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

*Costs Now An Issue: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported CNY 6.5 bn – declining CNY 2.2 bn (25.1%) on a linked quarter basis. In this environment, credit troubles no doubt are a foregone conclusion. However, this was not necessarily PAB’s biggest issue in its most results announcement, where the bulk of the earnings decline was attributed to a CNY 1.9 bn (17.1%) linked quarter increase in costs;*Credit Is WEAKER Still:  We find that credit weakness is actually deteriorating at an even more accelerated pace than in 3Q20, as net new NPLs have increased CNY 20.5 bn or a massive 241% (223% in 3Q20) on an annualized basis. We also find that PAB’s reserves still remain quite light by CNY 152 bn if we assume a 2x NPL ratio. This shortfall represents 60% 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.

*Costs Now An Issue: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported CNY 6.5 bn – declining CNY 2.2 bn (25.1%) on a linked quarter basis. In this environment, credit troubles no doubt are a foregone conclusion. However, this was not necessarily PAB’s biggest issue in its most results announcement, where the bulk of the earnings decline was attributed to a CNY 1.9 bn (17.1%) linked quarter increase in costs;*Credit Is WEAKER Still:  We find that credit weakness is actually deteriorating at an even more accelerated pace than in 3Q20, as net new NPLs have increased CNY 20.5 bn or a massive 241% (223% in 3Q20) on an annualized basis. We also find that PAB’s reserves still remain quite light by CNY 152 bn if we assume a 2x NPL ratio. This shortfall represents 60% 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. 

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance.

*Results Ahead Of Consensus: Bank of America (BAC.US) [BAC] reported 4Q20 bottom-line results of USD 5.2 bn, increasing USD 768 mn (17.3%) linked quarter. Results were driven by two factors: a) a USD 1.3 bn reduction in loss provision, tracking the overall improvement in net new NPLs; and b) a USD 474 mn (3.3%) decline in costs attributed to the 55.4% reduction in other operating expenses;*BAC Still Needs To Focus On Credit Quality: BAC’s NPLs increased USD 386 mn (8.2%) linked quarter and represent 55 bp of total loans – up 5 bp linked quarter due to both the NPL increase and the 2.9% contraction in loans outstanding. Although the NPL ratio is generally low, we are concerned with both the 30-89 days past due and commercial receivable criticisms which both increased; and*Buyback Will Be Attempted:BAC’s Standardized CET1 remained roughly unchanged linked quarter at 11.9%, and is 140 bp above BAC's capital requirement target.This should allow BAC to execute a share buyback of USD 3.2 bn in 1Q21 – USD 2.9 bn under the income test plus USD 300 mn to offset employee issuance. 

Bank of America – Driven Entirely By Credit

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Thematic (Sector/Industry)

After dropping steadily for the last 3 years, HK-listed China banks are finally starting to move higher led by <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> and <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a>.The suspension of <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a>'s IPO and the subsequent restrictions placed on Fintech (or Techfin) players gave the banks a shot in the arm. The economic recovery in China and the recent pre-announcement of better than consensus results by <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> have got investor attention.<a href="https://www.smartkarma.com/profiles/steven-holden" target="_blank" data-smartkarma-citation="accounts:1337" rel="noopener">Steven Holden</a> has highlighted the shift out of Banking stocks pre- and post COVID by active managers with holdings close to the lowest on record.With the China economy stabilizing and growing and reporting better than expected GDP numbers today, there could be a further move into Banking stocks pushing them higher.

After dropping steadily for the last 3 years, HK-listed China banks are finally starting to move higher led by China Merchants Bank H (3968 HK) and Postal Savings Bank of China (1658 HK).The suspension of Ant Group (6688 HK)'s IPO and the subsequent restrictions placed on Fintech (or Techfin) players gave the banks a shot in the arm. The economic recovery in China and the recent pre-announcement of better than consensus results by China Merchants Bank H (3968 HK) have got investor attention.Steven Holden has highlighted the shift out of Banking stocks pre- and post COVID by active managers with holdings close to the lowest on record.With the China economy stabilizing and growing and reporting better than expected GDP numbers today, there could be a further move into Banking stocks pushing them higher.

China Merchants Bank H / Equity Bottom-Up

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] announced a poor set of preliminary 4Q20 results, with net profit declining CNY 6.1 bn (22.7%) on a linked quarter basis – this, despite having its tax rate decline 790 bp to 15.6% over the period; and*Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. We note a potential net new NPL increase of CNY 11.4 bn linked quarter for a whopping annualized increase in NPLs of 80.4%. Trouble is brewing in paradise.

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] announced a poor set of preliminary 4Q20 results, with net profit declining CNY 6.1 bn (22.7%) on a linked quarter basis – this, despite having its tax rate decline 790 bp to 15.6% over the period; and*Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. We note a potential net new NPL increase of CNY 11.4 bn linked quarter for a whopping annualized increase in NPLs of 80.4%. Trouble is brewing in paradise.  

China Merchants Bank – Massive 4Q20 Charge-Offs

China

Industrial and Commercial Bank of China Limited provides banking services. The Company offers deposits, loans, fund underwriting, foreign currency settlement, and other services. Industrial and Commercial Bank of China provides its services to individuals, enterprises, and other clients.

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ICBC (H) (1398 HK)

Ping An Insurance - Awful Bank Result

PING AN INSURANCE: PAB reported a 25.1% lower linked quarter result. The bulk of the earnings decline was attributed to a 17.1% increase in costs;...

Thomas J. Monaco

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Credit tourists may vacate if economic growth and real credit fundaments are not delivered. The gap between credit spreads and fundamentals is...

Hank Calenti, CFA

Bank of America – Driven Entirely By Credit

BANK OF AMERICA: BAC's 4Q20 bottom-line of USD 5.2 bn increased 17.3% driven by a USD 1.3 bn reduction in provisions. NPLs increased 8.2%, as did...

Thomas J. Monaco

China Banks: Moving On Up

The recovery in the Chinese economy, the changes to fintech rules, the better than expected results, the low valuations and the extreme positioning...

Brian Freitas

China Merchants Bank – Massive 4Q20 Charge-Offs

CHINA MERCHANTS BANK: CMB announced a poor set of preliminary 4Q20 results, as profit declined 22.7% QOQ. Credit risk has substantially increased...

Thomas J. Monaco

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