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

Postal Savings Bank of China C / Equity Bottom-Up

<p><strong>*Private Placement Coming: </strong>We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   </p><p><strong>*Starting Off From A Better Place Than Peer: </strong>We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.</p>

*Private Placement Coming: We firmly believe that Postal Savings Bank (1658.HK) [PSBC] will be named a D-SIB which will cause it to face immediate pressures to raise capital, given the unprecedented COVID-19 and failure to deal with their legacy problem assets. To that end, PSBC is raising CNY 30 bn (USD 4.3 bn) through a private placement of shares to parent China Post Group. PSBC aims to close this transaction by the end of 1Q21; and   *Starting Off From A Better Place Than Peer: We view PSBC as one of mainland China’s higher quality financial institutions but we do recognize that credit risks continue to accelerate. At 1H20, we note that credit continues to breakdown at an accelerated pace, as net new NPLs increased CNY 12.1 bn or 57% on an annualized basis. The on-balance defaulted bonds amount to about CNY 500 mn, suggesting a limited impact. Total credit exposure to Yongmei and Henan Energy is CNY 1 bn.

Postal Savings Bank – D-SIB Spurs Placement

Thematic (Sector/Industry)

<p><strong><em>*D-SIB Standards Released:</em></strong> The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on December 3, 2020 released finalized standards for the country’s domestic systemically important banks (D-SIBs), and indicated that tighter regulations will be announced shortly; and</p><p><strong><em>* Aggressive Capital Raises Expected: </em></strong>In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value. </p>

*D-SIB Standards Released: The People’s Bank of China (PBOC) and China Bank and Insurance Regulatory Commission (CBIRC) on December 3, 2020 released finalized standards for the country’s domestic systemically important banks (D-SIBs), and indicated that tighter regulations will be announced shortly; and* Aggressive Capital Raises Expected: In our view, the forthcoming regulations are likely to focus on: additional paid-in capital; leverage ratios; risk concentrations; corporate governance; disclosure levels; and mechanism to prevent systemic risk; and internal controls. The idea is to finally strengthen mainland Chinese bank balance sheets and improve their loss absorption capacity. Problem for equity raises is that P/BV must be over 1.0x for the raise and many of the potential D-SIBs are trading below book value. 

<p><strong><em>*Don’t Be Misled By Better Numbers: </em></strong>Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and </p><p><strong><em>*Credit Risk Rising: </em></strong>As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.      </p>

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.      

ICBC – Be Very Wary Of Worsening Credit

Ping An Digital Economic Research Center

Zheng Zeng

Ping An Digital Economic Research Center (DERC)

Ping An - DERC

Ping An Digital Economic Research Center (DERC) utilizes more than 50 TB of high frequency data points, more than 30 years of historical data and more than 1.5 billion data points to drive research on the “AI + Macro Forecast” and provide insights and methods towards precise macroeconomic trends. 

Ping An DERC is a research center for Ping An Insurance (Group) Company of China, Ltd. (“Ping An”) is a world-leading technology-powered retail financial services group. With over 204 million retail customers and 534 million internet users, Ping An is one of the largest financial services companies in the world.

Macroeconomics

<div class="content-highlight">
<p><strong>China SME Financing Report Series Report II by Fudan-Ping An Research Institute for Macroeconomy</strong></p>
</div>
<div>As the coronavirus pandemic keeps worsening outside China and sends shock waves across the global economy, <strong>the central government of China has increased financial support for micro, small and medium enterprises (MSMEs, or SME for short in this report) following the “Two Sessions” meeting</strong> in May. This includes: (1) reducing loan rates; (2) asking large state-owned banks to increase their lending to small businesses by no-less-than 40% this year; (3) using a re-lending program of RMB400 billion (US$5.8 billion) to incentivize local banks to make unsecured loans to small businesses; and (4) encouraging financial institutions to make concessions of RMB1.5 trillion to all types of companies.</div>
<div></div>
<div>
<div>
<strong>However, difficulties in discerning the use of the loans and supervising post-lending funding have led to a dilemma when implementing these relief policies.</strong> On one hand, if SME loan policies are too generous with rates too low and covenants too loose, regulatory arbitrage may arise, with funds flowing to the real estate and capital markets, aggravating resource misallocation and encouraging a pivot away from the real economy. On the other hand, if SME funding costs are too high and issuing conditions too demanding, small businesses may be unwilling to borrow to maintain production and operations, and instead they will lay off employees and reduce investments to deal with the pandemic.</div>
<div></div>
</div>
<div>Evidence suggests that：</div>
<div>
<ul>
<li>Some companies have used loan subsidies granted by local fiscal authorities to <strong>profit from interest margins</strong>.</li>
<li>
<div>Due to increased risks, small businesses are<strong> less willing to borrow</strong> to restore operations in the absence of low-cost loans. </div>
</li>
</ul>
<p>To ensure relief funds are funneled directly to small businesses in need, and to avoid<br>arbitrage and circular funding, we recommend that all local governments <strong>set up an indicator </strong><strong>system comprising 29 items under five dimensions</strong> to monitor local SME financing, and speed up data integration and information sharing based on the local small and medium enterprise financing platform, precisely measuring the SME financing gap and monitoring the flow of loan funds based on data from multiple sources.</p>
</div>
<p></p>
<blockquote>
<p style="text-align: center;"><strong>Dilemma of SME financing relief policies in Charts</strong></p>
</blockquote>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/847/original/image_546907858361600399388597.png?1600399390" class="editor-image img-responsive" data-smartkarma-image-id="159847"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/845/original/image_378457837341600399357441.png?1600399360" class="editor-image img-responsive" data-smartkarma-image-id="159845"></figure>


