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

*Weaker Result Across Almost All Geographic Segments: Citigroup (C.US) [Citi] reported 2Q21 bottom-line results of USD 6.2 bn, decreasing USD 1.7 bn (22.0%) linked quarter. On operating basis, Citi posted results of USD 6.0 bn, USD 1.5 bn (93.3%) ahead of 1Q21 numbers. Negative operating jaws (revenues down 8.7% and costs up 1.1%) and weakness in both Global Consumer and Institutional businesses broke Citi this quarter; and*Credit Weaker But Coverage Strong:  In light of NCOs, net new NPLs amount to USD 616 mn or increasing at the same exact pace as 1Q21 at 48.0% on an annualized basis – although not nearly as bad as JPM’s 177% increase. While reserve cover remains strong in aggregate, credit degradation appears to still be on the rise going forward at Citi. That being said, despite the elevated increase, Citi still appears likely to continue down the road of reserve releases.

*Weaker Result Across Almost All Geographic Segments: Citigroup (C.US) [Citi] reported 2Q21 bottom-line results of USD 6.2 bn, decreasing USD 1.7 bn (22.0%) linked quarter. On operating basis, Citi posted results of USD 6.0 bn, USD 1.5 bn (93.3%) ahead of 1Q21 numbers. Negative operating jaws (revenues down 8.7% and costs up 1.1%) and weakness in both Global Consumer and Institutional businesses broke Citi this quarter; and*Credit Weaker But Coverage Strong:  In light of NCOs, net new NPLs amount to USD 616 mn or increasing at the same exact pace as 1Q21 at 48.0% on an annualized basis – although not nearly as bad as JPM’s 177% increase. While reserve cover remains strong in aggregate, credit degradation appears to still be on the rise going forward at Citi. That being said, despite the elevated increase, Citi still appears likely to continue down the road of reserve releases.

*Troubling Result: J.P. Morgan Chase &amp; Co (JPM.US) [JPM] reported 2Q21 bottom-line results of USD 11.9 bn, declining USD 2.4 bn (16.4%) linked quarter, as four out of five business units posted bottom-line declines pushing overall revenues lower USD 1.6 bn (5.0%). On a core operating basis, JPM’s results declined somewhat less – down USD 2.2 bn or 15.3% over the period. Results were weak almost across the board; and*Credit Quality Reversing Previous Gains: We calculate that net new NPLs linked quarter grew USD 4.9 bn bn or 177.3% on an annualized basis – a far cry from the 22.2% and 0.2% increase at 1Q21 and 4Q20, respectively. While JPM would appear on its face to be well-provided for, provision releases now appear to be coming to an end. If the current uptick in net new NPLs is here to stay, JPM would appear light on reserves in the neighborhood of USD 7.0 bn or 50% of quarterly PBT.

*Troubling Result: J.P. Morgan Chase &amp; Co (JPM.US) [JPM] reported 2Q21 bottom-line results of USD 11.9 bn, declining USD 2.4 bn (16.4%) linked quarter, as four out of five business units posted bottom-line declines pushing overall revenues lower USD 1.6 bn (5.0%). On a core operating basis, JPM’s results declined somewhat less – down USD 2.2 bn or 15.3% over the period. Results were weak almost across the board; and*Credit Quality Reversing Previous Gains: We calculate that net new NPLs linked quarter grew USD 4.9 bn bn or 177.3% on an annualized basis – a far cry from the 22.2% and 0.2% increase at 1Q21 and 4Q20, respectively. While JPM would appear on its face to be well-provided for, provision releases now appear to be coming to an end. If the current uptick in net new NPLs is here to stay, JPM would appear light on reserves in the neighborhood of USD 7.0 bn or 50% of quarterly PBT. 

Thematic (Sector/Industry)

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

ZhongAn Online P&C Insurance C / Equity Bottom-Up

*June Premium: ZhongAn Online P&amp;C Insurance (6060.HK) [ZhongAn] reported June 2021 premium growth of 49% YoY, ending 1H21 with gross written premium (GWP) growth of 45% YOY. Two factors contributed to the overall growth: 1) COVID-19 recovery; and 2) the low base in 2020; and*Bottom-line Challenges Remain: The fact of the matter is that ZhongAn’s bottom-line remains challenged. Auto and Consumer Finance have decelerating and declining turnover growth given the continued COVID-19 business disruptions. While YOY combined ratio improved, the improvement came largely from credit insurance whose loss ratio declined from 97% in 2019 to 63%. Given the continued credit insurance headaches at PICC P&amp;C (2328.HK) and Ping An Insurance, we have a difficult time believing that little old ZhongAn has figured out the secret sauce to credit insurance risk.

