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

*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.

*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)

*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.

*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. 

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

We move to Overweight <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (BNKEA)</a> capital inefficient securities, from Buy, as these securities have outperformed their peers since our recommendation. Investors have been well rewarded but remaining upside is less compelling.Bank of East Asia announced the retirement of it 5.5% coupon December first call US$- Additional Tier 1 (AT1) bond last week. This bond was not capital efficient. We first recommended that investors overweight this security in mid-February within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-overweight-short-call-at1-on-refinancing-ability" target="_blank" data-smartkarma-citation="insights:36787" rel="noopener">Overweight Short-Call AT1 on Refinancing Ability</a> and recently re-iterated this call within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Buy the Inefficient Capital Securities</a>. In retrospect, this was the most volatile AT1 security amongst those issued by Asian-headquartered banks and subject to first call in 2020, as we anticipated at the time of our first recommendation. Nonetheless, the courage of one’s convictions is what makes or breaks investment returns. We were fortunate to make the right call on this one. In fact, we have been told that we were the only research house making this recommendation based on the capital efficiency of the securities. Going forward, we see less upside in the AT1 capital curve of BNKEA as it trades more in-line with securities of other Hong Kong issuing banks. As such, we move to Overweight, from Buy, on BNKEA’s 5.625% coupon 2022 callable AT1.

We move to Overweight Bank of East Asia's (BNKEA) capital inefficient securities, from Buy, as these securities have outperformed their peers since our recommendation. Investors have been well rewarded but remaining upside is less compelling.Bank of East Asia announced the retirement of it 5.5% coupon December first call US$- Additional Tier 1 (AT1) bond last week. This bond was not capital efficient. We first recommended that investors overweight this security in mid-February within Overweight Short-Call AT1 on Refinancing Ability and recently re-iterated this call within Buy the Inefficient Capital Securities. In retrospect, this was the most volatile AT1 security amongst those issued by Asian-headquartered banks and subject to first call in 2020, as we anticipated at the time of our first recommendation. Nonetheless, the courage of one’s convictions is what makes or breaks investment returns. We were fortunate to make the right call on this one. In fact, we have been told that we were the only research house making this recommendation based on the capital efficiency of the securities. Going forward, we see less upside in the AT1 capital curve of BNKEA as it trades more in-line with securities of other Hong Kong issuing banks. As such, we move to Overweight, from Buy, on BNKEA’s 5.625% coupon 2022 callable AT1.

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

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.

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. 

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> almost raised US$35bn in the largest IPO in history. While the IPO may eventually proceed, we are unsure of the valuations the company could demand the next time around.Following the suspension of listing on the STAR Market by the Shanghai Stock Exchange due to a 'major event', <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> announced the suspension of the H-share listing too. The company also said that the refund of the application monies will be made as soon as possible to Hong Kong retail investors.This 'major event' will have knock-on implications for a host of other trades/strategies as well. In this Insight, we take a look at some of them.

Ant Group (6688 HK) almost raised US$35bn in the largest IPO in history. While the IPO may eventually proceed, we are unsure of the valuations the company could demand the next time around.Following the suspension of listing on the STAR Market by the Shanghai Stock Exchange due to a 'major event', Ant Group (6688 HK) announced the suspension of the H-share listing too. The company also said that the refund of the application monies will be made as soon as possible to Hong Kong retail investors.This 'major event' will have knock-on implications for a host of other trades/strategies as well. In this Insight, we take a look at some of them.

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 – 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

Bank of East Asia: Move to Overweight the Capital Inefficient Securities from Buy

We move to Overweight Bank of East Asia’s capital inefficient securities as these securities have outperformed their peers since our Buy...

Hank Calenti, CFA

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

Ant Group: IPO Suspension Implications

With Ant Group suspending the H-share listing following SSE's suspension of the A-share listing, there will be multiple implications for trades and...

Brian Freitas

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