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

*Excess Provisioning Eats Away At 4Q20 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 4Q20 results of CNY 11.4 bn – decreasing CNY 7.8 bn (40.8%) linked quarter. PSB’s struggles were twofold: loss provisions were too high; and an operating expenses accelerated; and * Credit Quality Risk Peaking: HOH, stated NPLs nominally increased CNY 605 mn or 1.2% to CNY 50.4 bn and amount to 88 bp to total loans – flat linked quarter. The growth in level of net new NPLs was CNY 9.3 bn or decelerating to 18.4% on an annualized basis. PSB’s loss provision increased CNY 2.9 bn (41.1%) linked quarter, almost seeming pointless given the reserve cover of 4.01x (4.03x at 3Q20) and the annualized NCO rate of 61 bp.

*Excess Provisioning Eats Away At 4Q20 Results: Established in 2007, Postal Savings Bank of China (1658.HK) [PSB] is mainland China’s youngest large commercial bank. PSB reported 4Q20 results of CNY 11.4 bn – decreasing CNY 7.8 bn (40.8%) linked quarter. PSB’s struggles were twofold: loss provisions were too high; and an operating expenses accelerated; and * Credit Quality Risk Peaking: HOH, stated NPLs nominally increased CNY 605 mn or 1.2% to CNY 50.4 bn and amount to 88 bp to total loans – flat linked quarter. The growth in level of net new NPLs was CNY 9.3 bn or decelerating to 18.4% on an annualized basis. PSB’s loss provision increased CNY 2.9 bn (41.1%) linked quarter, almost seeming pointless given the reserve cover of 4.01x (4.03x at 3Q20) and the annualized NCO rate of 61 bp.

Postal Savings Bank of China – Excess Provisioning

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; 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 410 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 4Q20 results of CNY 87.2 bn, increasing CNY 7.3 bn or 9.2% linked quarter. The linked quarter improvement, in our view, can solely be attributed to an unjustified and massive linked quarter reduction in loss provisions of CNY 31.3 bn (57.7%).  In addition, 4Q20 results can be highlighted by ICBC’s negative operating jaws; 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 410 bn which amounts to over a year of pre-tax results at ICBC.   

Industrial and Commercial Bank of China – Troubling Result

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Alibaba Group Holding  / Equity Bottom-Up

<ul>
<li>Globally, banking regulators are upping their scrutiny of Big Techs in finance, with China at the forefront of the regulatory effort to “level the playing field” between Big Techs and its banks</li>
<li>China stands out globally for the broad and rapid establishment of its Big Techs across the domestic finance ecosystem, led by <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> </li>
<li>Regulatory constraints on Ant Group’s online finance operations could potentially curtail the growth of its credit business; yet it has recently been reported that Ant is calling for a higher share of commissions from transactions on its payments platform</li>
<li>This could provide Ant with a revenue boost to its payments business, but we still see the big risk to Ant’s prospects (and its revised valuation) coming from tighter restrictions to its lending business and possibly the asset management arm, as well as the introduction of the e-Yuan eroding its leadership in digital payments</li>
<li>Consequently, we remain cautious on <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, and we stick with our view that key beneficiaries are smaller FinTechs like <a href="https://www.smartkarma.com/entities/lexinfintech-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26036:1" rel="noopener">Lexinfintech Holdings (LX US)</a> and, in the bank sector, the domestic bank <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>
</li>
<li>Risks to our view include lighter touch regulation from PBoC on the large FinTechs including Ant; another risk is Ant Group being able to avoid a meaningful loss of market share in payments and being able to deliver stronger than expected returns from asset management operations to more than offset the restrictions on credit operations</li>
</ul>


Globally, banking regulators are upping their scrutiny of Big Techs in finance, with China at the forefront of the regulatory effort to “level the playing field” between Big Techs and its banks
China stands out globally for the broad and rapid establishment of its Big Techs across the domestic finance ecosystem, led by Ant Financial Services Group (6688 HK) 
Regulatory constraints on Ant Group’s online finance operations could potentially curtail the growth of its credit business; yet it has recently been reported that Ant is calling for a higher share of commissions from transactions on its payments platform
This could provide Ant with a revenue boost to its payments business, but we still see the big risk to Ant’s prospects (and its revised valuation) coming from tighter restrictions to its lending business and possibly the asset management arm, as well as the introduction of the e-Yuan eroding its leadership in digital payments
Consequently, we remain cautious on Alibaba Group (BABA US), and we stick with our view that key beneficiaries are smaller FinTechs like Lexinfintech Holdings (LX US) and, in the bank sector, the domestic bank Postal Savings Bank of China (1658 HK)

Risks to our view include lighter touch regulation from PBoC on the large FinTechs including Ant; another risk is Ant Group being able to avoid a meaningful loss of market share in payments and being able to deliver stronger than expected returns from asset management operations to more than offset the restrictions on credit operations


Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a>, <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a> and <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> announcing results (and dividends) today, and <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/agricultural-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1120:1" rel="noopener">Agricultural Bank Of China (1288 HK)</a> and <a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank Of China Ltd (H) (3988 HK)</a> announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.With <a href="https://www.smartkarma.com/entities/baidu-inc-a55ca720-5968-48f0-8194-ac94390d065c" target="_blank" data-smartkarma-citation="entities:32212:1" rel="noopener">Baidu (9888 HK)</a> included in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a>. <a href="https://www.smartkarma.com/entities/bilibili-inc-83a27302-cd7d-4e6a-a1de-bcf93eb022c3" target="_blank" data-smartkarma-citation="entities:32215:1" rel="noopener">Bilibili Inc (9626 HK)</a> lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> has already filed papers to list in Hong Kong. Then there are companies like <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (1284375D CH)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a> and <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.

