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

<p><em><strong>*Lower Tax Rate Offset By Massive Provisions: </strong></em>CIMB Group (CIMB.MK) [CIMB] reported 4Q20 results of MYR 195.8 mn, increasing MYR 16.7 mn (9.3%) linked quarter. During the period, we noted a  massive reduction in its tax rate from 60.6% in 3Q20 to 18.0% which was additive to bottom-line performance by MYR 70.8 mn. However, this was offset by an enormous increase in loss provisions reflecting a breakdown in credit quality; and  </p><p> <em><strong>*Credit Risk Now Accelerating: </strong></em>With NCOs of MYR 1.9 bn (accelerating from the MYR 1.2 bn posted in 3Q20), we find that net new NPLs increased MYR 2.6 bn or a whopping 83.5% on an annualized basis. We continue to believe that reserve cover is too light by MYR 12.0 bn (versus MYR 1.5 bn in 3Q20) – which nearly six years of profit before tax or 21.1% of 4Q20 capital. </p>

*Lower Tax Rate Offset By Massive Provisions: CIMB Group (CIMB.MK) [CIMB] reported 4Q20 results of MYR 195.8 mn, increasing MYR 16.7 mn (9.3%) linked quarter. During the period, we noted a  massive reduction in its tax rate from 60.6% in 3Q20 to 18.0% which was additive to bottom-line performance by MYR 70.8 mn. However, this was offset by an enormous increase in loss provisions reflecting a breakdown in credit quality; and   *Credit Risk Now Accelerating: With NCOs of MYR 1.9 bn (accelerating from the MYR 1.2 bn posted in 3Q20), we find that net new NPLs increased MYR 2.6 bn or a whopping 83.5% on an annualized basis. We continue to believe that reserve cover is too light by MYR 12.0 bn (versus MYR 1.5 bn in 3Q20) – which nearly six years of profit before tax or 21.1% of 4Q20 capital. 

CIMB Group – Heading Deeper Into the Woods

Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Quantitative Analysis

<div>
<p>In this Smartkarma Original, we bring to you a quantitative approach for identifying Asian companies that are likely to raise/cut buyback. Applying this approach to a universe of 920+ companies listed across Asia helped us identify 40+ and 50+ companies that have a high likelihood of raising and cutting buybacks, respectively, over the next five years.</p>
</div>
<div>
<div>
<div class="content-highlight">
<p><strong>What's Original?</strong></p>
<ul style="list-style-type: disc;">
<li>We have two separate models, one for forecasting Buyback Raise and the other for Buyback Cut.</li>
<li>Our back test results are very encouraging with &gt;85% hit rate for our Buyback Raise model and &gt;94% hit rate for our Buyback Cut model.</li>
<li>For our Buyback Raise model, we differentiate from other quantitative buyback models by incorporating competing uses of cash like inorganic acquisitions through “Goodwill as % of Total Assets” parameter. Based on our analysis, we have also determined that, contrary to usual perception, any dividend payout is not a competing use of cash vs buyback but a healthy sign of capital return discipline and have incorporated it accordingly in our model. We also use long-term ROE vs growth trends to filter companies where the cash levels maybe low but the capability to do buyback with time can grow significantly. At the same time, we ensure to weed off very high growth companies that may have high re-investment needs through our carefully selected threshold for the "Long-term Revenue CAGR" parameter. </li>
</ul>
</div>
</div>
</div>
<div>
<h3>Insight Flow</h3>
</div>
<div>
<ul style="list-style-type: disc;">
<li>Live Dashboard</li>
<li> Methodology
<ul style="list-style-type: circle;">
<li>Buyback Raise Model</li>
<li>Buyback Cut Model</li>
</ul>
</li>
<li>Universe</li>
<li>Back Test Results
<ul style="list-style-type: circle;">
<li>Buyback Raise Model</li>
<li>Buyback Cut Model</li>
</ul>
</li>
<li>Model Results
<ul style="list-style-type: circle;">
<li>Summary Statistics</li>
<li>Companies with High Probability of Buyback Raise</li>
<li>Companies with High Probability of Buyback Cut</li>
</ul>
</li>
<li>Buyback Timing</li>
<li>Model Risks &amp; Limitations</li>
<li>Conclusion</li>
</ul>
</div>


In this Smartkarma Original, we bring to you a quantitative approach for identifying Asian companies that are likely to raise/cut buyback. Applying this approach to a universe of 920+ companies listed across Asia helped us identify 40+ and 50+ companies that have a high likelihood of raising and cutting buybacks, respectively, over the next five years.




What's Original?

We have two separate models, one for forecasting Buyback Raise and the other for Buyback Cut.
Our back test results are very encouraging with &gt;85% hit rate for our Buyback Raise model and &gt;94% hit rate for our Buyback Cut model.
For our Buyback Raise model, we differentiate from other quantitative buyback models by incorporating competing uses of cash like inorganic acquisitions through “Goodwill as % of Total Assets” parameter. Based on our analysis, we have also determined that, contrary to usual perception, any dividend payout is not a competing use of cash vs buyback but a healthy sign of capital return discipline and have incorporated it accordingly in our model. We also use long-term ROE vs growth trends to filter companies where the cash levels maybe low but the capability to do buyback with time can grow significantly. At the same time, we ensure to weed off very high growth companies that may have high re-investment needs through our carefully selected threshold for the "Long-term Revenue CAGR" parameter. 





