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

*UK BNPL Review Should Add Structure: Tencent Holding’s (700.HK) [Tencent] Afterpay Touch (APT.AU) [Afterpay] British business and the entire Buy-Now, Pay-Later (BNPL) segment is to be reviewed by the Financial Conduct Authority (FCA) – not dis-similar to those reviews conducted in Australia. We believe that the outcome will also be similar in that some form national structure and regulation will be put into place, and we remain encouraged by the Crown’s acknowledgement that the BNPL segment adds value; 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 of nearly 550% over the past eight months since the stake announcement, this alliance with Australia’s premier financial technology Buy Now Pay Later (BNPL) company is paying dividends to Tencent in numerous other ways.

*UK BNPL Review Should Add Structure: Tencent Holding’s (700.HK) [Tencent] Afterpay Touch (APT.AU) [Afterpay] British business and the entire Buy-Now, Pay-Later (BNPL) segment is to be reviewed by the Financial Conduct Authority (FCA) – not dis-similar to those reviews conducted in Australia. We believe that the outcome will also be similar in that some form national structure and regulation will be put into place, and we remain encouraged by the Crown’s acknowledgement that the BNPL segment adds value; 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 of nearly 550% over the past eight months since the stake announcement, this alliance with Australia’s premier financial technology Buy Now Pay Later (BNPL) company is paying dividends to Tencent in numerous other ways.

*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. 

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, and still has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.9%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund the restructuring - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, and still has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.9%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund the restructuring - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.  

Bank of East Asia – How Much Longer Can Caixa Hold On?

*Poor Results See No Signs Of Near-Term Abatement: Singapore Exchange (SGX.SP) [SGX] reported FY 1H21 results of SGD 240.4 mn, declining SGD 18.2 mn (7.0%) HOH. Excluding the SGD 15.6 mn in gains primarily attributed to non-cash fair value on its BidFX acquisition, SGX’core operating result would have declined SGD 33.9 mn (13.1%) over the period; and*Derivatives Challenges Led By Taiwan: The largest semi-annual results delta was attributed to derivatives, which declined SGD 33.6 mn or 12.2%. SGX ceased trading of MSCI Taiwan futures contracts on October 30, 2020 with their move to the Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx]. Until recently, 99.8% of the Taiwan index futures volumes has were held by SGX, but its dominant market share position is beginning to crack. As time passes, we will get an idea of how much volume of the Taiwan index futures will remain with MSCI indices and move to HKEx which has significant implications for SGX's lucrative A50 contract.

*Poor Results See No Signs Of Near-Term Abatement: Singapore Exchange (SGX.SP) [SGX] reported FY 1H21 results of SGD 240.4 mn, declining SGD 18.2 mn (7.0%) HOH. Excluding the SGD 15.6 mn in gains primarily attributed to non-cash fair value on its BidFX acquisition, SGX’core operating result would have declined SGD 33.9 mn (13.1%) over the period; and*Derivatives Challenges Led By Taiwan: The largest semi-annual results delta was attributed to derivatives, which declined SGD 33.6 mn or 12.2%. SGX ceased trading of MSCI Taiwan futures contracts on October 30, 2020 with their move to the Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx]. Until recently, 99.8% of the Taiwan index futures volumes has were held by SGX, but its dominant market share position is beginning to crack. As time passes, we will get an idea of how much volume of the Taiwan index futures will remain with MSCI indices and move to HKEx which has significant implications for SGX's lucrative A50 contract.

*Profit Warning: MTR Corp (66.HK) [MTR] warned that it has faced significant operational and valuation challenges, which have led to its first loss since listing two decades ago. Losses of negative HKD 4.8 bn are likely from COVID-19 and a troubled mega project; and*2021 To Remain Very Challenging: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain in place through much of 2021 as business conditions continue to worsen with the SAR now battling its now fourth wave of COVID-19. At it stands, ridership is down 31.5% YOY in 2020.

*Profit Warning: MTR Corp (66.HK) [MTR] warned that it has faced significant operational and valuation challenges, which have led to its first loss since listing two decades ago. Losses of negative HKD 4.8 bn are likely from COVID-19 and a troubled mega project; and*2021 To Remain Very Challenging: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain in place through much of 2021 as business conditions continue to worsen with the SAR now battling its now fourth wave of COVID-19. At it stands, ridership is down 31.5% YOY in 2020.

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)

Tencent Holdings - UK Speed Bump

TENCENT HOLDINGS: Tencent's Afterpay British business and BNPL segment being reviewed by FCA – not dis-similar to Australia. Review should lead to...

Thomas J. Monaco

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 of East Asia – How Much Longer Can Caixa Hold On?

BANK OF EAST ASIA: CaixaBank is a 17.3% holder of BEA, and still has significant capital concerns. CaixaBank needs to find additional ways to...

Thomas J. Monaco

Singapore Exchange - Going South

SINGAPORE EXCHANGE: SGX FY 1H21 results declined 7.0% HOH. Excluding the BidFX gain, SGX’ core operating result would have declined 13.1%. SGX...

Thomas J. Monaco

MTR Corp – Trainwreck

MTR CORP: MTR warned that it has faced significant operational and valuation challenges, which have led to a major loss. The border closure is...

Thomas J. Monaco