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

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn - increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and *Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi "does not have the scale" to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.

*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.

Bank of America – Not Exactly A Shining Result

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

<a href="https://www.smartkarma.com/entities/ngern-tid-lor" target="_blank" data-smartkarma-citation="entities:31103:1" rel="noopener">Ngern Tid Lor (NTL TB)</a>/TIDLOR is the leading auto-for-cash loan provider in Thailand with a 16% market share as measured by the outstanding vehicle title loans in 2019, according to Oliver Wyman. It is also a non-life insurance broker with the biggest branch network in Thailand. TIDLOR is an affiliate of <a href="https://www.smartkarma.com/entities/bank-of-ayudhya-pcl" target="_blank" data-smartkarma-citation="entities:136:1" rel="noopener">Bank Of Ayudhya (BAY TB)</a> (Krungsri), which is a strategic member of <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>. TIDLOR has launched an IPO to raise up to THB33 billion ($1.1 billion). The offer comprises a primary/secondary spilt of 23:77. The selling shareholders are Krungsri and CVC Capital Partners. <div class="content-highlight">The timing of the IPO is not ideal as a new COVID-19 outbreak has swept through Thailand which has forced <a href="https://www.smartkarma.com/entities/thai-beverage-pcl" target="_blank" data-smartkarma-citation="entities:3656:1" rel="noopener">Thai Beverage (THBEV SP)</a> to pull the plug on the listing of BeerCo. Despite the COVID-19 pandemic, TIDLOR delivered a creditable performance in 2020 underpinned by strong operations and asset quality. For investors willing to ride the current market uncertainty, we believe that TIDLOR is well placed to capture the long-term opportunity of Thailand’s vehicle title loan market.   </div>

Ngern Tid Lor (NTL TB)/TIDLOR is the leading auto-for-cash loan provider in Thailand with a 16% market share as measured by the outstanding vehicle title loans in 2019, according to Oliver Wyman. It is also a non-life insurance broker with the biggest branch network in Thailand. TIDLOR is an affiliate of Bank Of Ayudhya (BAY TB) (Krungsri), which is a strategic member of Mitsubishi UFJ Financial (MUFG) (8306 JP). TIDLOR has launched an IPO to raise up to THB33 billion ($1.1 billion). The offer comprises a primary/secondary spilt of 23:77. The selling shareholders are Krungsri and CVC Capital Partners. The timing of the IPO is not ideal as a new COVID-19 outbreak has swept through Thailand which has forced Thai Beverage (THBEV SP) to pull the plug on the listing of BeerCo. Despite the COVID-19 pandemic, TIDLOR delivered a creditable performance in 2020 underpinned by strong operations and asset quality. For investors willing to ride the current market uncertainty, we believe that TIDLOR is well placed to capture the long-term opportunity of Thailand’s vehicle title loan market.   

Ngern Tid Lor IPO Initiation: Finance on Four Wheels

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

*Results Should Only Get Better: JP Morgan Chase &amp; Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate &amp; Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Thematic (Sector/Industry)

Deposit growth at the 111 banks that are members of the Japanese Bankers Association (JBA) rose +9.7% YoY in February 2021, or by ¥74.454 trillion (US$683.1 billion), marking the third month in succession that bank deposits have achieved the highest YoY growth level ever recorded.  Deposits at all banks grew by ¥2.956 trillion (US$271.2 billion) in February alone to a new record level of ¥838.224 trillion (US$7.690 trillion) and represented the 173rd consecutive month of YoY deposit growth for all JBA member banks.As the fiscal year-end approaches, banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan rollovers on Wednesday 31 March.  Extra staff have been scheduled to operating departments and, according to local financial media, all leave cancelled at some regional banks in order to ensure that the banks do not suffer a similar fate to that of Mizuho Bank which suffered four highly embarrassing computer systems failures last month in the space of two weeks (please refer to Smartkarma Insight <a href="https://www.smartkarma.com/insights/mizuho-financial-group-8411-jp-deja-vu-all-over-again" target="_blank" data-smartkarma-citation="insights:48688" rel="noopener">Mizuho Financial Group (8411 JP):  Deja Vu All Over Again</a> for further details).The banking sector has enjoyed a relief rally since the start of the year, noticeably outperforming the Topix index for the first time in several years.  However, trees do not grow to heaven, and bank rallies tend to peter out in 90 days or so.  Having passed the ‘Ides of March’ perennial waypoint after which most Japanese bank rallies peter out, investors are already starting to take profits in the sector and seeking out areas of the Japanese stock market where the fundamentals are strong enough to support sustained outperformance.  Meanwhile, awash in cash, with margins under relentless pressure and core earnings deteriorating, the Japanese banking sector faces an increasingly clouded future in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Deposit growth at the 111 banks that are members of the Japanese Bankers Association (JBA) rose +9.7% YoY in February 2021, or by ¥74.454 trillion (US$683.1 billion), marking the third month in succession that bank deposits have achieved the highest YoY growth level ever recorded.  Deposits at all banks grew by ¥2.956 trillion (US$271.2 billion) in February alone to a new record level of ¥838.224 trillion (US$7.690 trillion) and represented the 173rd consecutive month of YoY deposit growth for all JBA member banks.As the fiscal year-end approaches, banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan rollovers on Wednesday 31 March.  Extra staff have been scheduled to operating departments and, according to local financial media, all leave cancelled at some regional banks in order to ensure that the banks do not suffer a similar fate to that of Mizuho Bank which suffered four highly embarrassing computer systems failures last month in the space of two weeks (please refer to Smartkarma Insight Mizuho Financial Group (8411 JP):  Deja Vu All Over Again for further details).The banking sector has enjoyed a relief rally since the start of the year, noticeably outperforming the Topix index for the first time in several years.  However, trees do not grow to heaven, and bank rallies tend to peter out in 90 days or so.  Having passed the ‘Ides of March’ perennial waypoint after which most Japanese bank rallies peter out, investors are already starting to take profits in the sector and seeking out areas of the Japanese stock market where the fundamentals are strong enough to support sustained outperformance.  Meanwhile, awash in cash, with margins under relentless pressure and core earnings deteriorating, the Japanese banking sector faces an increasingly clouded future in an ongoing near-zero interest rate environment.“Caveat Emptor!”  (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for 2021 and beyond.

Japan

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) ADR (MUFG US)

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Mitsubishi UFJ Financial (MUFG) ADR (MUFG US)

Citigroup – Shifting Winds

CITIGROUP: Citi reported a QOQ 1Q21 bottom-line result increase of 89.0% due to provision reversals and principal transactions. Net new NPLs...

Thomas J. Monaco

Bank of America – Not Exactly A Shining Result

BANK OF AMERICA: BAC's QOQ 1Q21 bottom-line increased 45.2% driven by reserve releases and trading (not sustainable). Net new NPLs reversed course...

Thomas J. Monaco

Ngern Tid Lor IPO Initiation: Finance on Four Wheels

TIDLOR has launched an IPO to raise up to THB33 billion ($1.1 billion). For investors willing to ride the current market uncertainty, we believe...

Arun George

J.P Morgan Chase & Co. – Well On Track

JP MORGAN CHASE: JPM 1Q21 bottom-line results increased 18.4% linked quarter due to principal transactions and provision reversals. This should...

Thomas J. Monaco

Japanese Banks: Oodles of the Stuff

Banks are becoming increasingly concerned about the current state of their computer systems and their ability to handle a surge in deposit and loan...

J. Brian Waterhouse

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