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

*Way Too Early Provision Reduction: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, 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;  *Credit Is WEAKER: 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; and *Fundamentally Challenged Still: Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans.

 *Way Too Early Provision Reduction: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, 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;  *Credit Is WEAKER: 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; and *Fundamentally Challenged Still: Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans. 

Ping An Insurance – Bank Fundamentals Worsening

*Whoops They Did It Again..: In Afterpay’s Touch’s (APT.AU) [Afterpay] latest update, it was announced that Afterpay will allow Westpac Banking (WBC.AU) to offer its Banking-as-a-Service to Afterpay’s approximate 3.3 mn, which include deposit accounts and cash-flow management tools, as early as FY 2Q21. If successful, this partnership could transform the sleepy Australian banking market as we know it;  *Tencent Tutelage: Afterpay is helping Tencent enter markets earlier and with Tencent’s (700.HK) tutelage likely will help Afterpay more deeply penetrate North America.  We fully anticipate that Tencent will help Afterpay enter the Asian markets - uncharted territory with a large young population – with the big prize obviously being mainland China. Tencent’s digital expertise should also help Afterpay to improve its technology platform (e.g. its digital wallet checkout experience and its shopping platform, plus customer led generation). It also wouldn’t surprise us if Tencent took up greater than its pro rata share of the capital raise; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 354% on this stake. Afterpay has already reached many of its key milestones, and we look forward to its quarterly update in a few weeks.

*Whoops They Did It Again..: In Afterpay’s Touch’s (APT.AU) [Afterpay] latest update, it was announced that Afterpay will allow Westpac Banking (WBC.AU) to offer its Banking-as-a-Service to Afterpay’s approximate 3.3 mn, which include deposit accounts and cash-flow management tools, as early as FY 2Q21. If successful, this partnership could transform the sleepy Australian banking market as we know it;  *Tencent Tutelage: Afterpay is helping Tencent enter markets earlier and with Tencent’s (700.HK) tutelage likely will help Afterpay more deeply penetrate North America.  We fully anticipate that Tencent will help Afterpay enter the Asian markets - uncharted territory with a large young population – with the big prize obviously being mainland China. Tencent’s digital expertise should also help Afterpay to improve its technology platform (e.g. its digital wallet checkout experience and its shopping platform, plus customer led generation). It also wouldn’t surprise us if Tencent took up greater than its pro rata share of the capital raise; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 354% on this stake. Afterpay has already reached many of its key milestones, and we look forward to its quarterly update in a few weeks. 

*Lucky and Smart: In Afterpay’s Touch’s (APT.AU) [Afterpay] latest update, it was announced that AUSTRAC has decided that it will not be taking any further regulatory action and that that it had uplifted its AML/CTF compliance framework and financial crime function, and satisfactorily completed all required remediation activity. Further, Afterpay `launched its instore offering in the US market just in time for the Christmas shopping season following its Simon Property Group (SPG.US) collaboration in the US;*Tencent Tutelage: Afterpay is helping Tencent enter markets earlier and with Tencent’s (700.HK) tutelage likely will help Afterpay more deeply penetrate North America.  We fully anticipate that Tencent will help Afterpay enter the Asian markets - uncharted territory with a large young population – with the big prize obviously being mainland China. Tencent’s digital expertise should also help Afterpay to improve its technology platform (e.g. its digital wallet checkout experience and its shopping platform, plus customer led generation). It also wouldn’t surprise us if Tencent took up greater than its pro rata share of the capital raise; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 328% on this stake.

*Lucky and Smart: In Afterpay’s Touch’s (APT.AU) [Afterpay] latest update, it was announced that AUSTRAC has decided that it will not be taking any further regulatory action and that that it had uplifted its AML/CTF compliance framework and financial crime function, and satisfactorily completed all required remediation activity. Further, Afterpay `launched its instore offering in the US market just in time for the Christmas shopping season following its Simon Property Group (SPG.US) collaboration in the US;*Tencent Tutelage: Afterpay is helping Tencent enter markets earlier and with Tencent’s (700.HK) tutelage likely will help Afterpay more deeply penetrate North America.  We fully anticipate that Tencent will help Afterpay enter the Asian markets - uncharted territory with a large young population – with the big prize obviously being mainland China. Tencent’s digital expertise should also help Afterpay to improve its technology platform (e.g. its digital wallet checkout experience and its shopping platform, plus customer led generation). It also wouldn’t surprise us if Tencent took up greater than its pro rata share of the capital raise; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 328% on this stake. 

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

JP Morgan & Co. – Good Credit Omen For US and Global Banks

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.   

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)

Ping An Insurance – Bank Fundamentals Worsening

PING AN INSURANCE: PING AN BANK Reported A Completely Manufactured 3Q20 Earnings Result, Cutting Provisions Despite Substantially Weaker Credit

Thomas J. Monaco

Tencent Holdings – Sliced Bread

Tencent Holdings: AfterPay Is Like The Greatest Thing Since Sliced Bread For Tencent. Not Only Has Tencent Earned 354% On Its Stake But AfterPay...

Thomas J. Monaco

Tencent – Rubbing Two Nickels Together

Tencent Continues To Reap The Benefits Of Its Australian Alliance, With Afterpay Now Getting A Clean Bill Of Health and Increasing Their US Presence

Thomas J. Monaco

JP Morgan & Co. – Good Credit Omen For US and Global Banks

JPM Results, A Good Credit Omen For US and Global Banks. Reserve Reversals Likely To Be A Trend For 4Q20 Results Season -Although Issues Persist

Thomas J. Monaco

Link REIT – Weak Results Preview

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative...

Thomas J. Monaco