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

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

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Ping An A-shares <a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> are trading at a 11% premium to the H-shares <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>. This continues the cycle of premiums and discounts going back to 2015.The last time the A-shares traded at a premium this large to the H-shares was in December last year. By mid to late January, the A-shares were trading near parity versus the H-shares.With <a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> trading at a 11% premium to <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> the risk/reward is favourable to setting up a premium contraction trade. The current premium lies at the 95th percentile over the last 5 years and the premium has widened faster than that of the HSAHP Index.Northbound and Southbound Stock Connect holdings of <a href="https://www.smartkarma.com/entities/ping-an-insurance-group-co-of-china" target="_blank" data-smartkarma-citation="entities:24682:1" rel="noopener">Ping An Insurance Group Co Of China (601318 CH)</a> and <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> have dropped sharply over the last couple of months, though there has been an uptick over the last couple of weeks.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to an contraction of the premium.

The Ping An A-shares Ping An Insurance Group Co Of China (601318 CH) are trading at a 11% premium to the H-shares Ping An Insurance (H) (2318 HK). This continues the cycle of premiums and discounts going back to 2015.The last time the A-shares traded at a premium this large to the H-shares was in December last year. By mid to late January, the A-shares were trading near parity versus the H-shares.With Ping An Insurance Group Co Of China (601318 CH) trading at a 11% premium to Ping An Insurance (H) (2318 HK) the risk/reward is favourable to setting up a premium contraction trade. The current premium lies at the 95th percentile over the last 5 years and the premium has widened faster than that of the HSAHP Index.Northbound and Southbound Stock Connect holdings of Ping An Insurance Group Co Of China (601318 CH) and Ping An Insurance (H) (2318 HK) have dropped sharply over the last couple of months, though there has been an uptick over the last couple of weeks.In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to an contraction of the premium.

Ping An A/​H: Discount Turns to a BIG Premium

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 H (1988 HK)

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

Ping An A/H: Discount Turns to a BIG Premium

Ping An A-shs are now trading at a 11% premium to the H-shs. This is in the 95th percentile and is partly driven by the buyback on A-shs. We like a...

Brian Freitas

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Market Cap (USDm)

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Dividend (Yield)

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

Ping An A/​H: Discount Turns to a BIG Premium

Ping An A-shs are now trading at a 11% premium to the H-shs. This is in the 95th percentile and is partly driven by the buyback on A-shs. We like a...

Brian Freitas

Ping An A/H: Discount Turns to a BIG Premium