Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Equity Bottom-Up

China Merchants Bank H / Equity Bottom-Up

<ul>
<li>In this report we conduct a credit quality review of eleven Chinese banks ahead of 3Q21 results, in the light of the Evergrande and real estate sector headwinds; we also assess the banks’ profitability ratios and their capacity to absorb increasing credit losses</li>
<li>We examine the NPL provisioning levels of Chinese banks and, more importantly, we supplement domestic headline NPL ratio metrics with their domestic category of Special Mention loans</li>
<li>In addition, we compare these domestic metrics to internationally recognised IFRS yardsticks of stage 2 and Stage 3 loans</li>
<li>A recent academic study estimates that Chinese banks’ loan delinquency levels could be two to four times higher than the stated NPL ratio, due largely to “hidden” NPLs through off balance sheet exposures</li>
<li>With the increased concern regarding real estate and mortgage exposures in particular, we research on-balance credit quality metrics in this report, broadening and deepening the credit quality assessment of Chinese banks with the aim to better capture credit impairments as well as sub-standard credit quality</li>
<li>We conclude that the best placed Chinese banks to weather the worsening headwinds on credit quality are <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> 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> with <a href="https://www.smartkarma.com/entities/industrial-and-commercial-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a> being one name to watch; the most exposed to further credit quality deterioration, in our view, are <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Banking H (1988 HK)</a> and <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China Citic Bank Corp Ltd H (998 HK)</a> </li>
<li>Risks to our positive view on PSBC and China Merchants Bank include worse than expected delinquency ratios going forward, especially in mortgage and real estate, driving cost of risk charges higher; upside risks to our negative view on China Minsheng Bank and China CITIC Bank include better than expected credit quality easing the pressure on cost of risk charges</li>
</ul>


In this report we conduct a credit quality review of eleven Chinese banks ahead of 3Q21 results, in the light of the Evergrande and real estate sector headwinds; we also assess the banks’ profitability ratios and their capacity to absorb increasing credit losses
We examine the NPL provisioning levels of Chinese banks and, more importantly, we supplement domestic headline NPL ratio metrics with their domestic category of Special Mention loans
In addition, we compare these domestic metrics to internationally recognised IFRS yardsticks of stage 2 and Stage 3 loans
A recent academic study estimates that Chinese banks’ loan delinquency levels could be two to four times higher than the stated NPL ratio, due largely to “hidden” NPLs through off balance sheet exposures
With the increased concern regarding real estate and mortgage exposures in particular, we research on-balance credit quality metrics in this report, broadening and deepening the credit quality assessment of Chinese banks with the aim to better capture credit impairments as well as sub-standard credit quality
We conclude that the best placed Chinese banks to weather the worsening headwinds on credit quality are China Merchants Bank H (3968 HK) and Postal Savings Bank of China (1658 HK) with ICBC (H) (1398 HK) being one name to watch; the most exposed to further credit quality deterioration, in our view, are China Minsheng Banking H (1988 HK) and China Citic Bank Corp Ltd H (998 HK) 
Risks to our positive view on PSBC and China Merchants Bank include worse than expected delinquency ratios going forward, especially in mortgage and real estate, driving cost of risk charges higher; upside risks to our negative view on China Minsheng Bank and China CITIC Bank include better than expected credit quality easing the pressure on cost of risk charges


Chinese Banks – Focusing on the Credit Quality Challenge

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

*Shenjing Fell Apart Before Evergrande Heated Up: Even prior to the China Evergrande Group (3333.HK) debacle, Shenjing Bank was (2066.HK) [Shenjing] struggling: 1) core operating earnings (excluding gains) were a negative CNY 1.1 tn at 1H21, by our calculation; and 2) short-term liquidity deteriorated at an unprecedented pace. With Evergrande’s risk, we calculate Shenjing’s NPLs are now closer to a whopping 24.4% - and solvency is called into question; and  *Evergrande’s Smartest Move Ever: The rest of the financial system figured out that Shenjing was an accident waiting to happen, with the interbank market cutting their risk. Despite this, Shengjing Finance Holdings (SFH) purchased Evergrande’s 19.93% stake – becoming the bank’s largest shareholder. For USD 1.55 bn, SFH has now absolved Evergrande of being a liquidity and capital backstop. Well done!

*Shenjing Fell Apart Before Evergrande Heated Up: Even prior to the China Evergrande Group (3333.HK) debacle, Shenjing Bank was (2066.HK) [Shenjing] struggling: 1) core operating earnings (excluding gains) were a negative CNY 1.1 tn at 1H21, by our calculation; and 2) short-term liquidity deteriorated at an unprecedented pace. With Evergrande’s risk, we calculate Shenjing’s NPLs are now closer to a whopping 24.4% - and solvency is called into question; and  *Evergrande’s Smartest Move Ever: The rest of the financial system figured out that Shenjing was an accident waiting to happen, with the interbank market cutting their risk. Despite this, Shengjing Finance Holdings (SFH) purchased Evergrande’s 19.93% stake – becoming the bank’s largest shareholder. For USD 1.55 bn, SFH has now absolved Evergrande of being a liquidity and capital backstop. Well done! 

