’s Financial Crimes Enforcement Network (FINCEN). The report suggests that there was about USD 2 tn in questionable transactions between 1999-2017, which were flagged by the sector’s internal compliance officers from over 90 financial institutions;  and*Expect An Active DOJ Under Biden/Harris: If Biden/Harris win, Deutsche and Turkey’s Halkbank (HALKB.TI) would appear to be most as risk with a more proactive Department of Justice (DOJ). However, not far behind are others including: HSBC Holdings (5.HK/HSBA/LN) and Standard Chartered (2888.HK/STAN.LN). In addition, when mainland Chinese-US relations materially deteriorate under a Biden administration, we would fully anticipate the entire mainland Chinese financial system to be under a magnifying glass.

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious activity reports (SARs), which were filed with the US Treasury’s Financial Crimes Enforcement Network (FINCEN). The report suggests that there was about USD 2 tn in questionable transactions between 1999-2017, which were flagged by the sector’s internal compliance officers from over 90 financial institutions;  and*Expect An Active DOJ Under Biden/Harris: If Biden/Harris win, Deutsche and Turkey’s Halkbank (HALKB.TI) would appear to be most as risk with a more proactive Department of Justice (DOJ). However, not far behind are others including: HSBC Holdings (5.HK/HSBA/LN) and Standard Chartered (2888.HK/STAN.LN). In addition, when mainland Chinese-US relations materially deteriorate under a Biden administration, we would fully anticipate the entire mainland Chinese financial system to be under a magnifying glass.

Asia Banks – Watch Your Anti-Money Laundering Risk Again

BOC Hong Kong (BOC HK) / Equity Bottom-Up

* Weak Quarter: BOC (Hong Kong) Holdings (2388.HK) [BOCHK] reported 2Q20 profit before taxes (PBT) of HKD 9.2 bn, decreasing HKD 1.5 bn (13.9%) on a linked quarter basis. The linked quarter PBT drop was driven by: a) declining net interest income of HKD 2.4 bn (22.8%) as the NIM contracted 22 bp to 1.39% despite loan growth of HKD 36.3 bn (2.5%); b) a HKD 200 mn (34.3%) increase in loss provisions, pushing NPL cover higher; and c) a HKD 247 mn (6.7%) increase in operating expenses which pushed the C/I ratio modestly higher to 28.3% (up 3.6%); and* Credit Improves, But Reserve Cover Challenged: NPLs declined HKD 1.4 bn (35.7%) HOH  - decreasing 9 bp over the period to a very light 16 bp of total loans. We are also encouraged by BOCHK’s net new NPLs which declined HKD 95 bn or 5.0% on an annualized basis. While reserve cover of NPLs increased 18% HOH to 239%, we believe BOCHK needs to fortify reserves close to HKD 9.2 bn  - or about a quarter’s worth of PBT.

* Weak Quarter: BOC (Hong Kong) Holdings (2388.HK) [BOCHK] reported 2Q20 profit before taxes (PBT) of HKD 9.2 bn, decreasing HKD 1.5 bn (13.9%) on a linked quarter basis. The linked quarter PBT drop was driven by: a) declining net interest income of HKD 2.4 bn (22.8%) as the NIM contracted 22 bp to 1.39% despite loan growth of HKD 36.3 bn (2.5%); b) a HKD 200 mn (34.3%) increase in loss provisions, pushing NPL cover higher; and c) a HKD 247 mn (6.7%) increase in operating expenses which pushed the C/I ratio modestly higher to 28.3% (up 3.6%); and* Credit Improves, But Reserve Cover Challenged: NPLs declined HKD 1.4 bn (35.7%) HOH  - decreasing 9 bp over the period to a very light 16 bp of total loans. We are also encouraged by BOCHK’s net new NPLs which declined HKD 95 bn or 5.0% on an annualized basis. While reserve cover of NPLs increased 18% HOH to 239%, we believe BOCHK needs to fortify reserves close to HKD 9.2 bn  - or about a quarter’s worth of PBT.  

BOC (Hong Kong) Holdings – Negative Operating Jaws

Hong Kong

BOC Hong Kong (Holdings) Limited provides a comprehensive range of financial products and services to retail and corporate customers.  Its products include retail banking, corporate banking, and treasury services.  The Company operates its branches in Hong Kong and China.

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BOC Hong Kong (BOC HK) (2388 HK)

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

Thomas J. Monaco

Bank of East Asia – Caixa Shake-Out Very Likely

BANK OF EAST ASIA: Pro Forma CaixaBank Is Under Severe Fundamental Pressure Prior To Its Bankia Merger And In Need of Capital. BEA's Stake Likely...

Thomas J. Monaco

ICBC – Be Very Wary Of Worsening Credit

INDUSTRIAL AND COMMERCIAL BANK OF CHINA: Don't Believe The Hype. Numbers Manufactured, and Credit Risk Suggests Long Winter For ICBC and Mainland...

Thomas J. Monaco

Asia Banks – Watch Your Anti-Money Laundering Risk Again

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious...

Thomas J. Monaco

BOC (Hong Kong) Holdings – Negative Operating Jaws

* Weak Quarter: BOC (Hong Kong) Holdings (2388.HK) [BOCHK] reported 2Q20 profit before taxes (PBT) of HKD 9.2 bn, decreasing HKD 1.5 bn (13.9%) on...

Thomas J. Monaco

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