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

Thematic (Sector/Industry)

*A Market With Little Discipline: Too many market participants have very little discipline, and to make matters worse, central banks have been all too happy to remove the moral hazard involved with excessive risk taking. This has resulted in the creation of a giant vortex of liquidity which could be as large as USD 1 quadrillion;*Broken Credit Ratings Agency Model: In our view, the credit ratings agency model is permanently broken as waterfall risks in various rated pools and tranches have become increasingly significant with the markets unable to self-regulate and regulators either unable to regulate (or told not to regulate);  and*SEC Far From Being Aggressive With Enforcement: In reality, the fines paid by Kroll/DBRS are not even a drop in the bucket compared with the USD 1.5 bn and USD 864 mn fines paid by S&amp;P (MH) and Moody's (MCO.US), respectively, to settle similar charges associated with the GFC. Whether this reflects more of a lower level of violations or a much less aggressive SEC regulator can be debated. It will be interesting to see is whether these investigations are expanded to include 2018-19 deals which appear to have even greater conflicts - particularly under Biden administration.

*A Market With Little Discipline: Too many market participants have very little discipline, and to make matters worse, central banks have been all too happy to remove the moral hazard involved with excessive risk taking. This has resulted in the creation of a giant vortex of liquidity which could be as large as USD 1 quadrillion;*Broken Credit Ratings Agency Model: In our view, the credit ratings agency model is permanently broken as waterfall risks in various rated pools and tranches have become increasingly significant with the markets unable to self-regulate and regulators either unable to regulate (or told not to regulate);  and*SEC Far From Being Aggressive With Enforcement: In reality, the fines paid by Kroll/DBRS are not even a drop in the bucket compared with the USD 1.5 bn and USD 864 mn fines paid by S&amp;P (MH) and Moody's (MCO.US), respectively, to settle similar charges associated with the GFC. Whether this reflects more of a lower level of violations or a much less aggressive SEC regulator can be debated. It will be interesting to see is whether these investigations are expanded to include 2018-19 deals which appear to have even greater conflicts - particularly under Biden administration. 

Equity Bottom-Up

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results.

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  *MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG's FY (March) 2020 bottom-line - despite MUFG's high reliance on gains.In aggregate, both transactions dilute MUFG's MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results. 

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

* 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.

* 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

*Military Flashpoint With Greece: In late July, a Turkish seismic exploration ship (“Oruc Reis”) was sent to Kastellorizo, an island on the Greek constellation shelf, to carry out gas surveys through August 23rd, and was accompanied by 15 Turkish naval ships. The French have deployed warships and fighter jets to the area, as the La Fayette frigate is participating in joint exercises with the Greek navy. Tensions between Turkey and France have already been at heightened levels since Turkey targeting the Forbin with radar; and   *Feckless Central Bank Leads To Crisis: A crisis in confidence starts slowly but is difficult to stop once momentum gathers. In Turkey's case, the stop gap measures now appear to be crumbling. With both locals and foreigners fleeing the TRL, the the risks of the introduction of a TRL gray market should NOT be underestimated. MSCI has also threatened to downgrade Turkey's equity market to frontier status which would trigger further outflows.

*Military Flashpoint With Greece: In late July, a Turkish seismic exploration ship (“Oruc Reis”) was sent to Kastellorizo, an island on the Greek constellation shelf, to carry out gas surveys through August 23rd, and was accompanied by 15 Turkish naval ships. The French have deployed warships and fighter jets to the area, as the La Fayette frigate is participating in joint exercises with the Greek navy. Tensions between Turkey and France have already been at heightened levels since Turkey targeting the Forbin with radar; and   *Feckless Central Bank Leads To Crisis: A crisis in confidence starts slowly but is difficult to stop once momentum gathers. In Turkey's case, the stop gap measures now appear to be crumbling. With both locals and foreigners fleeing the TRL, the the risks of the introduction of a TRL gray market should NOT be underestimated. MSCI has also threatened to downgrade Turkey's equity market to frontier status which would trigger further outflows.

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

There appears to be a recurring theme with banks, whereby those with high credit costs early in the year relative to recent years, see a marked decline in the June quarter. The opposite also appears to be the case for some, and <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN),</a> if not the poster-child is a good example. For this global behemoth, where even in the best times its returns are often subpar, its underwhelming operating results should not surprise.

There appears to be a recurring theme with banks, whereby those with high credit costs early in the year relative to recent years, see a marked decline in the June quarter. The opposite also appears to be the case for some, and HSBC Holdings (HSBA LN), if not the poster-child is a good example. For this global behemoth, where even in the best times its returns are often subpar, its underwhelming operating results should not surprise.

United Kingdom

Deutsche Bank AG is a global financial service provider delivering commercial, investment, private, and retail banking. The Bank offers debt, foreign exchange, derivatives, commodities, money markets, repo and securitization, cash equities, research, equity prime services, loans, convertibles, advice on M&A and IPO's, trade finance, retail banking, asset management, and corporate investments.

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Deutsche Bank AG (DBK1 LI)

Ratings Agencies – Beyond Repair

*A Market With Little Discipline: Too many market participants have very little discipline, and to make matters worse, central banks have been all...

Thomas J. Monaco

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

MUFG Receives Additional Dilution From Morgan Stanley In Another Overpriced US Transaction. Eaton Vance Was The Fourth In a Series of Wealth...

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

Turkey – On The Brink

*Military Flashpoint With Greece: In late July, a Turkish seismic exploration ship (“Oruc Reis”) was sent to Kastellorizo, an island on the Greek...

Thomas J. Monaco

HSBC – Unimpressive

There appears to be a recurring theme with banks, whereby those with high credit costs early in the year relative to recent years, see a marked...

Daniel Tabbush

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