Insight Flow



Live Dashboard
 Methodology

Buyback Raise Model
Buyback Cut Model


Universe
Back Test Results

Buyback Raise Model
Buyback Cut Model


Model Results

Summary Statistics
Companies with High Probability of Buyback Raise
Companies with High Probability of Buyback Cut


Buyback Timing
Model Risks &amp; Limitations
Conclusion



Asia Buyback Forecasting | Which Companies Are Likely to Raise/Cut Buybacks?

<p><strong><em>*Solid Core Operating Result: </em></strong>CIMB Group (CIMB.MK) [CIMB] reported 3Q20 results of MYR 194 mn, declining MYR 83 mn (30.0%) linked quarter. However, when we exclude securities gains/losses, core operating results actually came in at MYR 293 mn  - exceeding 2Q20 operating losses of MYR 58 mn; and</p><p> <strong><em>*Credit Risk Decelerating: </em></strong>CIMB’s NPLs declined MYR 999.9 mn (7.5%) to MYR 12.9 bn, and represent 3.38% of total loans – improving 24 bp linked quarter. With NCOs of MYR 1.2 bn, we find that net new NPLs increased MYR 187.5 mn or 5.6% on an annualized basis. Despite the improvement, we believe that reserve cover is too light by MYR 1.5 bn – which represents just over three quarters of profit before tax. </p>

*Solid Core Operating Result: CIMB Group (CIMB.MK) [CIMB] reported 3Q20 results of MYR 194 mn, declining MYR 83 mn (30.0%) linked quarter. However, when we exclude securities gains/losses, core operating results actually came in at MYR 293 mn  - exceeding 2Q20 operating losses of MYR 58 mn; and *Credit Risk Decelerating: CIMB’s NPLs declined MYR 999.9 mn (7.5%) to MYR 12.9 bn, and represent 3.38% of total loans – improving 24 bp linked quarter. With NCOs of MYR 1.2 bn, we find that net new NPLs increased MYR 187.5 mn or 5.6% on an annualized basis. Despite the improvement, we believe that reserve cover is too light by MYR 1.5 bn – which represents just over three quarters of profit before tax. 

<p><strong><em>*Much Better Than Expected: </em></strong>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%;</p><p><strong><em>*Credit Improving In Reality: </em></strong>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</p><p><strong><em>*Insurance Weakness: </em></strong>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.</p>

*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.

Thematic (Sector/Industry)

<p><strong><em>* ICIJ Points Fingers Post-Swedbank Fiasco: </em></strong>The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious activity reports (SARs), which were filed with the US Treasury’s Financial Crimes Enforcement Network (FINCEN). The report suggests that there was about USD 2 tn in questionable transactions between 1999-2017, which were flagged by the sector’s internal compliance officers from over 90 financial institutions;  and</p><p><strong><em>*Expect An Active DOJ Under Biden/Harris: </em></strong>If Biden/Harris win, Deutsche and Turkey’s Halkbank (HALKB.TI) would appear to be most as risk with a more proactive Department of Justice (DOJ). However, not far behind are others including: HSBC Holdings (5.HK/HSBA/LN) and Standard Chartered (2888.HK/STAN.LN). In addition, when mainland Chinese-US relations materially deteriorate under a Biden administration, we would fully anticipate the entire mainland Chinese financial system to be under a magnifying glass.</p>

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious activity reports (SARs), which were filed with the US Treasury’s Financial Crimes Enforcement Network (FINCEN). The report suggests that there was about USD 2 tn in questionable transactions between 1999-2017, which were flagged by the sector’s internal compliance officers from over 90 financial institutions;  and*Expect An Active DOJ Under Biden/Harris: If Biden/Harris win, Deutsche and Turkey’s Halkbank (HALKB.TI) would appear to be most as risk with a more proactive Department of Justice (DOJ). However, not far behind are others including: HSBC Holdings (5.HK/HSBA/LN) and Standard Chartered (2888.HK/STAN.LN). In addition, when mainland Chinese-US relations materially deteriorate under a Biden administration, we would fully anticipate the entire mainland Chinese financial system to be under a magnifying glass.

Asia Banks – Watch Your Anti-Money Laundering Risk Again

Malaysia

CIMB Group Holdings Berhad provides commercial banking and related financial services. The Company and its subsidiaries, operate as a regional universal bank offering a full range of financial products and services, covering corporate and investment banking, consumer banking, treasury, insurance and asset management.

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CIMB Group Holdings (CIMB MK)

CIMB Group – Heading Deeper Into the Woods

CIMB GROUP: CIMB reported 4Q20 results improved 9.3% linked quarter, and highlighted by a massive reduction in its tax rate and an enormous...

Thomas J. Monaco

Asia Buyback Forecasting | Which Companies Are Likely to Raise/Cut Buybacks?

A predictive quantitative model for Asian companies to help determine which companies are likely to raise/cut buybacks in future.

Ankit Agrawal, CFA

CIMB Group – Reserve Cover Light Still

CIMB GROUP: Operating results exhibited linked quarter improvement, although stated results declined. Reserve cover remains quite light despite...

Thomas J. Monaco

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

Asia Banks – Watch Your Anti-Money Laundering Risk Again

* ICIJ Points Fingers Post-Swedbank Fiasco: The International Consortium of Investigative Journalists (ICIJ) reviewed over 2,100 suspicious...

Thomas J. Monaco

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