The announcement of 2020 full year results is bringing some certainty to the HSCEI 2021 dividend index points. With Bank Of Communications Co H (3328 HK), ICBC (H) (1398 HK) and China Construction Bank H (939 HK) announcing results (and dividends) today, and Postal Savings Bank of China (1658 HK), Agricultural Bank Of China (1288 HK) and Bank Of China Ltd (H) (3988 HK) announcing on Monday and Tuesday next week, over 85% of the 2021 dividend index points will be known by end of the month.With Baidu (9888 HK) included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the close of trading on 8 April, potential changes to the index at the June review that will be implemented at the close on 4 June, and capping changes that will be implemented at 8% of the index weight for all stocks at the June review, the dividend ex-date for the stocks (and banks in particular) will play a big role in determining the fair value of the 2021 dividend futures.With the SEC pushing forward with the Holding Foreign Companies Accountable Act, US listed Chinese stocks could look to bring forward their plans to Secondary List on the HKEX (388 HK). Bilibili Inc (9626 HK) lists on Monday and media indicates that other Chinese companies are evaluating listing in Hong Kong. JD Logistics (JDL HK) has already filed papers to list in Hong Kong. Then there are companies like DiDi Chuxing (1284375D CH), ByteDance (1460967D CH) and Ant Financial Services Group (6688 HK) that could primary list in Hong Kong in the near future. While this will have minimal impact on the 2021 dividends, the impact on the 2022 and later dividend futures would be a lot higher.We see little downside from the current market on the HSCEI 2021 dividend futures, but believe that the HSCEI 2021/22 dividend steepener is trading too high. Potential changes to the index constituents should put downward pressure on the 2022 dividends with low dividend yield or zero dividend paying companies joining the index at high index weights, and high dividend paying companies being deleted from the index.

HSCEI Dividend Futures: June Index Review, Bank Divs, HFCAA - Sell the 2021/22 Steepener

China Merchants Bank H / Equity Bottom-Up

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and *Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling.

*Weak 4Q20 Bottom-Line: China Merchants Bank (3968.HK) [CMB] pre-announced a poor set of 4Q20 results. On March 19, 2020, the finals were disclosed and the results were even uglier than anticipated. While its true that net profit declined CNY 6.1 bn (22.7%) on a linked quarter basis to CNY 20.9 bn –despite having its tax rate decline 790 bp to 15.6% over the period, core operating results came in at just CNY 13.9 bn – declining CNY 9.3 bn or 40.0% linked quarter;  and *Best Retail Franchise Hitting Credit Wall: While CMB has the best retail franchise in mainland China, credit risk has substantially increased in 4Q20. More worrisome is the net new NPL increase of CNY 14.8 bn, representing an annualized increase in net new NPLs of 104.7%. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 213% - suggesting even the mighty are falling. 

China Merchants Bank – Pulling On All Levers

China

Postal Savings Bank of China Co., Ltd. provides banking services. The Company offers deposits, loans, fund settlement, and other services. Postal Savings Bank of China provides its services to individuals, enterprises, and other clients.

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Postal Savings Bank of China C (1658 HK)

Postal Savings Bank of China – Excess Provisioning

POSTAL SAVINGS BANK: PSB reported a 40.8% decline in QOQ results, as loss provisioning was too high relative to risk is peaking; and an operating...

Thomas J. Monaco

Industrial and Commercial Bank of China – Troubling Result

ICBC: ICBC reported a 9.2% QOQ increase in 4Q20 results, which is solely attributed to an unjustified and massive linked quarter reduction in loss...

Thomas J. Monaco

Ant Group: Alibaba’s Albatross?

Ant is demanding higher transactions fees on its payment platform, which could help but it should not offset the PBoC's constraints on its credit...

Victor Galliano

HSCEI Dividend Futures: June Index Review, Bank Divs, HFCAA - Sell the 2021/22 Steepener

While the HSCEI 2021 dividend futures are trading near our estimated fair, the HSCEI 2021/22 div steepener is not. We recommend selling the...

Brian Freitas

China Merchants Bank – Pulling On All Levers

CHINA MERCHANTS BANK: CMB's core operating results came in at just CNY 13.9 bn – declining 40.0% linked quarter. Negative operating jaws, and net...

Thomas J. Monaco

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