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

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*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

*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*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

Founder of Antler Capital

Stanley Tsai, CFA

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).
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<td style="width: 726.047px;">Exhibit 1: China Financials | Silver Linings Playbook</td>
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Source: Our analysis
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In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).



Exhibit 1: China Financials | Silver Linings Playbook





Source: Our analysis




Related Insights
China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 
Glut and Famine: We Might See Snow in China This Summer 
China Macro: PPI Peaks, while CPI Eases Tightening Fears 
China Macro: Exports Disappoint, but It's Still Early in the Game 
Glut and Famine: China's Monetary Conditions a Notch Tighter in May 
ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 
BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China Financials: Silver Linings Playbook

Equity Bottom-Up

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%.

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%. 

China Everbright Bank – Credit Remains Troublesome

China Merchants Bank H / Equity Bottom-Up

*Good 1Q21 Bottom-Line: China Merchants Bank (3968.HK) [CMB] reported 1Q21 results of CNY 32.0 bn, increasing CNY 11.3 bn (54.4%) linked quarter. Results were driven by net interest income improvement; robust fee growth; and an operating expense reduction; and *Credit Wall Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 18.9 bn or 138.5% on an annualized basis, accelerating form the 04.7% growth rate posted in 4Q20. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 184% - suggesting that even the mighty are falling.

*Good 1Q21 Bottom-Line: China Merchants Bank (3968.HK) [CMB] reported 1Q21 results of CNY 32.0 bn, increasing CNY 11.3 bn (54.4%) linked quarter. Results were driven by net interest income improvement; robust fee growth; and an operating expense reduction; and *Credit Wall Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 18.9 bn or 138.5% on an annualized basis, accelerating form the 04.7% growth rate posted in 4Q20. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 184% - suggesting that even the mighty are falling. 

China Merchants Bank – Pig Still In Python

*Many Moving Parts: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, remains challenged. For 1Q21, PAB reported results of CNY 10.1 bn – increasing CNY 3.6 bn (55.2%) on a linked quarter basis. Revenues, however, did increase CNY 4.8 bn (13.0%), much of which, in our view, can likely be attributed to gains while operating expenses contracted CNY 802 mn or 6.2% over the period; and*Credit Seeing Improvement: By our analysis, we find that credit weakness continues to occur as net new NPLs have increased CNY 4.2 bn or 53.6% on an annualized basis. In fairness, however, this is far better than the CNY 20.5 bn or a massive 241% (223% in 3Q20) increase on an annualized basis. Assuming the credit break in the PAB portfolio continues to remain at the current improved level, we find that PAB’s reserves still remain quite light by CNY 19 bn if we assume a 2x NPL ratio. This shortfall represents 6% of stated equity.

*Many Moving Parts: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, remains challenged. For 1Q21, PAB reported results of CNY 10.1 bn – increasing CNY 3.6 bn (55.2%) on a linked quarter basis. Revenues, however, did increase CNY 4.8 bn (13.0%), much of which, in our view, can likely be attributed to gains while operating expenses contracted CNY 802 mn or 6.2% over the period; and*Credit Seeing Improvement: By our analysis, we find that credit weakness continues to occur as net new NPLs have increased CNY 4.2 bn or 53.6% on an annualized basis. In fairness, however, this is far better than the CNY 20.5 bn or a massive 241% (223% in 3Q20) increase on an annualized basis. Assuming the credit break in the PAB portfolio continues to remain at the current improved level, we find that PAB’s reserves still remain quite light by CNY 19 bn if we assume a 2x NPL ratio. This shortfall represents 6% of stated equity.  

China

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

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China Everbright Bank Co A (601818 CH)

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CHINA BANKS: Recently the CBIRC issued guidance on implicit LGFV debt via Document 15 – further tightening the screws on mainland China's financial...

Thomas J. Monaco

China Financials: Silver Linings Playbook

Our Silver Linings Playbook outlines our views on the China financials names that are most likely to remain resilient in the face of macro...

Stanley Tsai, CFA

China Everbright Bank – Credit Remains Troublesome

CHINA EVERBRIGHT BANK: Operating results grew 27.4% QOQ, driven by positive operating jaws. Credit continues to weaken and the loss reserve...

Thomas J. Monaco

China Merchants Bank – Pig Still In Python

CHINA MERCHANTS BANK: CMB reported a 1Q21 QOQ results increase of 54.4% driven by net interest income; fee growth; and lower expenses. Net new...

Thomas J. Monaco

Ping An Insurance – Sea Change At Bank

PING AN INSURANCE: PAB reported a 55.2% QOQ improvement in results. Net new NPLs have increased 53.6% on an annualized basis - far better than the...

Thomas J. Monaco

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