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

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

HSBC Holdings Plc – Chronic Underperformer

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.0%-11.5%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund restructuring  - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.0%-11.5%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund restructuring  - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.  

Bank of East Asia – Caixa Shake-Out Very Likely

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Additional Tier 1 (AT1) bonds simultaneously issued by <a href="https://www.smartkarma.com/entities/commercial-bank-of-dubai" target="_blank" data-smartkarma-citation="entities:29706:1" rel="noopener">Commercial Bank of Dubai (CBD)</a> and the <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> present a unique opportunity to trade on the macro and micro-economic impacts of the COVID-19 economic environment in the United Arab Emirates and Hong Kong SAR, respectively.  Issued on Monday, 12 October, CBD achieved a 6% coupon while BNKEA managed 5.825%. Both banks are tier 2 entities in their home markets. From our perspective, one, if not both, of these bonds was mispriced in the primary market.Having examined Bank of East Asia’s financial fundamentals in <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Strategic Review to Set AT1 Value</a>, we contrast what we like and dislike regarding CBD with BNKEA. As BNKEA’s AT1 is now trading around the fair value which we projected in <a href="https://www.smartkarma.com/insights/bank-of-east-asia-s-new-at1-likely-coupon-and-curve-impact" target="_blank" data-smartkarma-citation="insights:44112" rel="noopener">Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact</a>, we conclude with suggestions on how to trade this pair as a possible proxy on Dubai versus Hong Kong as well as how to trade CBD relative to other banks headquartered in the United Arab Emirates.Commercial Bank of Dubai – what we dislike:<ul>
<li>Commercial real estate exposure is high.</li>
<li>Legacy asset quality issues still haunt.</li>
</ul><ul><li>Capital buffer is adequate, but inflated by forbearance.</li></ul>Commercial Bank of Dubai – what we like:<ul>
<li>Distributable reserves should enable AT1 payments if capital buffers are depleted.</li>
<li>Ownership and connections suggest strong support.</li>
</ul>

Additional Tier 1 (AT1) bonds simultaneously issued by Commercial Bank of Dubai (CBD) and the Bank of East Asia (BNKEA) present a unique opportunity to trade on the macro and micro-economic impacts of the COVID-19 economic environment in the United Arab Emirates and Hong Kong SAR, respectively.  Issued on Monday, 12 October, CBD achieved a 6% coupon while BNKEA managed 5.825%. Both banks are tier 2 entities in their home markets. From our perspective, one, if not both, of these bonds was mispriced in the primary market.Having examined Bank of East Asia’s financial fundamentals in Strategic Review to Set AT1 Value, we contrast what we like and dislike regarding CBD with BNKEA. As BNKEA’s AT1 is now trading around the fair value which we projected in Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact, we conclude with suggestions on how to trade this pair as a possible proxy on Dubai versus Hong Kong as well as how to trade CBD relative to other banks headquartered in the United Arab Emirates.Commercial Bank of Dubai – what we dislike:
Commercial real estate exposure is high.
Legacy asset quality issues still haunt.
Capital buffer is adequate, but inflated by forbearance.Commercial Bank of Dubai – what we like:
Distributable reserves should enable AT1 payments if capital buffers are depleted.
Ownership and connections suggest strong support.


Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty

Our top five picks for Additional Tier 1 (AT1) price accretion comprise bonds issued by <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank PCL (TMB TB)</a>, <a href="https://www.smartkarma.com/entities/banco-santander-brasil-sa" target="_blank" data-smartkarma-citation="entities:27709:1" rel="noopener">Banco Santander Brasil SA (SANB11 BZ)</a>, <a href="https://www.smartkarma.com/entities/citizens-financial-group" target="_blank" data-smartkarma-citation="entities:16004:1" rel="noopener">Citizens Financial (CFG US)</a>, <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a> and <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener">Banco Do Brasil Sa (BBAS3 BZ)</a>.  Three banks issued AT1 notes with coupons lower than yields on their respective shorter callable bonds over the last two weeks. The result was a jump in the price of the shorter callable bonds. Information price discovery drove this impact. For more on this, please see: <a href="https://www.smartkarma.com/insights/chong-hing-bank-at1-alchemy" target="_blank" data-smartkarma-citation="insights:41645" rel="noopener">Chong Hing Bank: AT1 Alchemy</a>. The alchemy behind these moves requires deconstructing bond spread components to separate the underlying credit risk of the firm from the non-call risk of the security. We then model the possible impact from issuing new AT1 bonds on the price of already outstanding securities.

Our top five picks for Additional Tier 1 (AT1) price accretion comprise bonds issued by TMB Bank PCL (TMB TB), Banco Santander Brasil SA (SANB11 BZ), Citizens Financial (CFG US), Grupo Financiero Banorte-O (GFNORTEO MF) and Banco Do Brasil Sa (BBAS3 BZ).  Three banks issued AT1 notes with coupons lower than yields on their respective shorter callable bonds over the last two weeks. The result was a jump in the price of the shorter callable bonds. Information price discovery drove this impact. For more on this, please see: Chong Hing Bank: AT1 Alchemy. The alchemy behind these moves requires deconstructing bond spread components to separate the underlying credit risk of the firm from the non-call risk of the security. We then model the possible impact from issuing new AT1 bonds on the price of already outstanding securities. 

Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion

Hong Kong

Chong Hing Bank Limited provides banking and related services.  It operates branches in Hong Kong, China, and the United States.

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Chong Hing Bank (1111 HK)

Oversea Chinese Banking Corp. – Solid

OVERSEA CHINESE BANKING CORP.: Credit Showing Signs Of Recovery With Negative NPL Growth - Offsetting Weakness In NIMs and Insurance.

Thomas J. Monaco

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

Thomas J. Monaco

Bank of East Asia – Caixa Shake-Out Very Likely

BANK OF EAST ASIA: Pro Forma CaixaBank Is Under Severe Fundamental Pressure Prior To Its Bankia Merger And In Need of Capital. BEA's Stake Likely...

Thomas J. Monaco

Commercial Bank of Dubai Vs Bank of East Asia: A Tale of Two AT1s in COVID-19 Uncertainty

AT1 bonds simultaneously issued by Commercial Bank of Dubai and the Bank of East Asia present an opportunity to trade the COVID-19 economic impacts...

Hank Calenti, CFA

Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion

Our top five picks for Additional Tier 1 (AT1) price accretion comprise bonds issued by TMB Bank PCL (TMB TB), Banco Santander Brasil SA (SANB11...

Hank Calenti, CFA

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