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

*Blowout 3Q21 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB], mainland China’s youngest large commercial bank, reported 3Q21 bottom-line results of CNY 23.5 bn – increasing CNY 3.7 bn (18.6%) linked quarter. Much of the improvement at PSB is due to credit leverage, as loss provisions declined CNY 9.3 bn (54.3%); and*Credit Quality Continues Its Positive Turn, But Reserves More Than Adequate: Net new NPLs did increase CNY 7.8 bn or 61.0% annualized versus CNY 14.9 bn or 116.6% at 2Q21. Despite the increase in net new NPLs, it would appear that PSB’s reserves would remain excessive to the tune of CNY 100 bn or about a year of pre-tax profits – begging the question of why not reverse loss reserves?

*Blowout 3Q21 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB], mainland China’s youngest large commercial bank, reported 3Q21 bottom-line results of CNY 23.5 bn – increasing CNY 3.7 bn (18.6%) linked quarter. Much of the improvement at PSB is due to credit leverage, as loss provisions declined CNY 9.3 bn (54.3%); and*Credit Quality Continues Its Positive Turn, But Reserves More Than Adequate: Net new NPLs did increase CNY 7.8 bn or 61.0% annualized versus CNY 14.9 bn or 116.6% at 2Q21. Despite the increase in net new NPLs, it would appear that PSB’s reserves would remain excessive to the tune of CNY 100 bn or about a year of pre-tax profits – begging the question of why not reverse loss reserves?

Postal Savings Bank of China – Reserve Reversals Expected

China Merchants Bank H / Equity Bottom-Up

*3Q21 Bottom-Line Is Not What It Appears: China Merchants Bank (3968.HK) [CMB] reported 3Q21 bottom-line results of CNY 32.7 bn, increasing CNY 3.3 bn (11.3%) linked quarter. However, when we exclude gains and the unreasonable drop in loss provisions, we find that CMB's adjusted core operating result looks something closer to CNY 12.6 bn - declining CNY 8.8 bn or 41.2% over the same period; and*Credit Has Fallen Off Of A Cliff: Unfortunately for CMB, net new problem loans continue to accelerate at Indian bank pace of CNY 23.5 bn or 172.3% annualized. Provided that the accelerated net new NPL trajectory remains, we foresee a significant decline in NPL cover into the 150% territory from nearly 450% – which is lower than the average mainland Chinese bank.

*3Q21 Bottom-Line Is Not What It Appears: China Merchants Bank (3968.HK) [CMB] reported 3Q21 bottom-line results of CNY 32.7 bn, increasing CNY 3.3 bn (11.3%) linked quarter. However, when we exclude gains and the unreasonable drop in loss provisions, we find that CMB's adjusted core operating result looks something closer to CNY 12.6 bn - declining CNY 8.8 bn or 41.2% over the same period; and*Credit Has Fallen Off Of A Cliff: Unfortunately for CMB, net new problem loans continue to accelerate at Indian bank pace of CNY 23.5 bn or 172.3% annualized. Provided that the accelerated net new NPL trajectory remains, we foresee a significant decline in NPL cover into the 150% territory from nearly 450% – which is lower than the average mainland Chinese bank. 

China Merchants Bank – An Optical Illusion

*Loan Defaults and USD Bond Payments Set To Continue:  China Evergrande Group (3333.HK) [Evergrande] magically made an 11th hour interest payment of USD 83.5 mn to bondholders on Friday, October 22, 2021 – escaping default by the skin of its teeth, just as its 30-day grace period with bondholders was about to end. While the market is worried about a China Huarong Asset Management (2799.HK) default crippling the country’s USD credit market, they too should understand that any bond default by Evergande likely roils this market as well; and* Worrisome Comments By  PBOC Governor Yi: The mainland Chinese government rarely comments on a single entity, which is why Governor Yi’s thoughts are alarming. “First, we’re going to try to prevent contagion to other real estate companies. Second, we’ll prevent contagion to other parts of the financial sector.” This self-inflicted wound will require a tourniquet to stop the bleeding; expect non-D-SIFI bank and insurer failures in mainland China.

*Loan Defaults and USD Bond Payments Set To Continue:  China Evergrande Group (3333.HK) [Evergrande] magically made an 11th hour interest payment of USD 83.5 mn to bondholders on Friday, October 22, 2021 – escaping default by the skin of its teeth, just as its 30-day grace period with bondholders was about to end. While the market is worried about a China Huarong Asset Management (2799.HK) default crippling the country’s USD credit market, they too should understand that any bond default by Evergande likely roils this market as well; and* Worrisome Comments By  PBOC Governor Yi: The mainland Chinese government rarely comments on a single entity, which is why Governor Yi’s thoughts are alarming. “First, we’re going to try to prevent contagion to other real estate companies. Second, we’ll prevent contagion to other parts of the financial sector.” This self-inflicted wound will require a tourniquet to stop the bleeding; expect non-D-SIFI bank and insurer failures in mainland China.

China Evergrande Group – China’s Wrecking Ball

*Quarter Highlighted By Weak Credit: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q21 results of CNY 11.7 bn – increasing CNY 4.1 bn (55.0%). Don’t shoot off the streamers just yet, credit quality was abysmal and Ping An is seemingly pulling on its bank lever to offset what looks to be another quarter self-inflicted harm  within its investment portfolio;  and *Credit Challenges: By our analysis, we find that credit remains incredibly challenged as net new NPLs are now accelerating at Indian bank pace of CNY 12.4 bn or 159.8% annualized.  Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves remain CNY 19 bn light.

*Quarter Highlighted By Weak Credit: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q21 results of CNY 11.7 bn – increasing CNY 4.1 bn (55.0%). Don’t shoot off the streamers just yet, credit quality was abysmal and Ping An is seemingly pulling on its bank lever to offset what looks to be another quarter self-inflicted harm  within its investment portfolio;  and *Credit Challenges: By our analysis, we find that credit remains incredibly challenged as net new NPLs are now accelerating at Indian bank pace of CNY 12.4 bn or 159.8% annualized.  Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves remain CNY 19 bn light.

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.

<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

China

China Minsheng Banking Corp., Ltd. operates in commercial banking businesses. The Bank provides deposit, loan, settlement, discount, financial bond issuance, government bond underwriting and trading, letter of credit, bank guarantee, and other related financial services.

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China Minsheng Banking A (600016 CH)

Postal Savings Bank of China – Reserve Reversals Expected

POSTAL SAVINGS BANK: PSB's QOQ 3Q21 increased 18.6%, due largely to credit leverage and net interest income improvement. PSB’s reserves appear...

Thomas J. Monaco

China Merchants Bank – An Optical Illusion

CHINA MERCHANTS BANK: CMB's QOQ 3Q21 adjusted core operating result declined 41.2%, by our calculation. Net new problem loans continue to...

Thomas J. Monaco

China Evergrande Group – China’s Wrecking Ball

EVERGRANDE: Evergrande magically made an interest payment to bondholders, escaping default by the skin of its teeth. This self-inflicted wound...

Thomas J. Monaco

Ping An Insurance – Breaking The Bank

PING AN: PAB reported 3Q21 QOQ growth of 55.0%. Credit quality was abysmal and Ping An is pulling on its bank lever to offset another quarter self...

Thomas J. Monaco

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

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