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

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

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 20 August. The constituent changes will be effective after the close of trading on 3 September.For 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>, there are 2 inclusions and 2 exclusions.In line with our forecasts, the inclusions are <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (2618 HK)</a> and <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> while the deletions are <a href="https://www.smartkarma.com/entities/shimao-property-holdings-limited" target="_blank" data-smartkarma-citation="entities:8375:1" rel="noopener">Shimao Property Holdings (813 HK)</a> and <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a>. One-way turnover is estimated at 6.82% and will result in a one-way trade of HK$4.84bn. Following an increase in the index shares and no change in the capping factor at the July monthly rebalance, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>'s weight will be capped at 8% leading to outflows from the stock.There are only 10 trading days to implementation of the changes.<a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> was a forecast inclusion 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> but was not expected to be included in the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a>. Passive trackers across both indices will need to buy over 3 days of ADV on the stock and the stock could open higher on Monday.<a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (2618 HK)</a> is down 38% from its IPO price and the index inclusion could act as a support in the short term. Short selling commenced a few weeks back and shorts have piled in rapidly.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 20 August. The constituent changes will be effective after the close of trading on 3 September.For the Hang Seng China Enterprises Index (HSCEI INDEX), there are 2 inclusions and 2 exclusions.In line with our forecasts, the inclusions are JD Logistics (2618 HK) and Li Ning Co Ltd (2331 HK) while the deletions are Shimao Property Holdings (813 HK) and Anhui Conch Cement (914 HK). One-way turnover is estimated at 6.82% and will result in a one-way trade of HK$4.84bn. Following an increase in the index shares and no change in the capping factor at the July monthly rebalance, Alibaba Group (9988 HK)'s weight will be capped at 8% leading to outflows from the stock.There are only 10 trading days to implementation of the changes.Li Ning Co Ltd (2331 HK) was a forecast inclusion in the Hang Seng China Enterprises Index (HSCEI INDEX) but was not expected to be included in the Hong Kong Hang Seng Index (HSI INDEX). Passive trackers across both indices will need to buy over 3 days of ADV on the stock and the stock could open higher on Monday.JD Logistics (2618 HK) is down 38% from its IPO price and the index inclusion could act as a support in the short term. Short selling commenced a few weeks back and shorts have piled in rapidly.

HSCEI Index Rebalance: Li Ning's Double Inclusion; Alibaba Capping Leads to High Turnover

China Merchants Bank H / Equity Bottom-Up

*2Q21 Bottom-Line Sees Cracks: China Merchants Bank (3968.HK) [CMB] reported 2Q21 results of CNY 29.1 bn, decreasing CNY 2.9 bn (9.0%) linked quarter, driven by negative operating jaws, a decline net fees and commissions, and higher provisions, tracking weaker credit quality; and *Credit Wall of Worry Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 20.3 bn or 150.2% annualized versus CNY 18.9 bn or 138.5% at 1Q21. Although CMB’s reserve cover still remains quite robust, the net new NPL ratio trajectory suggests that reserve cover of NPLs will drop to something more in line with a typical mainland Chinese bank.

*2Q21 Bottom-Line Sees Cracks: China Merchants Bank (3968.HK) [CMB] reported 2Q21 results of CNY 29.1 bn, decreasing CNY 2.9 bn (9.0%) linked quarter, driven by negative operating jaws, a decline net fees and commissions, and higher provisions, tracking weaker credit quality; and *Credit Wall of Worry Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 20.3 bn or 150.2% annualized versus CNY 18.9 bn or 138.5% at 1Q21. Although CMB’s reserve cover still remains quite robust, the net new NPL ratio trajectory suggests that reserve cover of NPLs will drop to something more in line with a typical mainland Chinese bank.

China Merchants Bank – Now Negative Operating Jaws

Thematic (Sector/Industry)

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further; and*Clarification Was Necessary: Uncertainties surrounding the definition of local state-owned entity (SOE) with implicit financing support from the government has already led to an aggressive impact on lending. Numerous local infrastructure SOEs have subsidiaries with some form of implicit local government debt support, and without financing Document 15 would have had even more significant consequences. Still over 50% of LGFVs remain affected.

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further; and*Clarification Was Necessary: Uncertainties surrounding the definition of local state-owned entity (SOE) with implicit financing support from the government has already led to an aggressive impact on lending. Numerous local infrastructure SOEs have subsidiaries with some form of implicit local government debt support, and without financing Document 15 would have had even more significant consequences. Still over 50% of LGFVs remain affected.

China Banks – Some Clarity On LGFV Financing

China

China Construction Bank Corporation provides banking services. The Company offers deposits, loans, fund management, foreign exchange, and other services. China Construction Bank provides its services to individuals, enterprises, and other clients.

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China Construction Bank (601939 CH)

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

HSCEI Index Rebalance: Li Ning's Double Inclusion; Alibaba Capping Leads to High Turnover

Li Ning and JD Logistics have been added to the HSCEI while Anhui Conch and Shimao Prop have been deleted. Alibaba's weight in the index will be...

Brian Freitas

China Merchants Bank – Now Negative Operating Jaws

CHINA MERCHANTS BANK: CMB reported QOQ 2Q21 results decline of 9.0% driven by negative operating jaws, a decline net fees and commissions, and...

Thomas J. Monaco

China Banks – Some Clarity On LGFV Financing

CHINA BANKS: Recently the CBIRC issued guidance to both banks and insurers on implicit debt of LGFV via Document 15. Clarification was needed given...

Thomas J. Monaco

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