Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

The news of a C19 vaccine is a discrete variable that can affect how banks assess credit risk. With a vaccine there is less risk of economic shutdown, less risk of worsening consumption, and less risk of more unemployment. All of this must mean better statistics for probability of default (PD) and loss given default (LGD). At the same time, the US President-elect is talking about a ‘dark winter’ and urging mass mask-wearing. This comes as many European countries re-shutdown their economies at least to some degree. Banks will be hard-pressed to not view the Biden comments and actions from European countries as negative for credit metrics. This can mean a messy and moving set of credit risk assumptions for banks, making the path forward that much more difficult to ascertain.

The news of a C19 vaccine is a discrete variable that can affect how banks assess credit risk. With a vaccine there is less risk of economic shutdown, less risk of worsening consumption, and less risk of more unemployment. All of this must mean better statistics for probability of default (PD) and loss given default (LGD). At the same time, the US President-elect is talking about a ‘dark winter’ and urging mass mask-wearing. This comes as many European countries re-shutdown their economies at least to some degree. Banks will be hard-pressed to not view the Biden comments and actions from European countries as negative for credit metrics. This can mean a messy and moving set of credit risk assumptions for banks, making the path forward that much more difficult to ascertain.

China Banks – Biden, Vaccine, Provisions

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

*VONB Better Linked Quarter: AIA Group (1299.HK) {AIA} reported 3Q20 Value of New Business (VONB) of USD 706 mn, increasing 22% linked quarter with positive growth noted in Malaysia, Singapore and India – but VONB declined 28% YOY;*Greater China Challenges: Hong Kong’s pure domestic business reported modest linked quarter growth in VONB, but is still likely struggling with mainland Chinese clients as the border remains closed due to quarantines. Mainland China too was weaker as demand for protection products remains challenged. AIA China's VONB in 3Q20 was broadly in -line with 2Q20, but was likely lower YOY given the savings shift, and lower VONB margin; and* Watch The Investment Portfolio: Yields drive the bottom-line at life insurers. Rates have been reduced to all-time lows in most markets globally, and investment returns at AIA’s bottom-line will continue to be challenged. In addition, ratings agency downgrades are expected to negatively impact AIA solvency margins.  With over USD 220 bn in corporate debt issues likely on the verge of downgrade by the venerable ratings agencies (which is greater than the actual USD 147 bn downgraded during the GFC) the market must be prepared for substantive hits to AIA’s investment portfolio.

*VONB Better Linked Quarter: AIA Group (1299.HK) {AIA} reported 3Q20 Value of New Business (VONB) of USD 706 mn, increasing 22% linked quarter with positive growth noted in Malaysia, Singapore and India – but VONB declined 28% YOY;*Greater China Challenges: Hong Kong’s pure domestic business reported modest linked quarter growth in VONB, but is still likely struggling with mainland Chinese clients as the border remains closed due to quarantines. Mainland China too was weaker as demand for protection products remains challenged. AIA China's VONB in 3Q20 was broadly in -line with 2Q20, but was likely lower YOY given the savings shift, and lower VONB margin; and* Watch The Investment Portfolio: Yields drive the bottom-line at life insurers. Rates have been reduced to all-time lows in most markets globally, and investment returns at AIA’s bottom-line will continue to be challenged. In addition, ratings agency downgrades are expected to negatively impact AIA solvency margins.  With over USD 220 bn in corporate debt issues likely on the verge of downgrade by the venerable ratings agencies (which is greater than the actual USD 147 bn downgraded during the GFC) the market must be prepared for substantive hits to AIA’s investment portfolio.

AIA Group – Greater China and Investments Remain Risks

There are few banks that compare to those in China on controlling costs. This will likely be the way forward for others in Asia and globally. Where some have seen costs/assets down considerably and to low levels in any context, others have more room to cut. Of the largest banks by assets, <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a>,<a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:714:1" rel="noopener">China Merchants Bank A (600036 CH)</a>and <a href="https://www.smartkarma.com/entities/ping-an-bank-co-ltd-a" target="_blank" data-smartkarma-citation="entities:681:1" rel="noopener">Ping An Bank Co Ltd A (000001 CH)</a> have seen the least improvement in costs/assets over the past nine years – and where this ratio remains high compared with peers.

