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

* Peak Value:So much value has been derived again on hope for the shares of Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx], which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. Cash and derivative volumes are also higher on HKEx YOY by 39% and 5%, respectively. As such, we witnessed HKEx’s 2020 share performance of 45.1% that has resulted in a global exchange leading valuation of 9.7x P/BV; and* 3Q20 Results Will Be Telling: HKEx will release its 3Q earnings result on November 11, 2020. While its fund to hope and dream, the reality is that equity turnover velocity and volumes on HKEX have declined on the back of weaker price volatility. Cash equity ADTV has declined from a high of HKD 165 bn in July to HKD 135 bn in August to lower still at HKD 123 bn during September. The October figure to date has declined another 21.9% MOM to HKD 95 bn. Volume weakness was also seen in derivatives contracts from a July peak of 1.4 mn ADTV to 1.0 mn during Aug/Sep). To put these declines into perspective, volumes in the cash equity and derivatives amount to over 50% of HKEx's revenue.

* Peak Value:So much value has been derived again on hope for the shares of Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx], which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. Cash and derivative volumes are also higher on HKEx YOY by 39% and 5%, respectively. As such, we witnessed HKEx’s 2020 share performance of 45.1% that has resulted in a global exchange leading valuation of 9.7x P/BV; and* 3Q20 Results Will Be Telling: HKEx will release its 3Q earnings result on November 11, 2020. While its fund to hope and dream, the reality is that equity turnover velocity and volumes on HKEX have declined on the back of weaker price volatility. Cash equity ADTV has declined from a high of HKD 165 bn in July to HKD 135 bn in August to lower still at HKD 123 bn during September. The October figure to date has declined another 21.9% MOM to HKD 95 bn. Volume weakness was also seen in derivatives contracts from a July peak of 1.4 mn ADTV to 1.0 mn during Aug/Sep). To put these declines into perspective, volumes in the cash equity and derivatives amount to over 50% of HKEx's revenue.

Hong Kong Exchanges & Clearing – Fully Discounted

*Lucky and Smart: In Afterpay’s Touch’s (APT.AU) [Afterpay] latest update, it was announced that AUSTRAC has decided that it will not be taking any further regulatory action and that that it had uplifted its AML/CTF compliance framework and financial crime function, and satisfactorily completed all required remediation activity. Further, Afterpay `launched its instore offering in the US market just in time for the Christmas shopping season following its Simon Property Group (SPG.US) collaboration in the US;*Tencent Tutelage: Afterpay is helping Tencent enter markets earlier and with Tencent’s (700.HK) tutelage likely will help Afterpay more deeply penetrate North America.  We fully anticipate that Tencent will help Afterpay enter the Asian markets - uncharted territory with a large young population – with the big prize obviously being mainland China. Tencent’s digital expertise should also help Afterpay to improve its technology platform (e.g. its digital wallet checkout experience and its shopping platform, plus customer led generation). It also wouldn’t surprise us if Tencent took up greater than its pro rata share of the capital raise; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 328% on this stake.

*Lucky and Smart: In Afterpay’s Touch’s (APT.AU) [Afterpay] latest update, it was announced that AUSTRAC has decided that it will not be taking any further regulatory action and that that it had uplifted its AML/CTF compliance framework and financial crime function, and satisfactorily completed all required remediation activity. Further, Afterpay `launched its instore offering in the US market just in time for the Christmas shopping season following its Simon Property Group (SPG.US) collaboration in the US;*Tencent Tutelage: Afterpay is helping Tencent enter markets earlier and with Tencent’s (700.HK) tutelage likely will help Afterpay more deeply penetrate North America.  We fully anticipate that Tencent will help Afterpay enter the Asian markets - uncharted territory with a large young population – with the big prize obviously being mainland China. Tencent’s digital expertise should also help Afterpay to improve its technology platform (e.g. its digital wallet checkout experience and its shopping platform, plus customer led generation). It also wouldn’t surprise us if Tencent took up greater than its pro rata share of the capital raise; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 328% on this stake. 

