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

*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; *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; and    *Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes.

*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; *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; and    *Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes. 

HSBC Holdings Plc – Act Now, You’ll Never See These Prices Again

*Joint Announcement For Stock Connect Expansion: Just when we thought that Hong Kong Exchanges &amp; Clearing (388.HK) [KKEx] had no other rabbits to pull out of its hat in 2020, the HKEx, Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) jointly announced further scope for Stock Connect expansion in early 2021 on November 27, 2020 regarding the STAR Market and biotech companies;  *Solid Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 3Q20 earnings of HKD 3.3 bn, improving HKD 376 mn (12.7%) linked quarter. Results were even more impressive when we exclude investment income (declined HKD 206 mn or 23.2% linked quarter) – increasing HKD 582 mn (28.0%) to HKD 2.7 bn; and*Peak Value: So much value has been derived on hope for the shares of HKEx, which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. As such, we have witnessed HKEx’s 2020 share performance of 44.4% that has resulted in a global exchange leading valuation of 10.4x P/BV.

*Joint Announcement For Stock Connect Expansion: Just when we thought that Hong Kong Exchanges &amp; Clearing (388.HK) [KKEx] had no other rabbits to pull out of its hat in 2020, the HKEx, Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) jointly announced further scope for Stock Connect expansion in early 2021 on November 27, 2020 regarding the STAR Market and biotech companies;  *Solid Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 3Q20 earnings of HKD 3.3 bn, improving HKD 376 mn (12.7%) linked quarter. Results were even more impressive when we exclude investment income (declined HKD 206 mn or 23.2% linked quarter) – increasing HKD 582 mn (28.0%) to HKD 2.7 bn; and*Peak Value: So much value has been derived on hope for the shares of HKEx, which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. As such, we have witnessed HKEx’s 2020 share performance of 44.4% that has resulted in a global exchange leading valuation of 10.4x P/BV. 

Hong Kong Exchanges & Clearing – Making Another Connection

*Challenges Ignored: Last week a competitor held a virtual conference with Ping An Insurance (2318.HK) [Ping An Insurance]. In typical fashion, the management of Ping An barely scratched the surface in their discussion of its weakened franchise;   *Only A Discussion On Life and P&amp;C: Management guided that Ping An Life (PAL) will have positive Value of New Business (VONB) growth for 2021, as a beneficiary of health reforms. It sees a number of new digital tools empowering agents in sales and customer development, in addition to improving agency recruitment. For Ping An P&amp;C, management guided that the full-year combined ratio would be “slightly higher” than the 99.1% posted through 3Q20. This means that Ping An P&amp;C likely will be loss making on an operational basis if the combined ratio exceeds 100%; and* Move Along, Nothing To See Here: There was no discussion of the following: 1) Continued weakness in Ping An Life’s results; 2) It being  a finalist to acqure Tahoe Insurance in Hong Kong; 3) technology platform; credit insurance risk; and the capital contrained Ping An Bank.

*Challenges Ignored: Last week a competitor held a virtual conference with Ping An Insurance (2318.HK) [Ping An Insurance]. In typical fashion, the management of Ping An barely scratched the surface in their discussion of its weakened franchise;   *Only A Discussion On Life and P&amp;C: Management guided that Ping An Life (PAL) will have positive Value of New Business (VONB) growth for 2021, as a beneficiary of health reforms. It sees a number of new digital tools empowering agents in sales and customer development, in addition to improving agency recruitment. For Ping An P&amp;C, management guided that the full-year combined ratio would be “slightly higher” than the 99.1% posted through 3Q20. This means that Ping An P&amp;C likely will be loss making on an operational basis if the combined ratio exceeds 100%; and* Move Along, Nothing To See Here: There was no discussion of the following: 1) Continued weakness in Ping An Life’s results; 2) It being  a finalist to acqure Tahoe Insurance in Hong Kong; 3) technology platform; credit insurance risk; and the capital contrained Ping An Bank. 

