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

*Better, But Off A Low Base: AIA Group (1299.HK) [AIA] released its 1H21 results. Operating profit amounted to USD 3.2 bn, increasing 5% YOY, while VONB improved 22% YOY to USD 1.8 bn due to a combination of higher new sales volume (ANP up across all markets ex-Hong Kong which declined 11% YOY) and VONB margin expansion from (up 4.6% to 59.0%). Net profit improved to USD 3.2 bn, increasing 47% YOY due to the large negative investment variance in 1H20; and* China And Hong Kong Risks Still Need To Be Addressed: Concerned about weakening organic growth, AIA has gone on a deal-making spree: Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life; an exclusive 15-year bancassurance relationship with BEA; acquisition of Blue Cross (Asia-Pacific) Insurance’s underwritten closed life insurance; a strategic digital partnership with ZhongAn Online P&amp;C Insurance’ (6060.HK) [ZhongAn]; and received CBIRC approval to restructure its Shanghai-based life insurance branch into a wholly-owned subsidiary. In addition to the massive managerial distractions with so many deals at one time, there are challenges of bogusly rated AAA mainland Chinese bonds; no end in sight with its flailing Hong Kong flagship; and getting the BEA Life team on the same with AIA Hong Kong.

*Better, But Off A Low Base: AIA Group (1299.HK) [AIA] released its 1H21 results. Operating profit amounted to USD 3.2 bn, increasing 5% YOY, while VONB improved 22% YOY to USD 1.8 bn due to a combination of higher new sales volume (ANP up across all markets ex-Hong Kong which declined 11% YOY) and VONB margin expansion from (up 4.6% to 59.0%). Net profit improved to USD 3.2 bn, increasing 47% YOY due to the large negative investment variance in 1H20; and* China And Hong Kong Risks Still Need To Be Addressed: Concerned about weakening organic growth, AIA has gone on a deal-making spree: Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life; an exclusive 15-year bancassurance relationship with BEA; acquisition of Blue Cross (Asia-Pacific) Insurance’s underwritten closed life insurance; a strategic digital partnership with ZhongAn Online P&amp;C Insurance’ (6060.HK) [ZhongAn]; and received CBIRC approval to restructure its Shanghai-based life insurance branch into a wholly-owned subsidiary. In addition to the massive managerial distractions with so many deals at one time, there are challenges of bogusly rated AAA mainland Chinese bonds; no end in sight with its flailing Hong Kong flagship; and getting the BEA Life team on the same with AIA Hong Kong. 

China Merchants Bank H / Equity Bottom-Up

*2Q21 Bottom-Line Sees Cracks: China Merchants Bank (3968.HK) [CMB] reported 2Q21 results of CNY 29.1 bn, decreasing CNY 2.9 bn (9.0%) linked quarter, driven by negative operating jaws, a decline net fees and commissions, and higher provisions, tracking weaker credit quality; and *Credit Wall of Worry Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 20.3 bn or 150.2% annualized versus CNY 18.9 bn or 138.5% at 1Q21. Although CMB’s reserve cover still remains quite robust, the net new NPL ratio trajectory suggests that reserve cover of NPLs will drop to something more in line with a typical mainland Chinese bank.

*2Q21 Bottom-Line Sees Cracks: China Merchants Bank (3968.HK) [CMB] reported 2Q21 results of CNY 29.1 bn, decreasing CNY 2.9 bn (9.0%) linked quarter, driven by negative operating jaws, a decline net fees and commissions, and higher provisions, tracking weaker credit quality; and *Credit Wall of Worry Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 20.3 bn or 150.2% annualized versus CNY 18.9 bn or 138.5% at 1Q21. Although CMB’s reserve cover still remains quite robust, the net new NPL ratio trajectory suggests that reserve cover of NPLs will drop to something more in line with a typical mainland Chinese bank.

China Merchants Bank – Now Negative Operating Jaws

*Challenging Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 2Q21 weak earnings of HKD 2.8 bn, declining HKD 1.1 bn (27.9%) linked quarter. Results were even worse when we exclude investment income (declined HKD 73 mn or 15.7% linked quarter) – decreasing HKD 997 mn (29.5%) to HKD 2.4 bn. Results were highlighted by HKEX’ marginally negative operating jaws, as recurring revenue declined HKD 1.9 bn (29.7%) while operating expenses increased HKD 8 mn (0.7%) over the period. HKEX’ 2Q21 witnessed weak revenues almost across the board; and*Risks Are Increasing: In addition to an extended valuation when ADT has begun to turn and having a new CEO with no exchange experiences, HKEX needs to contend with the government’s examination of a stamp duty increase, mainland China’s contemplation of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center; and the Sino-ification of HKEX trading as tension mount between the US and mainland China.

