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

*Poor US Results: In our latest review of HSBC Holdings’ (5.HK/HSBA.LN) [HSBC] US subsidiary, HSBC North America (HSBCNA), we note that fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed 3Q20 results actually were. According to the 3Q20 US regulatory report, HSBCNA reported bottom-line results if USD 160.0 mn, a USD 111.3 mn (228.5%) increase linked quarter. 3Q20 results were driven by two factors: a massive loss provision and tax rate decline; *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; and *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.

*Poor US Results: In our latest review of HSBC Holdings’ (5.HK/HSBA.LN) [HSBC] US subsidiary, HSBC North America (HSBCNA), we note that fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed 3Q20 results actually were. According to the 3Q20 US regulatory report, HSBCNA reported bottom-line results if USD 160.0 mn, a USD 111.3 mn (228.5%) increase linked quarter. 3Q20 results were driven by two factors: a massive loss provision and tax rate decline; *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; and *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. 

*Always The Magician: Founded in 2010, Metro Bank plc (MTRO.LN) [Metro] was the first de novo high street bank in the United Kingdom in over 150 years. After a period of rapid growth, Metro ran into some difficulties. Over the years, we have learned never to count out Founder Vernon Hill (former Chair and Founder of former Commerce Bancorp in New Jersey) who always walks between the raindrops. Metro has moved forward with the sale of its mortgage portfolio to Natwest Group plc on December 18, 2020; and *Large Capital Gain: The sold Metro portfolio should provide the company with and GBP 83mm gain on sale – representing 42% of market-cap. The sale of 20% of Metro’s loan portfolio also removes Metro’s need to issue expensive MREL debt versus its prior debt guidance issuance of between GBP 200-300 mn.

 *Always The Magician: Founded in 2010, Metro Bank plc (MTRO.LN) [Metro] was the first de novo high street bank in the United Kingdom in over 150 years. After a period of rapid growth, Metro ran into some difficulties. Over the years, we have learned never to count out Founder Vernon Hill (former Chair and Founder of former Commerce Bancorp in New Jersey) who always walks between the raindrops. Metro has moved forward with the sale of its mortgage portfolio to Natwest Group plc on December 18, 2020; and *Large Capital Gain: The sold Metro portfolio should provide the company with and GBP 83mm gain on sale – representing 42% of market-cap. The sale of 20% of Metro’s loan portfolio also removes Metro’s need to issue expensive MREL debt versus its prior debt guidance issuance of between GBP 200-300 mn. 

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.Market Outlook: Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.Market Outlook: Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

<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> newly issued Additional Tier 1 (AT1) bond is not worth chasing. HSBC remains adrift and a strategic reset in February could have an outsized impact on longer dated notes. We see better risk adjusted returns in lower duration securities of the issuer.HCBC’s 4.6% coupon 2030 first call AT1 bond priced in-line with similarly long-duration AT1 notes. The market’s preference for duration aided in generating attractive pricing for the issuer. Priced at 10-year Treasuries plus 365 basis points, we see little upside and plenty of market-driven downside at this level. Only <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> 4.5% coupon 2030 first call AT1 priced at a tighter spread in 10-year AT1 paper this year and BNP’s market timing was perfect.This issuance also suggests to us a sooner than expected restart of stock buybacks. To limit capital leverage, HSBC Holding’s UK regulator generally does not allow banks to issue AT1 while the firm is buying stock in the open market. Stock buybacks can deplete capital buffers faster than regular dividends and, therefore, are not AT1 investor friendly.  Taken together, a flat yield curve combined with<ul><li><ul>
<li>overpriced risk relative to ratings,</li>
<li>spreads that are tight to similar maturity senior bonds</li>
<li>capital buffers that are in-line with peers but driven by high conversion trigger levels that are not priced-in, and</li>
<li>underpriced credit default risk at the long end</li>
</ul></li></ul>leads us to conclude that the newly issued AT1 note has limited upside relative to its shorter duration cohorts.Finally, investor preference for long-duration assets in the low yield environment appears to be having a large impact on valuations. Chasing spread at this point in the cycle can be dangerous. Given better risk / return opportunities on other parts of the credit continuum, we do not recommend chasing HSBC’s new AT1 bond.

HSBC Holdings' (HSBA LN) newly issued Additional Tier 1 (AT1) bond is not worth chasing. HSBC remains adrift and a strategic reset in February could have an outsized impact on longer dated notes. We see better risk adjusted returns in lower duration securities of the issuer.HCBC’s 4.6% coupon 2030 first call AT1 bond priced in-line with similarly long-duration AT1 notes. The market’s preference for duration aided in generating attractive pricing for the issuer. Priced at 10-year Treasuries plus 365 basis points, we see little upside and plenty of market-driven downside at this level. Only BNP Paribas' (BNP FP) 4.5% coupon 2030 first call AT1 priced at a tighter spread in 10-year AT1 paper this year and BNP’s market timing was perfect.This issuance also suggests to us a sooner than expected restart of stock buybacks. To limit capital leverage, HSBC Holding’s UK regulator generally does not allow banks to issue AT1 while the firm is buying stock in the open market. Stock buybacks can deplete capital buffers faster than regular dividends and, therefore, are not AT1 investor friendly.  Taken together, a flat yield curve combined with
overpriced risk relative to ratings,
spreads that are tight to similar maturity senior bonds
capital buffers that are in-line with peers but driven by high conversion trigger levels that are not priced-in, and
underpriced credit default risk at the long end
leads us to conclude that the newly issued AT1 note has limited upside relative to its shorter duration cohorts.Finally, investor preference for long-duration assets in the low yield environment appears to be having a large impact on valuations. Chasing spread at this point in the cycle can be dangerous. Given better risk / return opportunities on other parts of the credit continuum, we do not recommend chasing HSBC’s new AT1 bond.

Postal Savings Bank of China C / Equity Bottom-Up

*Private Placement Coming: We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   *Starting Off From A Better Place Than Peer: We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.

*Private Placement Coming: We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   *Starting Off From A Better Place Than Peer: We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.

Postal Savings Bank – D-SIB Spurs Placement

United Kingdom

HSBC Holdings plc is the holding company for the HSBC Group. The Company provides a variety of international banking and financial services, including retail and corporate banking, trade, trusteeship, securities, custody, capital markets, treasury, private and investment banking, and insurance. HSBC Holdings operates worldwide.

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HSBC Holdings (HSBC US)

HSBC Holdings Plc – Cut and Run

HSBC HOLDINGS: HSBCNA fundamentals continue to worsen – although management seems to hope that no one will notice the poor quality and how managed...

Thomas J. Monaco

Metro Bank Plc – Emrys

METRO BANK PLC: Metro was the first de novo high street bank in the United Kingdom in over 150 years. Metro ran into some difficulties, and moved...

Thomas J. Monaco

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

The Fed spikes while the ECB sweetens the seasonal punch bowl. US stimulus may add the moonshine. This could be a festive week for bank securities....

Hank Calenti, CFA

HSBC’s New AT1: Not Worth Chasing

HSBC remains adrift and a strategic reset could have an outsized impact on longer dated notes. The newly issued AT1 is not worth chasing. We see...

Hank Calenti, CFA

Postal Savings Bank – D-SIB Spurs Placement

POSTAL SAVINGS BANK OF CHINA: D-SIB Status Spurs Private Placement And Likely A Lower ROE Both From Dilution And Challenged Fundamentals In 2021.

Thomas J. Monaco

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