China SME Financing Report Series Report II by Fudan-Ping An Research Institute for Macroeconomy

As the coronavirus pandemic keeps worsening outside China and sends shock waves across the global economy, the central government of China has increased financial support for micro, small and medium enterprises (MSMEs, or SME for short in this report) following the “Two Sessions” meeting in May. This includes: (1) reducing loan rates; (2) asking large state-owned banks to increase their lending to small businesses by no-less-than 40% this year; (3) using a re-lending program of RMB400 billion (US$5.8 billion) to incentivize local banks to make unsecured loans to small businesses; and (4) encouraging financial institutions to make concessions of RMB1.5 trillion to all types of companies.



However, difficulties in discerning the use of the loans and supervising post-lending funding have led to a dilemma when implementing these relief policies. On one hand, if SME loan policies are too generous with rates too low and covenants too loose, regulatory arbitrage may arise, with funds flowing to the real estate and capital markets, aggravating resource misallocation and encouraging a pivot away from the real economy. On the other hand, if SME funding costs are too high and issuing conditions too demanding, small businesses may be unwilling to borrow to maintain production and operations, and instead they will lay off employees and reduce investments to deal with the pandemic.


Evidence suggests that：


Some companies have used loan subsidies granted by local fiscal authorities to profit from interest margins.

Due to increased risks, small businesses are less willing to borrow to restore operations in the absence of low-cost loans. 


To ensure relief funds are funneled directly to small businesses in need, and to avoid arbitrage and circular funding, we recommend that all local governments set up an indicator system comprising 29 items under five dimensions to monitor local SME financing, and speed up data integration and information sharing based on the local small and medium enterprise financing platform, precisely measuring the SME financing gap and monitoring the flow of loan funds based on data from multiple sources.



Dilemma of SME financing relief policies in Charts




China: Speeding up Data Integration to Solve the Dilemma of SME Financing Relief Policies

Rates Strategist, Bondcritic

Sumit Gupta

Rates Strategist

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

FX & Rates

<ul>
<li><strong><em>Digital currencies are gaining regulators' attention. Bank of England Governor Mark Carney’s speech at the Jackson Hole Symposium is one acknowledgement of a need for a new economic order where virtual currencies could provide a solution.</em></strong></li>
<li><strong><em>Digital currencies help overcome the zero lower bound problem which interest rate markets face today, in our view. Though this requires the phasing out of cash, it is easier said than done. The development of the e-Krona in Sweden offers an interesting case study.</em></strong></li>
<li><strong><em>With the introduction of the People’s Bank of China (PBoC) digital currency, we expect the debate between privately-owned and central bank-owned digital currencies to gain steam. In our view, central banks will have to overcome the baggage of traditional finance to make a meaningful dent in the digital currency space, which is not easy. On the other hand, there is no known mechanism to control private crypto currency inflation.</em></strong></li>
<li><strong><em>The world is looking for a new monetary order. Virtual currencies are likely to find a way in there, we believe. </em></strong></li>
</ul>


Digital currencies are gaining regulators' attention. Bank of England Governor Mark Carney’s speech at the Jackson Hole Symposium is one acknowledgement of a need for a new economic order where virtual currencies could provide a solution.
Digital currencies help overcome the zero lower bound problem which interest rate markets face today, in our view. Though this requires the phasing out of cash, it is easier said than done. The development of the e-Krona in Sweden offers an interesting case study.
With the introduction of the People’s Bank of China (PBoC) digital currency, we expect the debate between privately-owned and central bank-owned digital currencies to gain steam. In our view, central banks will have to overcome the baggage of traditional finance to make a meaningful dent in the digital currency space, which is not easy. On the other hand, there is no known mechanism to control private crypto currency inflation.
The world is looking for a new monetary order. Virtual currencies are likely to find a way in there, we believe. 


The Growing Weight of Digital Currencies in Mainstream Finance

China

The People's Bank of China is the central bank of the People's Republic of China. The Company formulates and implements monetary policy and supervises and regulates the financial industry. The People's Bank of China conducts business in China.

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People’s Bank Of China (PBCZ CH)

Postal Savings Bank – D-SIB Spurs Placement

POSTAL SAVINGS BANK OF CHINA: D-SIB Status Spurs Private Placement And Likely A Lower ROE Both From Dilution And Challenged Fundamentals In 2021.

Thomas J. Monaco

China Banks – About Time

CHINA BANKS: PBOC and CBIRC Released Finalized D-SIB Standards and Indicated Tighter Regulations. Aggressive Capital Raises Are Expected.

Thomas J. Monaco

ICBC – Be Very Wary Of Worsening Credit

INDUSTRIAL AND COMMERCIAL BANK OF CHINA: Don't Believe The Hype. Numbers Manufactured, and Credit Risk Suggests Long Winter For ICBC and Mainland...

Thomas J. Monaco

China: Speeding up Data Integration to Solve the Dilemma of SME Financing Relief Policies

Fudan-Ping An Research Institute for Macroeconomy

Ping An - DERC

The Growing Weight of Digital Currencies in Mainstream Finance

Digital currencies are gaining regulators' attention. Bank of England Governor Mark Carney’s speech at the Jackson Hole Symposium is one...

Bondcritic

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