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

*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

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.      

ICBC – Be Very Wary Of Worsening Credit

People's Insurance (PICC) / Equity Bottom-Up

*Improving Profitability: Peoples Insurance (1339.HK) [Peoples] reported 3Q20 net profit after tax of CNY 6.1 bn, an increase of CNY 593 mn (10.7%) linked quarter. The increase is primarily attributed to the Life unit, whose bottom-line improved CNY 1.5 bn (191.8%) over the period, and Other which improved CNY 784 mn (9.7x); and*PICC P&amp;C Continues An Uphill Battle: PICC P&amp;C (2328.HK) profits declined CNY 1.8 bn (37.7%).  Credit insurance remains the key drag on earnings due to underwriting weakness. PICC P&amp;C’s combined ratio increased 200 bp to 100.4% in 3Q20, due to the higher expense ratio (up 630 bp to 35.5%)  - only partially offset by a lower loss ratio (down 430 bp to 64.9%).

*Improving Profitability: Peoples Insurance (1339.HK) [Peoples] reported 3Q20 net profit after tax of CNY 6.1 bn, an increase of CNY 593 mn (10.7%) linked quarter. The increase is primarily attributed to the Life unit, whose bottom-line improved CNY 1.5 bn (191.8%) over the period, and Other which improved CNY 784 mn (9.7x); and*PICC P&amp;C Continues An Uphill Battle: PICC P&amp;C (2328.HK) profits declined CNY 1.8 bn (37.7%).  Credit insurance remains the key drag on earnings due to underwriting weakness. PICC P&amp;C’s combined ratio increased 200 bp to 100.4% in 3Q20, due to the higher expense ratio (up 630 bp to 35.5%)  - only partially offset by a lower loss ratio (down 430 bp to 64.9%). 

Peoples Insurance – Investment Led Profit Increase

*Strong APT FY 1Q21 Results: Afterpay released a strong quarterly update with momentum across the entire business with further integrations with large retailer contracts ahead of the holiday shopping season. GMV of AUD 4.1 bn during the quarter; active customers are 11.2 mn, up from 9.9m at end of June – ahead of our expectations; and Australia in-store sales are recovering, representing close to 20% of total sales;*Earning Their Stripe: Afterpay had also announced that it had entered into a strategic partnership with Stripe Payments,  a major global payments company with over 100,000 SMBs, to allow its users to offer Afterpay their customers which should allow it to expand its reach among online shoppers; and  *Sprinkling More Fairy Dust: Tencent Holdings (700.HK) [Tencent] continues to hit it out of the park with its Afterpay Touch (APT.AU) [Afterpay] stake. In addition to a superb return on investment of 358% over the past five 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 APT FY 1Q21 Results: Afterpay released a strong quarterly update with momentum across the entire business with further integrations with large retailer contracts ahead of the holiday shopping season. GMV of AUD 4.1 bn during the quarter; active customers are 11.2 mn, up from 9.9m at end of June – ahead of our expectations; and Australia in-store sales are recovering, representing close to 20% of total sales;*Earning Their Stripe: Afterpay had also announced that it had entered into a strategic partnership with Stripe Payments,  a major global payments company with over 100,000 SMBs, to allow its users to offer Afterpay their customers which should allow it to expand its reach among online shoppers; and  *Sprinkling More Fairy Dust: Tencent Holdings (700.HK) [Tencent] continues to hit it out of the park with its Afterpay Touch (APT.AU) [Afterpay] stake. In addition to a superb return on investment of 358% over the past five 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.

Tencent Holdings - It Keeps Getting Better

*Weak Results Showing No Signs Of Improvement: Ping An Insurance (2318.HK) [Ping An] reported abbreviated results for 3Q20, coming in at CNY 34.5 bn which declined CNY 8.2 bn (19.2%) on a linked quarter basis. The decline in earnings is attributed to a CNY 10.1 bn (8.7%) decline in Ping An Life (PAL) net earned premiums; a CNY 40.7 bn (43.7%) decline in investment income as rates and markets stabilized; and a CNY 8.5 bn (20.1%) increase in SG&amp;A;*Insurance Remains Fundamentally Challenged: Despite the Investor Day cheerleading session, PAL’s value of new business (VONB) declined 33% YOY in 3Q, driven by larger than expected margin decline associated with mix of reduced agent motivation during COVID-19 and demand weakness. Ping An P&amp;C’s combined ratio rose 1.0% to 99.1% in 3Q20 - barely allowing this business any breathing room. This increase would appear to be attributed to auto insurance reform, which is placing downward pressure on pricing; andBank Risk: Ping An Bank (000001.CH) [PAB], reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk. Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity.

*Weak Results Showing No Signs Of Improvement: Ping An Insurance (2318.HK) [Ping An] reported abbreviated results for 3Q20, coming in at CNY 34.5 bn which declined CNY 8.2 bn (19.2%) on a linked quarter basis. The decline in earnings is attributed to a CNY 10.1 bn (8.7%) decline in Ping An Life (PAL) net earned premiums; a CNY 40.7 bn (43.7%) decline in investment income as rates and markets stabilized; and a CNY 8.5 bn (20.1%) increase in SG&amp;A;*Insurance Remains Fundamentally Challenged: Despite the Investor Day cheerleading session, PAL’s value of new business (VONB) declined 33% YOY in 3Q, driven by larger than expected margin decline associated with mix of reduced agent motivation during COVID-19 and demand weakness. Ping An P&amp;C’s combined ratio rose 1.0% to 99.1% in 3Q20 - barely allowing this business any breathing room. This increase would appear to be attributed to auto insurance reform, which is placing downward pressure on pricing; andBank Risk: Ping An Bank (000001.CH) [PAB], reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk. Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity. 

Ping An Insurance – The Drip Drop Of Bad News

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)

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

ICBC – Be Very Wary Of Worsening Credit

INDUSTRIAL AND COMMERCIAL BANK OF CHINA: Don't Believe The Hype. Numbers Manufactured, and Credit Risk Suggests Long Winter For ICBC and Mainland...

Thomas J. Monaco

Peoples Insurance – Investment Led Profit Increase

PEOPLES INSURANCE: Were It Not For Strong Investment Income, Both the Life Unit and PICC P&C Would Each Have Posted Diminishing Returns.

Thomas J. Monaco

Tencent Holdings - It Keeps Getting Better

TENCENT HOLDINGS: Tencent Keeps hitting The Ball Out of The Park With Afterpay, Who Reported Solid FY 1Q21 Results and Another Partnership

Thomas J. Monaco

Ping An Insurance – The Drip Drop Of Bad News

PING AN INSURANCE: First It Was The Bank Who Reported Manufactured Results, As Credit Worsened. Now The Insurers Continue To Struggle With No End...

Thomas J. Monaco