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

*First Out Of The Gate: J.P, Morgan &amp; Co. (JPM.US) [JPM] reported 3Q20 results of USD 9.3 bn or USD 2.92 per share – well ahead of consensus of USD 2.22 per share. Results improvement was led primarily by JPM’s USD 9.9 bn (94.2%) reduction in loss provisions on a linked quarter basis. Offsetting the stellar bottom-line performance, we note several troubling trends: a) net interest income declined on the back of NIM compression and loan portfolio contraction; b) a significant decline in capital markets related revenues; and c) expenses increases;    *Credit Weakness Decelerates: Despite calculating that NCOs were actually a negative USD 1.4 bn, we find that net new NPLs linked quarter amounted to a positive USD 184 mn or 7.0% on an annualized basis. While still weakening, the pace of increase has decelerated from the 26% posted in 2Q20; and* CAPM and Cost Pressure: Volatile capital markets-related revenues took a bit of a digger – declining USD 3.9 bn (26.7%) linked quarter - representing a declining 66.9% of total revenues at 3Q20 (down from the 77.0% posted at 2Q20). When we exclude compensation costs which have a large variable component, we note that the more fixed expenses increased. Comp/revenue, despite the overall bottom-line improvement, worsened to 53.5% - up 3.8% during the period while JPM’s efficiency ratio worsened to 57.9% versus 51.4% in 2Q20.

JP Morgan & Co. – Good Credit Omen For US and Global Banks

Thematic (Sector/Industry)

*A Market With Little Discipline: Too many market participants have very little discipline, and to make matters worse, central banks have been all too happy to remove the moral hazard involved with excessive risk taking. This has resulted in the creation of a giant vortex of liquidity which could be as large as USD 1 quadrillion;*Broken Credit Ratings Agency Model: In our view, the credit ratings agency model is permanently broken as waterfall risks in various rated pools and tranches have become increasingly significant with the markets unable to self-regulate and regulators either unable to regulate (or told not to regulate);  and*SEC Far From Being Aggressive With Enforcement: In reality, the fines paid by Kroll/DBRS are not even a drop in the bucket compared with the USD 1.5 bn and USD 864 mn fines paid by S&amp;P (MH) and Moody's (MCO.US), respectively, to settle similar charges associated with the GFC. Whether this reflects more of a lower level of violations or a much less aggressive SEC regulator can be debated. It will be interesting to see is whether these investigations are expanded to include 2018-19 deals which appear to have even greater conflicts - particularly under Biden administration.

*A Market With Little Discipline: Too many market participants have very little discipline, and to make matters worse, central banks have been all too happy to remove the moral hazard involved with excessive risk taking. This has resulted in the creation of a giant vortex of liquidity which could be as large as USD 1 quadrillion;*Broken Credit Ratings Agency Model: In our view, the credit ratings agency model is permanently broken as waterfall risks in various rated pools and tranches have become increasingly significant with the markets unable to self-regulate and regulators either unable to regulate (or told not to regulate);  and*SEC Far From Being Aggressive With Enforcement: In reality, the fines paid by Kroll/DBRS are not even a drop in the bucket compared with the USD 1.5 bn and USD 864 mn fines paid by S&amp;P (MH) and Moody's (MCO.US), respectively, to settle similar charges associated with the GFC. Whether this reflects more of a lower level of violations or a much less aggressive SEC regulator can be debated. It will be interesting to see is whether these investigations are expanded to include 2018-19 deals which appear to have even greater conflicts - particularly under Biden administration. 

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.   

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)

Hong Kong Exchanges & Clearing – Fully Discounted

Hong Kong Exchanges & Clearing: Alot of Positives Surrounding China Opportunity Has Pushed Shares 45% Higher In 2020, But Recent Fundamentals Would...

Thomas J. Monaco

Tencent – Rubbing Two Nickels Together

Tencent Continues To Reap The Benefits Of Its Australian Alliance, With Afterpay Now Getting A Clean Bill Of Health and Increasing Their US Presence

Thomas J. Monaco

JP Morgan & Co. – Good Credit Omen For US and Global Banks

JPM Results, A Good Credit Omen For US and Global Banks. Reserve Reversals Likely To Be A Trend For 4Q20 Results Season -Although Issues Persist

Thomas J. Monaco

Ratings Agencies – Beyond Repair

*A Market With Little Discipline: Too many market participants have very little discipline, and to make matters worse, central banks have been all...

Thomas J. Monaco

Link REIT – Weak Results Preview

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative...

Thomas J. Monaco