*Challenging Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 2Q21 weak earnings of HKD 2.8 bn, declining HKD 1.1 bn (27.9%) linked quarter. Results were even worse when we exclude investment income (declined HKD 73 mn or 15.7% linked quarter) – decreasing HKD 997 mn (29.5%) to HKD 2.4 bn. Results were highlighted by HKEX’ marginally negative operating jaws, as recurring revenue declined HKD 1.9 bn (29.7%) while operating expenses increased HKD 8 mn (0.7%) over the period. HKEX’ 2Q21 witnessed weak revenues almost across the board; and*Risks Are Increasing: In addition to an extended valuation when ADT has begun to turn and having a new CEO with no exchange experiences, HKEX needs to contend with the government’s examination of a stamp duty increase, mainland China’s contemplation of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center; and the Sino-ification of HKEX trading as tension mount between the US and mainland China.

Hong Kong Exchanges & Clearing – Glitter Is Gone

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*Clarification Was Necessary: Uncertainties surrounding the definition of local state-owned entity (SOE) with implicit financing support from the government has already led to an aggressive impact on lending. Numerous local infrastructure SOEs have subsidiaries with some form of implicit local government debt support, and without financing Document 15 would have had even more significant consequences. Still over 50% of LGFVs remain affected.

*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*Clarification Was Necessary: Uncertainties surrounding the definition of local state-owned entity (SOE) with implicit financing support from the government has already led to an aggressive impact on lending. Numerous local infrastructure SOEs have subsidiaries with some form of implicit local government debt support, and without financing Document 15 would have had even more significant consequences. Still over 50% of LGFVs remain affected.

China Banks – Some Clarity On LGFV Financing

ZhongAn Online P&C Insurance C / Equity Bottom-Up

*CBIRC Now Taking On Online Insurers: The China Banking and Insurance Regulatory Commission’s (CBIRC) roll out of the internet insurance revision plan “Notice on Carrying out Special Rectification of Internet Insurance Disorders” aims to scrutinize mainland China’s insurance technology platforms, ordering firms and agencies to end improper marketing and pricing practices, and improve privacy protections; and*Very Negative Implications For Insurers And Broader Market: This move by the CBIRC would intimate the near wipeout of the current generation of online insurers. This regulatory onslaught is stifling innovation and likely push business returns to well below the cost of equity. This heavy-handed approach is causing the outflow of foreign capital from mainland China to be sustainably heavy for an extended period of time.

*CBIRC Now Taking On Online Insurers: The China Banking and Insurance Regulatory Commission’s (CBIRC) roll out of the internet insurance revision plan “Notice on Carrying out Special Rectification of Internet Insurance Disorders” aims to scrutinize mainland China’s insurance technology platforms, ordering firms and agencies to end improper marketing and pricing practices, and improve privacy protections; and*Very Negative Implications For Insurers And Broader Market: This move by the CBIRC would intimate the near wipeout of the current generation of online insurers. This regulatory onslaught is stifling innovation and likely push business returns to well below the cost of equity. This heavy-handed approach is causing the outflow of foreign capital from mainland China to be sustainably heavy for an extended period of time.

ZhongAn Online P&C Insurance – Tapped By The Ugly Stick

Hong Kong

CSOP FTSE China A50 ETF is an exchange-traded fund incorporated in Hong Kong. The Fund seeks to track the performance of the FTSE China A50 Index. The Fund invests most of its total assets in the equities of member companies of the FTSE China A50 Index. This is a RQFII fund.

CSOP FTSE China A50 (HKD) (2822 HK)

AIA Group – Its Own Worst Enemy

AIA GROUP: AIA's 1H21 operating profit improved 5% YOY off of a low base, while VONB improved 22%. With all of its aggressive moves in mainland...

Thomas J. Monaco

China Merchants Bank – Now Negative Operating Jaws

CHINA MERCHANTS BANK: CMB reported QOQ 2Q21 results decline of 9.0% driven by negative operating jaws, a decline net fees and commissions, and...

Thomas J. Monaco

Hong Kong Exchanges & Clearing – Glitter Is Gone

HONG KONG EXCHANGES: HKEX reported 2Q21 weak earnings, declining 27.9%. Results were highlighted by HKEX’ marginally negative operating jaws. HKEX’...

Thomas J. Monaco

China Banks – Some Clarity On LGFV Financing

CHINA BANKS: Recently the CBIRC issued guidance to both banks and insurers on implicit debt of LGFV via Document 15. Clarification was needed given...

Thomas J. Monaco

ZhongAn Online P&C Insurance – Tapped By The Ugly Stick

ZHONGAN ONLINE INSURANCE: The CBIRC has rolled out the “Notice on Carrying out Special Rectification of Internet Insurance Disorders”, ordering...

Thomas J. Monaco