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

*Decent Operating Results: Lufax Holdings (LU.US) [Lufax] reported 3Q20 results of CNY 2.2 bn, declining CNY 929 mn (30.1%) on a linked quarter basis. However, when we exclude the CNY 1.3 bn restructuring charge and gains of CNY 144 mn, Lufax’ operating results amounted to CNY 3.3 bn – increasing CNY 228 mn (7.3%) over the same period;  and*Regulatory Risk Is Prevalant: An evolution of the regulatory environment remains a significant challenge to Lufax, and more likely than not will require further business adjustments and ad pressure to the bottom-line, including: lower interest rate caps;  higher capital requirements; improved risk-taking controls; along with other consumer protection measures. That being said, much of the regulatory uncertainty is more from policy window guidance rather than from new regulations themselves.

*Decent Operating Results: Lufax Holdings (LU.US) [Lufax] reported 3Q20 results of CNY 2.2 bn, declining CNY 929 mn (30.1%) on a linked quarter basis. However, when we exclude the CNY 1.3 bn restructuring charge and gains of CNY 144 mn, Lufax’ operating results amounted to CNY 3.3 bn – increasing CNY 228 mn (7.3%) over the same period;  and*Regulatory Risk Is Prevalant: An evolution of the regulatory environment remains a significant challenge to Lufax, and more likely than not will require further business adjustments and ad pressure to the bottom-line, including: lower interest rate caps;  higher capital requirements; improved risk-taking controls; along with other consumer protection measures. That being said, much of the regulatory uncertainty is more from policy window guidance rather than from new regulations themselves. 

Lufax Holdings – Good Number Right Out Of The Gate

Thematic (Sector/Industry)

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on December 3, 2020 released finalized standards for the country’s domestic systemically important banks (D-SIBs), and indicated that tighter regulations will be announced shortly; and* Aggressive Capital Raises Expected: In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value.

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on December 3, 2020 released finalized standards for the country’s domestic systemically important banks (D-SIBs), and indicated that tighter regulations will be announced shortly; and* Aggressive Capital Raises Expected: In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value. 

*Strong Momentum As We Head Into Holiday Season: Just as we head into the holiday season, Tencent Holdings’ (700.HK) [Tencent] Afterpay Touch (APT.AU) [Afterpay] provided some strong key metrics in its latest media release;  *More Transformation To Come: What a magnificent amazing six months this has been for Tencent’s Afterpay, and the next six months look to be even more transformational with operations beginning in the European Union, launches of banking products, and potentially the launch of the business in Asia (likely under the tutelage of Tencent); and*More Magic Fairy Dust: Tencent continues to hit it out of the park with its Afterpay stake. In addition to a superb return on investment of 400% over the past six months since the stake announcement, this alliance with Australia’s premier financial technology Buy Now Pay Later (BNPL) company is paying dividends to Tencent in numerous other ways.

*Strong Momentum As We Head Into Holiday Season: Just as we head into the holiday season, Tencent Holdings’ (700.HK) [Tencent] Afterpay Touch (APT.AU) [Afterpay] provided some strong key metrics in its latest media release;  *More Transformation To Come: What a magnificent amazing six months this has been for Tencent’s Afterpay, and the next six months look to be even more transformational with operations beginning in the European Union, launches of banking products, and potentially the launch of the business in Asia (likely under the tutelage of Tencent); and*More Magic Fairy Dust: Tencent continues to hit it out of the park with its Afterpay stake. In addition to a superb return on investment of 400% over the past six months since the stake announcement, this alliance with Australia’s premier financial technology Buy Now Pay Later (BNPL) company is paying dividends to Tencent in numerous other ways.

*We Anxiously Await HSBC’s US Departure: According the Financial Times on November 28, 2020, HSBC is considering offloading its entire US retail network - although a full exit from other businesses in the US is unlikely. The recommendation of a US exit is expected to be presented to the board as early as this week, although the Group is scheduled to provide an update on its plans for its French and US businesses in February 2021; *HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again; and    *Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes.

*We Anxiously Await HSBC’s US Departure: According the Financial Times on November 28, 2020, HSBC is considering offloading its entire US retail network - although a full exit from other businesses in the US is unlikely. The recommendation of a US exit is expected to be presented to the board as early as this week, although the Group is scheduled to provide an update on its plans for its French and US businesses in February 2021; *HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again; and    *Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes. 

HSBC Holdings Plc – Act Now, You’ll Never See These Prices Again

*Joint Announcement For Stock Connect Expansion: Just when we thought that Hong Kong Exchanges &amp; Clearing (388.HK) [KKEx] had no other rabbits to pull out of its hat in 2020, the HKEx, Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) jointly announced further scope for Stock Connect expansion in early 2021 on November 27, 2020 regarding the STAR Market and biotech companies;  *Solid Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 3Q20 earnings of HKD 3.3 bn, improving HKD 376 mn (12.7%) linked quarter. Results were even more impressive when we exclude investment income (declined HKD 206 mn or 23.2% linked quarter) – increasing HKD 582 mn (28.0%) to HKD 2.7 bn; and*Peak Value: So much value has been derived on hope for the shares of HKEx, which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. As such, we have witnessed HKEx’s 2020 share performance of 44.4% that has resulted in a global exchange leading valuation of 10.4x P/BV.

*Joint Announcement For Stock Connect Expansion: Just when we thought that Hong Kong Exchanges &amp; Clearing (388.HK) [KKEx] had no other rabbits to pull out of its hat in 2020, the HKEx, Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) jointly announced further scope for Stock Connect expansion in early 2021 on November 27, 2020 regarding the STAR Market and biotech companies;  *Solid Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 3Q20 earnings of HKD 3.3 bn, improving HKD 376 mn (12.7%) linked quarter. Results were even more impressive when we exclude investment income (declined HKD 206 mn or 23.2% linked quarter) – increasing HKD 582 mn (28.0%) to HKD 2.7 bn; and*Peak Value: So much value has been derived on hope for the shares of HKEx, which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. As such, we have witnessed HKEx’s 2020 share performance of 44.4% that has resulted in a global exchange leading valuation of 10.4x P/BV. 

Hong Kong Exchanges & Clearing – Making Another Connection

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)

Lufax Holdings – Good Number Right Out Of The Gate

LUFAX HOLDINGS: Lufax operating results were solid. However, the regulatory environment remains a significant challenge.

Thomas J. Monaco

China Banks – About Time

CHINA BANKS: PBOC and CBIRC Released Finalized D-SIB Standards and Indicated Tighter Regulations. Aggressive Capital Raises Are Expected.

Thomas J. Monaco

Tencent Holdings – Father Christmas

TENCENT HOLDINGS: It's May 2020 Stake In Afterpay Keeps Paying Dividends. In It's Latest Release, Afterpay Announced Very Positive Momentum As We...

Thomas J. Monaco

HSBC Holdings Plc – Act Now, You’ll Never See These Prices Again

HSBC HOLDINGS PLC: Financial Times Suggesting Board Will Be Presented With Options On US Franchise This Week. This Was A Long Time In Coming.

Thomas J. Monaco

Hong Kong Exchanges & Clearing – Making Another Connection

HONG KONG EXCHANGES & CLEARING: The Three Exchanges Have Added To The Stock Connect With STAR Market and Biotech Additions

Thomas J. Monaco