Ping An Insurance – Avoiding The Hard Questions

*Virtual Call Does Little To Quell Concerns: Last week a competitor held a virtual conference with AIA Group (1299.HK) [AIA]. In typical fashion, the management of AIA only discussed the positives neglecting many of the market realities;   *Mainland China Expansion and ASEAN Margins In Focus: According to management, the mainland Chinese expansion is of course progressing well as it plans three regional hubs - Beijing, Shanghai and recently approved Sichuan branch - to act as business centers. As discussed at the latest 3Q20 earnings release and now re-discussed, VONB margins have been increasing in select ASEAN markets; and*Elephants In The Room: Given both the earnings and balance sheet headwinds, who really cares about how many agents were added in mainland China? What was not discussed: negative tax implications for mainland Chinese subsidiaries versus branches; the bogusly rated AAA mainland Chinese bonds; the flailing Hong Kong flagship; and its USD-based investment portfolio.

*Virtual Call Does Little To Quell Concerns: Last week a competitor held a virtual conference with AIA Group (1299.HK) [AIA]. In typical fashion, the management of AIA only discussed the positives neglecting many of the market realities;   *Mainland China Expansion and ASEAN Margins In Focus: According to management, the mainland Chinese expansion is of course progressing well as it plans three regional hubs - Beijing, Shanghai and recently approved Sichuan branch - to act as business centers. As discussed at the latest 3Q20 earnings release and now re-discussed, VONB margins have been increasing in select ASEAN markets; and*Elephants In The Room: Given both the earnings and balance sheet headwinds, who really cares about how many agents were added in mainland China? What was not discussed: negative tax implications for mainland Chinese subsidiaries versus branches; the bogusly rated AAA mainland Chinese bonds; the flailing Hong Kong flagship; and its USD-based investment portfolio.  

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.

*Third Indian Bank Failure In 15 Months: For the third time in 15 months, the Reserve Bank of India (RBI) took over a failing regional bank - announcing that it would limit deposit withdrawals and replace the board of directors at Lakshm Vilas Bank (LVB.IN) due to a "serious deterioration" in its finances. After the failure of Punjab and Maharashtra Co-operative Bank and Yes Bank (YES.IN); and 12 consecutive quarters of posting losses it should come as no surprise that the RBI placed LVB under moratorium through December 16, 2020; and*Not Letting Cash Burn A Hole In Its Pocket: On Novenber 17, 2020, the RBI also announced a draft scheme to merge LVB with DBS Bank India Limited, the 100%-owned subsidiary of DBS Bank Holdings (DBS.SP), which will infuse INR 25 bn into its subsidiary to absorb and recapitalize LVB. This transaction is riddled with problems and will certainly cost DBS far greater than its initial investment.  

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)

HSBC Holdings Plc – Act Now, You’ll Never See These Prices Again

HSBC HOLDINGS PLC: Financial Times Suggesting Board Will Be Presented With Options On US Franchise This Week. This Was A Long Time In Coming.

Thomas J. Monaco

Hong Kong Exchanges & Clearing – Making Another Connection

HONG KONG EXCHANGES & CLEARING: The Three Exchanges Have Added To The Stock Connect With STAR Market and Biotech Additions

Thomas J. Monaco

Ping An Insurance – Avoiding The Hard Questions

PING AN INSURANCE: Everyone Understands That Ping An Insurance Is Struggling In Every Business Line. Management Refuses To Discuss How They Are...

Thomas J. Monaco

AIA Group – Let’s Get Real

AIA GROUP: AIA Must Not Believe Its Investor Base Cares About Anything But China Growth. It Expects Everyone To Ignore Hong Kong, Negative Tax...

Thomas J. Monaco

DBS Group Holdings – Dumb India Deal

DBS GROUP HOLDINGS: Transaction For Lakshmi Vilas Bank In India At INR 25 BN Is Way Too Pricey For Risk DBS Is Taking On. Price Will Ultimately Be...

Thomas J. Monaco