China Evergrande Group – Shoes Dropping At Shenjing

*Weaker Quarter: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 2Q21 bottom-line results of CNY 77.7 bn, decreasing CNY 8.0 bn or 9.3% linked quarter. The linked quarter weakness, in our view, can be attributed to negative operating jaws as costs increased CNY 9.4 bn (14.8%) and revenues declined CNY 589 mn (0.3%); and*Credit Risk Continues to Rise: The level of net new NPLs increased 46.4% on annualized basis and remains elevated. When one considers the break-down in credit quality, reserves would appear to be light – in the neighborhood of CNY 86.1 bn, amounting to about one quarter of pre-tax results at ICBC.

*Weaker Quarter: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 2Q21 bottom-line results of CNY 77.7 bn, decreasing CNY 8.0 bn or 9.3% linked quarter. The linked quarter weakness, in our view, can be attributed to negative operating jaws as costs increased CNY 9.4 bn (14.8%) and revenues declined CNY 589 mn (0.3%); and*Credit Risk Continues to Rise: The level of net new NPLs increased 46.4% on annualized basis and remains elevated. When one considers the break-down in credit quality, reserves would appear to be light – in the neighborhood of CNY 86.1 bn, amounting to about one quarter of pre-tax results at ICBC.   

Industrial and Commercial Bank of China – Negative Jaws Pressure Results

Postal Savings Bank of China C / Equity Bottom-Up

*Excess Provisioning Eats Away At 2Q21 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 2Q21 bottom-line results of CNY 19.9 bn – declining CNY 1.4 bn (6.6%) linked quarter. Excluding gains, PSB’s core operating results declined CNY 6.0 bn (36.0%) over the period. Results were impacted by significantly higher loss provisions and negative operating jaws; and
*Credit Quality Turns, But Reserves More Than Adequate: Net new NPLs increased CNY 14.9 bn and equate to an elevated 116.6% annualized – quite the difference from the CNY 9.3 bn or 18.4% annualized posted at year-end. Despite the accelerated increase in net new NPLs, it would appear that PSB’s reserves exceed known and potential credit risk to the tune of CNY 89.5 bn or over a year of pre-tax profits – begging the question of why the increase in loss provisions?

*Excess Provisioning Eats Away At 2Q21 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 2Q21 bottom-line results of CNY 19.9 bn – declining CNY 1.4 bn (6.6%) linked quarter. Excluding gains, PSB’s core operating results declined CNY 6.0 bn (36.0%) over the period. Results were impacted by significantly higher loss provisions and negative operating jaws; and
*Credit Quality Turns, But Reserves More Than Adequate: Net new NPLs increased CNY 14.9 bn and equate to an elevated 116.6% annualized – quite the difference from the CNY 9.3 bn or 18.4% annualized posted at year-end. Despite the accelerated increase in net new NPLs, it would appear that PSB’s reserves exceed known and potential credit risk to the tune of CNY 89.5 bn or over a year of pre-tax profits – begging the question of why the increase in loss provisions?

Postal Savings Bank of China – Way Too Conservative

*Bank Results Decline Linked Quarter: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, continues to feel the challenges of a slowing mainland Chinese economy. For 2Q21, PAB reported results of CNY 7.5 bn – decreasing CNY 2.7 bn (26.4%) linked quarter. From our vantage point, higher loss provisions and weaker net interest income weighed heavily on results; and*Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves still remain quite light by CNY 16 bn. This shortfall represents about two quarter of pre-tax earnings.

*Bank Results Decline Linked Quarter: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, continues to feel the challenges of a slowing mainland Chinese economy. For 2Q21, PAB reported results of CNY 7.5 bn – decreasing CNY 2.7 bn (26.4%) linked quarter. From our vantage point, higher loss provisions and weaker net interest income weighed heavily on results; and*Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves still remain quite light by CNY 16 bn. This shortfall represents about two quarter of pre-tax earnings.   

Ping An Insurance – Credit Mixed, But Still Worrisome

China

China CITIC Bank Corporation Limited provides banking services. The Company offers deposits, loans, domestic settlement,  currency trading, bank guarantee, and other services. China CITIC Bank provides its services to individuals, enterprises, and other clients.

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China Citic Bank Corp Ltd H (998 HK)

Chinese Banks – Focusing on the Credit Quality Challenge

Chinese bank headline NPLs understate the system's credit risks at a problematic time; looking beyond the stated NPLs, we like China Merchants &...

Victor Galliano

China Evergrande Group – Shoes Dropping At Shenjing

EVERGRANDE: Before the Evergrande debacle, Shenjing posted core operating losses and liquidity stress. Despite this, Shengjing Finance absolved...

Thomas J. Monaco

Industrial and Commercial Bank of China – Negative Jaws Pressure Results

ICBC: ICBC reported a QOQ 2Q21 bottom-line decline of 9.3% due to negative operating jaws. The level of net new NPLs increased 46.4% annualized...

Thomas J. Monaco

Postal Savings Bank of China – Way Too Conservative

POSTAL SAVINGS BANK: PSB's 2Q21QOQ core result increased 36.0% due to higher loss provisions and negative jaws. Despite the increase in net new...

Thomas J. Monaco

Ping An Insurance – Credit Mixed, But Still Worrisome

PING AN INSURANCE: Ping An Bank reported a 26.4% QOQ results decline for 2Q21 reflecting higher provisions. Credit is challenged as net new NPLs...

Thomas J. Monaco

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