There are few banks that compare to those in China on controlling costs. This will likely be the way forward for others in Asia and globally. Where some have seen costs/assets down considerably and to low levels in any context, others have more room to cut. Of the largest banks by assets, Postal Savings Bank of China (1658 HK),China Merchants Bank A (600036 CH)and Ping An Bank Co Ltd A (000001 CH) have seen the least improvement in costs/assets over the past nine years – and where this ratio remains high compared with peers. 

*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.

*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

*Weak Results Showing No Signs Of Improvement: Ping An Insurance (2318.HK) [Ping An] reported abbreviated results for 3Q20, coming in at CNY 34.5 bn which declined CNY 8.2 bn (19.2%) on a linked quarter basis. The decline in earnings is attributed to a CNY 10.1 bn (8.7%) decline in Ping An Life (PAL) net earned premiums; a CNY 40.7 bn (43.7%) decline in investment income as rates and markets stabilized; and a CNY 8.5 bn (20.1%) increase in SG&amp;A;*Insurance Remains Fundamentally Challenged: Despite the Investor Day cheerleading session, PAL’s value of new business (VONB) declined 33% YOY in 3Q, driven by larger than expected margin decline associated with mix of reduced agent motivation during COVID-19 and demand weakness. Ping An P&amp;C’s combined ratio rose 1.0% to 99.1% in 3Q20 - barely allowing this business any breathing room. This increase would appear to be attributed to auto insurance reform, which is placing downward pressure on pricing; andBank Risk: Ping An Bank (000001.CH) [PAB], reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk. Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity.

*Weak Results Showing No Signs Of Improvement: Ping An Insurance (2318.HK) [Ping An] reported abbreviated results for 3Q20, coming in at CNY 34.5 bn which declined CNY 8.2 bn (19.2%) on a linked quarter basis. The decline in earnings is attributed to a CNY 10.1 bn (8.7%) decline in Ping An Life (PAL) net earned premiums; a CNY 40.7 bn (43.7%) decline in investment income as rates and markets stabilized; and a CNY 8.5 bn (20.1%) increase in SG&amp;A;*Insurance Remains Fundamentally Challenged: Despite the Investor Day cheerleading session, PAL’s value of new business (VONB) declined 33% YOY in 3Q, driven by larger than expected margin decline associated with mix of reduced agent motivation during COVID-19 and demand weakness. Ping An P&amp;C’s combined ratio rose 1.0% to 99.1% in 3Q20 - barely allowing this business any breathing room. This increase would appear to be attributed to auto insurance reform, which is placing downward pressure on pricing; andBank Risk: Ping An Bank (000001.CH) [PAB], reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk. Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity. 

Ping An Insurance – The Drip Drop Of Bad News

China

Ping An Bank Co Ltd provides a full range of commercial banking services including RMB and foreign currency deposit, loan, international and domestic settlement, discount, currency trading, letter of credit, bank guarantee, and other related services.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Ping An Bank Co Ltd A (000001 CH)

China Banks – Biden, Vaccine, Provisions

There are conflicting factors at play in assessing banks, including Chinese banks, which will making the path forward that much more difficult to...

Daniel Tabbush

AIA Group – Greater China and Investments Remain Risks

AIA GROUP: While VONB Has Seen Improvement Linked Quarter, Greater China Challenges and The Investment Portfolio Are Big Risks To The Bottom-line

Thomas J. Monaco

China Banks – Controlling Costs

China banks are ahead on controlling costs. This will likely be the way for others in Asia and globally. PSBC, CMB and Ping An Bank have seen the...

Daniel Tabbush

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

Ping An Insurance – The Drip Drop Of Bad News

PING AN INSURANCE: First It Was The Bank Who Reported Manufactured Results, As Credit Worsened. Now The Insurers Continue To Struggle With No End...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)