*June Premium: ZhongAn Online P&amp;C Insurance (6060.HK) [ZhongAn] reported June 2021 premium growth of 49% YoY, ending 1H21 with gross written premium (GWP) growth of 45% YOY. Two factors contributed to the overall growth: 1) COVID-19 recovery; and 2) the low base in 2020; and*Bottom-line Challenges Remain: The fact of the matter is that ZhongAn’s bottom-line remains challenged. Auto and Consumer Finance have decelerating and declining turnover growth given the continued COVID-19 business disruptions. While YOY combined ratio improved, the improvement came largely from credit insurance whose loss ratio declined from 97% in 2019 to 63%. Given the continued credit insurance headaches at PICC P&amp;C (2328.HK) and Ping An Insurance, we have a difficult time believing that little old ZhongAn has figured out the secret sauce to credit insurance risk.

ZhongAn Online P&C Insurance – Still A Dumpster Fire

*Major US Merchant Deal: Tencent Holding’s (700.HK) [Tencent] Afterpay Touch's (APT.AU) [Afterpay] recently announced an integrated, multi-year national partnership with Unibail-Rodamco-Westfield (URW.AU), the owner of <a href="https://www.westfield.com/" target="_blank" rel="noopener">Westfield</a> shopping centers in the US, to support retailers by offering its Buy Now, Pay Later (BNPL) to consumers as they return to shopping malls; and*Tencent’s Midas Touch: Tencent continues to hit it out of the park with its Afterpay stake. In addition to its superb return on investment over the past ten months since the stake announcement - -even after giving back some of its gains, this alliance with Australia’s premier financial technology BNPL company is paying dividends to Tencent in numerous other ways.

*Major US Merchant Deal: Tencent Holding’s (700.HK) [Tencent] Afterpay Touch's (APT.AU) [Afterpay] recently announced an integrated, multi-year national partnership with Unibail-Rodamco-Westfield (URW.AU), the owner of Westfield shopping centers in the US, to support retailers by offering its Buy Now, Pay Later (BNPL) to consumers as they return to shopping malls; and*Tencent’s Midas Touch: Tencent continues to hit it out of the park with its Afterpay stake. In addition to its superb return on investment over the past ten months since the stake announcement - -even after giving back some of its gains, this alliance with Australia’s premier financial technology BNPL company is paying dividends to Tencent in numerous other ways. 

Tencent Holdings – Celebrating The Return Of Retail

China

iShares FTSE A50 China Index ETF is an exchanged-traded fund established in Hong Kong. The investment objective of the iShares FTSE A50 China Index ETF is to provide investment results that, before fees and expenses, closely correspond to the performance of A50 Index.

iShares FTSE/Xinhua A50 China (2823 HK)

Citigroup – Janes’ Pain

Citigroup: Citi reported a 22.0% QOQ 2Q21 bottom-line decline from negative operating jaws and weakness in Global Consumer and Institutional. Net...

Thomas J. Monaco

J.P. Morgan & Co. – Not Good Jamie

J.P. Morgan: JPM reported a QOQ decline in 2Q21 in bottom-line of 16.4%. Previous credit quality gains have reversed, leading us to question...

Thomas J. Monaco

China Banks – Screws Tighten On LGFVs

CHINA BANKS: Recently the CBIRC issued guidance on implicit LGFV debt via Document 15 – further tightening the screws on mainland China's financial...

Thomas J. Monaco

ZhongAn Online P&C Insurance – Still A Dumpster Fire

ZhongAn Online: ZhongAn reported June 2021 premium growth of 49% YoY. Two factors contributed to the growth: COVID-19 recovery; and low base in...

Thomas J. Monaco

Tencent Holdings – Celebrating The Return Of Retail

TENCENT HOLDINGS: Tencent's Afterpay recently announced an integrated, multi-year national partnership with Westfield shopping centers in the US,...

Thomas J. Monaco