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

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.

*Negative Operating Jaws Were A Surprise: DBS Group Holdings (DBS.SP) [DBS] reported 3Q20 results of SGD 1.3 bn, increasing SGD 50 mn (4.0%) on a linked quarter basis. Results were solely led on a justified SGD 295 mn (34.7%) reduction in loss provisions, which point to DBS’real challenges with negative operating jaws; and*Credit Risk Rising: By our calculation, and despite the net recovery of SGD 24 mn, we find that net new NPLs continue to increase – up SGD 272 mn or 18.9% on an annualized basis. Management too was less sanguine about credit quality on a go forward basis, expecting a re-acceleration of NPL formation in 2021 as COVID-19 government programs are set to expire. We feel that reserves should be shored up in the neighborhood of SGD 1.3 bn – amounting to a full quarter of results – and intimating this quarter was more managed than DBS would have the investment community believe.      

DBS Group Holdings – Not Trending The Right Way Yet

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

HSBC Holdings Plc – Chronic Underperformer

*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

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>
<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> delivered an encouraging set of results, driven primarily by lower expected credit losses and a very healthy core capital ratio</li>
<li>In addition, there was positive progress in the European and US restructuring, and in the group’s cost reduction programme</li>
<li>Updates on the strategic review of HSBC France retail and the US operations will be provided by management in February 2021</li>
<li>On the negative side, there was Asian interest margin erosion in the quarter due largely to the lower HIBOR, HSBC MENA loss deepened and the group’s 3Q20 cost of risk may be unsustainably low</li>
<li>HSBC Mexico offers some constructive read across for <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a> 3Q20 results on cost of risk and also on revenues</li>
<li>HSBC has a very strong and liquid balance sheet, and has contained credit delinquency while maintaining NPL coverage</li>
<li>We are cautiously optimistic that medium term returns will exceed consensus expectations, on the back of management’s non-core business restructurings and cost attrition supported by growth in fee generating business in Asia</li>
<li>Risks to our view include worse than expected credit quality, intensifying competition in Asia putting pressure on fees and loan margins and slower than expected execution on restructurings</li>
</ul>



HSBC Holdings (HSBA LN) delivered an encouraging set of results, driven primarily by lower expected credit losses and a very healthy core capital ratio
In addition, there was positive progress in the European and US restructuring, and in the group’s cost reduction programme
Updates on the strategic review of HSBC France retail and the US operations will be provided by management in February 2021
On the negative side, there was Asian interest margin erosion in the quarter due largely to the lower HIBOR, HSBC MENA loss deepened and the group’s 3Q20 cost of risk may be unsustainably low
HSBC Mexico offers some constructive read across for Grupo Financiero Banorte-O (GFNORTEO MF) 3Q20 results on cost of risk and also on revenues
HSBC has a very strong and liquid balance sheet, and has contained credit delinquency while maintaining NPL coverage
We are cautiously optimistic that medium term returns will exceed consensus expectations, on the back of management’s non-core business restructurings and cost attrition supported by growth in fee generating business in Asia
Risks to our view include worse than expected credit quality, intensifying competition in Asia putting pressure on fees and loan margins and slower than expected execution on restructurings


HSBC (HSBA LN): Signs of Progress, Within a Mixed Set of 3Q20 Results

Thematic (Sector/Industry)

*Train Wreck: The Central Bank of Turkey (CBT) is keeping interest rates low, and failed to raise interest rates at its latest meeting last week – against consensus of a 200 bp increase. In our view, low rates are likely to result in modest inflation. Despite what feel like punitive capital controls, the Turkish lira (TRY) actually declined 2% on day – nearing 8 TRY/USD achieving another record low and down 35% YTD versus the USD; *Artificially High Turkish Lira: CBT data exhibits that the easing of trading restrictions resulted in foreign investor selling nearly 70% of their previously held Turkish government bonds and equities YTD. Investors are likely to continue to take advantage of President Erdogan's ineptitude of an artificially high TRY by continuing to sell while the getting is still good; and *Continue Reducing Risk: Turkish banks and the Turkish economy should be sold, and if the former Vice President Joe Biden actually wins the White house this could be the end of the TRY.

*Train Wreck: The Central Bank of Turkey (CBT) is keeping interest rates low, and failed to raise interest rates at its latest meeting last week – against consensus of a 200 bp increase. In our view, low rates are likely to result in modest inflation. Despite what feel like punitive capital controls, the Turkish lira (TRY) actually declined 2% on day – nearing 8 TRY/USD achieving another record low and down 35% YTD versus the USD; *Artificially High Turkish Lira: CBT data exhibits that the easing of trading restrictions resulted in foreign investor selling nearly 70% of their previously held Turkish government bonds and equities YTD. Investors are likely to continue to take advantage of President Erdogan's ineptitude of an artificially high TRY by continuing to sell while the getting is still good; and *Continue Reducing Risk: Turkish banks and the Turkish economy should be sold, and if the former Vice President Joe Biden actually wins the White house this could be the end of the TRY.

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.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

HSBC Holdings (HSBC US)

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

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

HSBC (HSBA LN): Signs of Progress, Within a Mixed Set of 3Q20 Results

HSBC's 3Q20 results were constructive, with signs of restructuring benefits coming through, as well as well contained delinquencies; there is much...

Victor Galliano

Turkey – Choo Choo

TURKEY: A Crisis Is Coming As a Result of Strongman President Erdogan's Inability to See The forest From The Trees. Rates Too High, Artificially...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

DBS Group Holdings – Not Trending The Right Way Yet

DBS GROUP HOLDINGS: Trends Are Poor. Costs Higher, Revenues Lower, and Provision Trend Likely To Be Reversed As We Head Into 2021.

Thomas J. Monaco

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

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

HSBC (HSBA LN): Signs of Progress, Within a Mixed Set of 3Q20 Results

HSBC's 3Q20 results were constructive, with signs of restructuring benefits coming through, as well as well contained delinquencies; there is much...

Victor Galliano

Turkey – Choo Choo

TURKEY: A Crisis Is Coming As a Result of Strongman President Erdogan's Inability to See The forest From The Trees. Rates Too High, Artificially...

Thomas J. Monaco